Q2 2014 Teekay Tankers Ltd Earnings Call
Aug 07, 2014 AM EDT
TNK - Teekay Tankers Ltd
Q2 2014 Teekay Tankers Ltd Earnings Call
Aug 07, 2014 / 05:00PM GMT
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Corporate Participants
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* Ryan Hamilton
Teekay Tankers Ltd - IR
* Kevin Mackay
Teekay Tankers Ltd - CEO
* Vince Lok
Teekay Tankers Ltd - CFO
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Conference Call Participants
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* Jon Chappell
Evercore Partners - Analyst
* Donald McLee
Wells Fargo Securities - Analyst
* Nish Mani
JPMorgan - Analyst
* Shawn Collins
BofA Merrill Lynch - Analyst
* Sherif El-maghraby
Morgan Stanley - Analyst
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Presentation
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Operator [1]
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Welcome to Teekay Tankers Ltd second-quarter 2014 earnings results conference call.
(Operator Instructions)
As a reminder, this call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Kevin Mackay. Please go ahead, sir.
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Ryan Hamilton, Teekay Tankers Ltd - IR [2]
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Before Mr. Mackay begins, I would like to direct all participants to our website at www.TeekayTankers.com where you'll find a copy of the second-quarter 2014 earnings presentation. Mr. McKay will review this presentation during today's conference call.
Please [allow me] to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to materially different from those in the forward-looking statements is contained in the second-quarter 2014 earnings release and earnings presentation available on our website. I will now turn the call over to Mr. Mackay to begin.
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Kevin Mackay, Teekay Tankers Ltd - CEO [3]
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Thank you, Ryan. Hello, everyone, and thank you very much for joining us on my first earnings release conference call as the new Chief Executive Officer of Teekay Tankers. With me here in Vancouver is Vince Lok, Teekay Tankers' Chief Financial Officer, and Brian Fortier, Group Controller of Teekay Corporation. During today's call, I will be taking you through Teekay Tankers' second-quarter 2014 earnings results presentation, which can be found on our website, beginning with our recent highlights on slide 3 of the presentation.
Teekay Tankers reported an adjusted net loss of $0.05 per share in the second quarter compared to an adjusted net loss of $0.08 per share in same period of the prior year. Cash available for distribution, or CAD, was $0.11 per share in the second quarter, up from $0.07 per share in the same period of the prior year. The increases were primarily due to stronger Suezmax, Aframax, and LR2 spot tanker rates earned in second quarter of 2014, partially offset by a decrease in recognized interest income as a result of the monetization of the Company's investment in term loans this past March.
In the second quarter of 2014, the Company declared and paid a quarterly dividend of $0.03 per share. Since inception, Teekay Tankers has declared dividends in 27 consecutive quarters, which now total $7.365 per share in dividends. Teekay Tankers' dividend is currently fixed at an annual level of $0.12 per share payable quarterly. Teekay Tankers realized a $10 million gain on the sale of two 2010-built VLCCs in the second quarter, which previously secured our investment in term loans. Since gains resulted from the sale of assets are not typically included in CAD, this amount has been excluded from our CAD per share result that I quoted earlier. Including the gain on sale, Teekay Tankers' second-quarter CAD per share would increase by approximately $0.12.
Our commercial team continued to be active in the second quarter, as they have recently secured six additional in-charter contracts, consisting of two Aframax tankers and four LR2 product tankers, totaling 5.5 ship years, with options to extend up to 4.25 ship years. Three of the in-charter vessels have already delivered into our fleet, while the remaining three vessels will deliver between August and September this year. With the addition of these new in-charters, our total in-charter [fleet] grows to eight vessels, increasing our spot exposure to what we anticipate will be a firming tanker market.
In July, crude tanker rates in the Suezmax and Aframax segments reached their highest levels for the month of July since 2008, which was mainly attributable to an increase in long-haul Suezmax movements from the Atlantic to the Pacific, the end of seasonal refinery maintenance, stock piling due to geographical unrest around the world, and vessel delays at US Gulf and Mediterranean seaports. I will touch on some of these factors later during today's call. Finally, this week, Teekay Tankers completed the acquisition of its 50% joint venture interest in Teekay's conventional tanker commercial and technical management operations for $15 million, which was paid in shares. Currently, we expect to generate additional annualized equity income of approximately $2.5 million as a result of this investment.
Turning to slide 4, I will take a moment to provide an update on Teekay Tankers' fleet employment mix and how we have made the strategic move to actively increase the Company's spot tanker exposure. With our market view being that spot tankers rates will, on average, exceed time-charter out rates, we have focused on increasing Teekay Tankers' spot market exposure through a combination of new in-charter contracts, which often times include the additional option periods, and transitioning some of our vessels from time-charter out contracts into the spot market as their existing contracts expire.
As noted in the opening highlights, Teekay Tankers has, in recent months, been actively in-chartering third-party vessels, which increases our spot market exposure without increasing our capital investment. As a result of the eight in-charter contracts we have entered into this year, we have increased Teekay Tankers' spot exposure by approximately 2,500 revenue days, or 24% for the next 12 months. In addition, we were able to secure deferred deliveries on four of the in-charter contracts to ensure the vessels will deliver in time for a potential winter market rally.
On a fleet basis, our spot exposure for the next 12 months now totals 24 vessels, or 74% of revenue days, which is a significant increase from 14 vessels, or 53% of revenue days during 2012, when the outlook for the spot tanker market was weak. The decision to scale back on our fixed-rate cover reflects our view that the tanker market fundamentals will continue to improve. Looking ahead, we expect to continue to increase our spot market exposure through further in-chartering, and allowing some of our fixed-rate fleet to naturally roll off existing time charters rather than pursue replacement fixed-rate contracts for these vessels.
As shown on slide 5, there can be no question that spot tanker rates have improved year-over-year. As shown by the chart on the top left of the slide, spot tanker rates in the second quarter of 2014 averaged significantly higher compared to the same period last year. With Aframax rates improving by approximately $3,000 per day, or 25% year-on-year, and Suezmax rates improving by $4,000 per day, or 33% year-on-year. This increase in spot rates is a reflection of higher fleet utilization compared to this time last year, a strong indication of tightening crude tanker market fundamentals.
Looking at the chart on the top right of the slide, you can see that the spot market has continued to strengthen during the third quarter, with Aframax and Suezmax spot rates reaching the highest levels seen in the month of July since 2008. This counter-seasonal spike in rates is due to a combination of higher global refining throughput and fear-driven stock piling due to unrest in Iraq, as well as some Aframax- and Suezmax-specific facts, which we will examine in the next slide.
The spike in rates, in what is usually a seasonally weaker time of year for crude tankers, is very encouraging. We believe that the recent increase in rate volatility is a positive signal ahead of a seasonally stronger winter market, which typically begins in the fourth quarter and we expect that this market volatility will continue in the coming weeks and months.
Turning to slide 6, I will focus for a moment on the stronger-than-expected Aframax demand at the start of the third quarter, which pushed spot rates in these segments up to new six-year highs for the month of July. The Suezmax sector, in particular, has been extremely buoyant in recent weeks and we believe this is largely a result of a shift to longer-haul trade routes. This might seem counterintuitive given the increase in US crude oil production in recent years, which has significantly reduced Suezmax movements from West Africa to the US east coast; however, perhaps less well-documented, there has been a corresponding increase in Suezmax trades on other routes, including long-haul from the Atlantic to Pacific Basin.
As shown on the map at the top left of the slide, Suezmax spot market activity on three key routes has increased substantially in the first half of 2014. First, Suezmax movements from West Africa to Europe have increased by 9%, as European refiners look to replace lost Libyan supply with West African barrels. Second, West Africa crude exports to Asia on Suezmaxes has increased by 16%, as Asia looks to diversify its sources of crude oil. Finally, Suezmax have been cannibalizing traditional VLCC trade routes out of the Middle East, with loadings from the Middle East to Asia increasing by 21% year-on-year.
The combination of these trade pattern changes has led to a much more stretched Suezmax fleet, with more vessels operating in the Pacific Basin and more vessels trading on long-haul routes than in the past. This has benefited Suezmax ton-mile demand and has also meant that the Atlantic market has at times seen periods of very tight vessel supply leading to the type of run-up in spot rates that we have seen recently.
The strong Suezmax market has also had a positive knock-on effect for Aframaxes in recent weeks, as competition for cargos on trades, which can utilize both Aframax and Suezmax tonnage has been reduced. Aframax spot rates have also benefited from regional trade disruptions, notably in the Caribbean market. The chart at the bottom left of the slide illustrates the record high crude oil inventories in US Gulf due to rising domestic production, which has left the region short of onshore storage capacity. This has created lengthy vessel delays in the region, which has served to reduce the pool of available vessels and provide support for higher spot rates. On the other side of the Atlantic, repeated oil supply disruption from the political issues in Libya and Iraq has created uncertainty over scheduling, and has further contributed to Aframax rate volatility in recent weeks.
Turning to slide 7, I will walk through the outlook for mid-size crude tanker fleet supply, which we believe will be one of the key drivers of a sustained tanker market recovery over the next few years. As shown on the two charts on this slide, by 2016, the Suezmax and Aframax fleets are estimated to shrink in size by 2% and 7% respectively, compared to current levels. The scrapping of older vessels, which is expected to outweigh new vessel deliveries over the forecasted period. We've already seen this occurring in 2014, as the Suezmax fleet has reduced by a net 2 vessels since the start of the year, and the Aframax fleet has reduced by a net 13 vessels. In summary, a shrinking Aframax, Suezmax fleet coupled with a positive outlook for mid-size tanker demand should drive a sustained increase in crude tanker rates in the coming months and years.
Turning to slide 8, I will provide an update on spot earnings for the third quarter to date. Compared to average realized rates for the second quarter of 2014, Suezmax, Aframax, and LR2 rates for the third quarter of 2014 to date have been significantly higher. Based on approximately 43% of spot revenue days book, our third quarter-to-date Suezmax bookings have averaged approximately $19,600 per day, up significantly from $16,100 per day in the second quarter of 2014. Our third quarter-to-date Aframax RSA bookings have averaged approximately $18,600 per day, up from $15,500 per day in the second quarter of 2014. Based on approximately 68% of spot revenue days booked, our third quarter-to-date LR2 bookings have also seen higher, averaging approximately $14,000 per day compared to $13,350 per day in the second quarter of 2014.
Before we open up the call to questions, I would like to turn your attention to slide 9, which provides some key details pertaining to Teekay Group 2014 Investor Day. I'm excited to take over leadership of Teekay Tankers at such a promising time in the tanker market cycle and I look forward to meeting with our analysts and investors to provide an in-depth presentation covering our strategies, financial position and market outlook at that time. The event will be held during the morning of Tuesday, September 30 at the St. Regis Hotel in New York and will be webcast live for all interested current or prospective investors.
With that, operator, we are now available to take questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Our first question today will come from Jon Chappell with Evercore. Please go ahead.
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Jon Chappell, Evercore Partners - Analyst [2]
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Thank you. Good morning, guys.
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Kevin Mackay, Teekay Tankers Ltd - CEO [3]
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Good morning.
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Jon Chappell, Evercore Partners - Analyst [4]
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Kevin, you've only been in the role for a couple of weeks now, maybe a couple of months, but I just wanted to get your views coming from a customer. Any surprises that you've seen, either good or bad, being on the operator side, and just what's your, call it, three- to five-year strategy for TNK?
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Kevin Mackay, Teekay Tankers Ltd - CEO [5]
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Yes, it's actually day 48, I believe, I've been in the role, so still asking a lot of questions, still formulating opinions on various topics, as I learn more about the Organization. Just a general comment, that having competed against this Organization as an independent ship owner on the other side, as well as seeing it from a customer-facing side, my regard for Teekay was always held very highly and the last 48 days have not only not changed my opinion on that topic, but actually enhanced my opinion. So very, very positive in terms of what I've seen so far.
Like any organization, we have work to do, and if I could just touch on a couple of key areas that you'll probably hear me repeat over the course of time. For Teekay Tankers specifically, our focus will be to drive and really execute on operational excellence. It's imperative, as the world's leading tanker brand in this segment, that we operate our ships safely and reliably; our customers and stakeholders demand that of us and it's our license to operate, so I will be focused heavily on OE and I'll be speaking to that in the months and years ahead.
I clearly have an intention to grow the Organization. The Company has done well to weather the storm of the tanker markets over the last five years, with a good solid strategy that maintained our presence in the market, while some of our competitors fell away. But now coming in, it's time to look for growth and that will focus primarily on customers and the relationships that we already have with some very good oil companies and oil trading and oil refining companies.
We're also looking at the new trade patterns that are emerging. We'll be focusing on new customers and developing new and strong relationships in order to employ our fleet as we grow into new markets and new areas. So I'm excited to be here. I'm looking forward to putting the Company back on a path of growth, and from what I've seen, I'm confident that Teekay Tankers has a really bright future ahead of it.
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Jon Chappell, Evercore Partners - Analyst [6]
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Great. The time-charter in strategy is a little new. I'm sure maybe that was in the process before you started, or maybe not. I just wanted to hear your views on, given where the capital structure stands today and the potential for growth through traditional asset ownership versus time-charter in, where you think you'll be spending a lot of your time focusing right now?
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Kevin Mackay, Teekay Tankers Ltd - CEO [7]
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The strategy in-charter was started late spring and has really ramped up in the last couple of months and will continue to do so as we go forward. But f you look at TNK as a long-term play on the market, of the tanker market, we've got several levers at our disposal that we can utilize to manage the portfolio at various points in the cycle. So whether it's capital investment through newbuilds or second hands, we have the avenue to look at time-charters, which we've been doing, which requires no capital investment and gives us an agile and prompt response to where we see the market moving in the near-term.
We've also got our growth for fee revenue businesses through our expansion of our pools and technical and commercial management expertise and we've also got the avenue of our investments through companies like TIL. So to my mind, as I come into the Organization, it's not just solely looking at one of those levers. It's managing the portfolio at any given point in time through the cycle and pulling or pushing based on the opportunities that present us.
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Jon Chappell, Evercore Partners - Analyst [8]
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Makes sense. One last one, and feel free to use Vince to help out with this one, as well, but just as you think about that and then as it relates to the capital structure, been able to delever a fair amount just recently, thanks to the sales of the LCCs. How do you think about the balance between using capital to grow at this point in the cycle versus also maybe taking the leverage down a little bit, especially as we slowly creep towards 2017 and the bigger bullet payment in that year?
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Kevin Mackay, Teekay Tankers Ltd - CEO [9]
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I'll kick it off and then I'll hand over to Vince. Certainly my approach will be to have a strong financial discipline on the Organization. Looking at our current capital structure, as the market improves and we generate higher cash flows going forward through that market recovery, some of that leverage will -- we'll use some of that cash to pay down our outstanding revolver.
Then going forward, we'll analyze acquisitions and opportunities to grow the fleet using our capital structure and our relationships with the banks. Generally, it will be a team approach, utilizing good relationships that our sponsor has in Teekay Corporation with banks, as well as our management approach to a balanced capital and financial strategy.
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Vince Lok, Teekay Tankers Ltd - CFO [10]
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Just to add to that, as you said, Jon, we did delever the balance sheet recently, with the sales of two VLCCs for $154 million and that has provided us with lower debt balances, as well as higher liquidity. So as of June 30, we have about $250 million of liquidity, so we have the near-term liquidity to take advantage of opportunities.
And as Kevin mentioned, the higher cash flows is also being retained to reduce our debt levels and further strengthen our balance sheet, as well as the cash flows from the Teekay operations. So we're in fairly good shape in terms of our capital structure right now.
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Jon Chappell, Evercore Partners - Analyst [11]
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Great. Thanks a lot, Vince. Thanks, Kevin, and welcome.
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Kevin Mackay, Teekay Tankers Ltd - CEO [12]
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Thank you, Jon. I appreciate it.
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Operator [13]
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Your next question will come from Donald McLee with Wells Fargo. Please go ahead.
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Donald McLee, Wells Fargo Securities - Analyst [14]
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Hey, guys. Thanks for taking my call. First, I just wanted to focus on growth and given the recent strength in the Suez and Aframax rates over the last quarter or so, do you expect growth going forward to be focused in the crude or the product tanker segments?
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Kevin Mackay, Teekay Tankers Ltd - CEO [15]
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Just make a general comment first before I go into detail on the sectors. As Management, it's incumbent upon us to keep an open mind and to pay attention to what is going on in the tanker market generally. You can only look to Kodak and the Polaroid camera to see what a blinkered strategy or a blinkered view can happen to a company.
So we'll always pay attention to what is going on around us, but we also have to understand where our core competencies lie, and for TNK, at the moment, that is in the Suezmax space and the Aframax space. So as we look to grow the Company, it will be primarily focused in those two areas. I also think as we look at the fundamentals in those two sectors specifically, they offer the best value creation going forward.
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Donald McLee, Wells Fargo Securities - Analyst [16]
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That makes sense. Within that, the Suez and Aframax asset classes, is there a preference between newbuild and second-hand tonnage?
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Kevin Mackay, Teekay Tankers Ltd - CEO [17]
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If you look at asset prices, newbuilds are somewhat closer to their 10-year average and there's some new regulations coming in that might increase the cost of newbuilding assets post-2017. On the other hand, second-hand values are trading at 25% to 30% below their 10-year average so that does present, at this point in time, a better value proposition. But as I mentioned in the answer to one of the previous questions from Jon, that will change over time, and as a -- if we take a portfolio approach to the way we manage our Organization, we'll be evaluating both of those asset classes and trying to make the right calls as we go forward.
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Donald McLee, Wells Fargo Securities - Analyst [18]
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Got it. And then is there a long-term fleet target in mind?
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Kevin Mackay, Teekay Tankers Ltd - CEO [19]
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No, there's not a fixed number that we're aiming to grow to. A lot will depend on how trade patterns evolve and where we feel that we can gain scale and market exposure, as well as availability of cargos and the relationships we build with our customers. We can also look to our pools and growing the Organization through asset purchases or newbuildings or time-charters ignores the fact that we also have three very good reputable pools that can bring owners into our scale and also provide TNK with some fee-based revenue.
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Donald McLee, Wells Fargo Securities - Analyst [20]
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All right, thanks. That's helpful. That's all my questions.
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Kevin Mackay, Teekay Tankers Ltd - CEO [21]
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Thanks, Donald.
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Operator [22]
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Your next question will come from Nish Mani with JPMorgan. Please go ahead.
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Nish Mani, JPMorgan - Analyst [23]
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Good morning, guys. I wanted to follow-up on the prior two questions and your response as it relates to asset values. You had noted that second-hand asset values remain attractive compared to newbuilds, yet you guys have embarked on a spree of charter ins. I wanted to get a sense of if we could read between the lines and think that you think those -- by chartering in-vessels right now, there's further downside in asset values- before things begin to really recover?
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Kevin Mackay, Teekay Tankers Ltd - CEO [24]
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No, I can't speak to the months before I came in, but the strategy to look at term-chartering in vessels is quicker. We saw the market picking up in the -- or expect it to pick up in the fourth quarter. We moved very quickly and very decisively to bring in six additional ships. So it was more a function of the ability for the Organization to be agile and take advantage of where we saw some very low and valuable rates on the time-charter market.
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Nish Mani, JPMorgan - Analyst [25]
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Okay, because you mentioned that there is a degree of liquidity the Company has now and so, if and when you do find assets that are attractive in both valuation and quality, you would be willing to spring forward and pick up a few more?
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Kevin Mackay, Teekay Tankers Ltd - CEO [26]
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If the right deal comes along and we can structure it in such a way that it's accretive to our earnings, we'll certainly, we'll look at any avenue.
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Nish Mani, JPMorgan - Analyst [27]
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Okay. That's helpful. And taking a step back and thinking about the market from a broad perspective, how concerned are you that the incumbent recovery, such as there is one in the back half of this year or early next year is largely supply-driven, or supply side-driven and that the demand trends are rather ephemeral? And if that's the case, do you think that the recovery could be sustained and create a buoy in the rate environment into the going-forward period?
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Kevin Mackay, Teekay Tankers Ltd - CEO [28]
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Generally speaking on a macro level, if you will, the global economy continues to grow and tick ahead, a 4% rate going out through next year or two. Along with that and correlated is oil demand improvements.
But one of the significant macro structural changes that we're going to see in the next three to five years is the displacement between where the new oil production is coming online and where it's being refined. 67% of new oil production capacity is west of Suez, and 75% of all their new refineries being built are east of Suez, so that speaks to a west-to-east flow of oil, which is positive for tanker demand in the long run.
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Nish Mani, JPMorgan - Analyst [29]
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Okay. That's helpful. Just final point on financials, TNK's share price has been a little volatile over the past, call it, 12 months or so, and that's broadly in line with the tanker market, as we think about it. At what point do you guys think about shareholder-friendly practices to buying back shares at some point with [extra] liquidity or increasing distribution to shareholders? Is that something that you guys are thinking about discussing at this time?
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Kevin Mackay, Teekay Tankers Ltd - CEO [30]
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As the market improves and we generate increased cash flow, as Vince spoke earlier, where we use that to pay down our existing revolver and strengthen our balance sheet, that will be in the near-term, the focus. But going forward, we will develop a financial strategy that looks after shareholders, whether that's through increased growth through vessel acquisitions or otherwise. Vince, do you want to comment?
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Vince Lok, Teekay Tankers Ltd - CFO [31]
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We have a lot of options available to us, that as we indicated, when we changed our dividend to a fixed dividend several -- 1.5 years ago, the idea there was to retain the operating cash flow so that we can use that to better use to grow the fleet and create more shareholder value. In the near-term, that is the strategy in terms of the dividend policy and we're mainly using that cash flow for growth.
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Nish Mani, JPMorgan - Analyst [32]
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That's really helpful, guys. Thank you so much for the time. Appreciate it.
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Kevin Mackay, Teekay Tankers Ltd - CEO [33]
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Thanks, Nish.
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Operator [34]
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Your next question will come from Shawn Collins with Bank of America. Please go ahead.
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Shawn Collins, BofA Merrill Lynch - Analyst [35]
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Great, thanks. Hi, Kevin. Hi, Ryan. How are you guys today?
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Kevin Mackay, Teekay Tankers Ltd - CEO [36]
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Good, thanks, Shawn. How are you doing?
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Shawn Collins, BofA Merrill Lynch - Analyst [37]
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Very well, thank you. Thanks. Can you just talk about the extent of the summer slowdown that you're seeing in the third quarter and compare that to past summer seasons? I know on slide 6, you referenced the strongest July since 2008. That is a nice surprise. But can you comment on the current market dynamic?
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Kevin Mackay, Teekay Tankers Ltd - CEO [38]
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If you look historically, the third quarter is never usually an exceedingly strong one. You have a quiet period in the market that you get through before the typical winter spike, and this year, what we saw changing in that was fundamentally a stretch in both the Suezmax and Aframax fleets because of a combination of factors.
If you look at the Suezmax fleet, you had refineries coming back online, which from the early summer and spring turnarounds and that caused more volume of cargos to be moved. We see an increase in volume, particularly from West Africa to Asia and from Europe to Asia. Take the example of Indian imports. West Africa to India volumes are up to 600,000 barrels a day in July, which is the highest level we've seen in this period for the last three years.
On the Aframax side, it was more a story of regional pockets of disruption, where in US Gulf you had tank top situations, which backed out turnaround times on ships. You had vessels experiencing delays of 8 to 12 days during the month and that obviously soaks up a lot of the tonnage supply.
But going forward, while the current market has probably returned more to its normal third-quarter levels, other than the US Gulf where it's still holding in the mid-$20,000, $25,000 a day range, the market generally has settled back into its normal third-quarter pattern. Having said that, the market will firm and I'm positive that the outlook will be good going into the winter months.
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Shawn Collins, BofA Merrill Lynch - Analyst [39]
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Great. That's helpful. And glad to hear that the summer was more active than usual.
So changing subjects slightly, I know you just closed on August 1 the acquisition of 50% of Teekay commercial and technical operations. Can you just provide a few highlights for how this will change your operations going forward as you think about operations in the past?
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Kevin Mackay, Teekay Tankers Ltd - CEO [40]
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The dropdown or the purchase, if you will, from the Corporation to TNK, at a high level is really, it's a positive signal that our sponsor is still supportive of the original Teekay Tanker franchise and I view that very positively. It demonstrates ongoing support for the conventional tanker business from our sponsor.
But if you actually look at where Teekay operations is, it's revenue that's generated through our three pools that will now flow 50% into TNK. In terms of the people, it's the same people really doing the same jobs. N
ow it's just the outcome of their efforts and their capabilities and their expertise will now flow one-half to TNK and one-half to Teekay Corp. Fundamentally, how we approach the operations and our application of our technical expertise and commercial acumen won't change.
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Shawn Collins, BofA Merrill Lynch - Analyst [41]
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Okay, great. That's helpful and makes sense. Just last question, I know there's clearly uncertainty over the Libyan fuel supplies. Can you comment on your understanding of the situation there and when you think it might or might not resolve itself?
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Kevin Mackay, Teekay Tankers Ltd - CEO [42]
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No, I wouldn't -- there's probably people out there that can answer that in a lot better detail than I can from a political standpoint. What I will comment on is the uncertainty is causing a lot of disruption in the market. We saw that in July when it appeared that production was -- or Libyan ports were open for business and customers were given dates to load cargos and reached out into the market to cover those and then found the barrels weren't available or the dates changed.
And that caused an awful lot of uncertainty in the market, which drove sentiment and drove the spike that you saw in the Mediterranean. As long as the Libyan situation remains fluid, and I don't have a view on how long that uncertainty will last, but in a sense, it is positive for tanker markets, specifically Suezmaxes and Aframaxes. It's driving European refiners to buy more oil from West Africa, which is increasing the ton-mile, and going into the fourth quarter, that will be another positive element of what drives the market up.
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Shawn Collins, BofA Merrill Lynch - Analyst [43]
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Okay. Understand. That's great. That's helpful. Thank you very much for the time and for the helpful insight.
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Kevin Mackay, Teekay Tankers Ltd - CEO [44]
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Thanks, Shawn.
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Operator [45]
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(Operator Instructions)
Your next question will come from Sherif El-maghraby with Morgan Stanley. Please go ahead.
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Sherif El-maghraby, Morgan Stanley - Analyst [46]
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Hi, this is Sherif on for Fotis. You guys have touched on the majority of my questions, but I just got one. Going back to your purchase of your technical operation from Teekay, I realize the operations don't change very much, but can you go into a little bit more detail on how you expect that to impact cash flows going forward? Will you make anything on it or perhaps take a loss?
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Kevin Mackay, Teekay Tankers Ltd - CEO [47]
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Do you want to take that?
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Vince Lok, Teekay Tankers Ltd - CFO [48]
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We've given guidance that currently we expect TNK's 50% share to generate about $2.5 million per annum of cash flow, so that's, say, call it, $600,000 roughly per quarter at the current size of the pools. But if we are able to continue to grow the pools, as well as -- a portion of the pool revenue is a percentage of gross revenues, or TCE rates -- so part of that income will actually correlate with spot tanker rates. So there's certainly potential upside to that $2.5 million going forward.
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Sherif El-maghraby, Morgan Stanley - Analyst [49]
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Okay. That's it for me. Thanks very much.
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Operator [50]
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And we seem to have no further questions at this time. I'll turn the call back over to Management for any closing comments.
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Kevin Mackay, Teekay Tankers Ltd - CEO [51]
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Okay. Thank you very much for dialing on my first earnings conference call. I look forward to speaking with you in more depth at our Teekay this investor day at the end of September. Thanks again.
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Operator [52]
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Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation. You may now disconnect your lines and have a great day.
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