Q3 2015 Teekay Tankers Ltd Earnings Call

Nov 05, 2015 AM EST
TNK - Teekay Tankers Ltd
Q3 2015 Teekay Tankers Ltd Earnings Call
Nov 05, 2015 / 06:00PM GMT 

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Corporate Participants
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   *  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 ISI - Analyst
   *  Mike Webber
      Wells Fargo Securities, LLC - Analyst
   *  Spiro Dounis
      UBS - Analyst
   *  Fotis Giannakoulis
      Morgan Stanley - Analyst
   *  Amit Mehrotra
      Deutsche Bank - Analyst
   *  Shawn Collins
      BofA Merrill Lynch - Analyst
   *  Chris Damas
      BCMI Research - Analyst
   *  Richard Diamond
      Strait Lane Capital Partners - Analyst
   *  Noah Parquette
      JPMorgan - Analyst
   *  Omar Nokta
      Clarksons Platou Securities - Analyst
   *  Magnus Fyhr
      GMP Securities - Analyst

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Presentation
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Operator   [1]
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 Welcome to Teekay Tankers Limited third-quarter 2015 earnings results conference call. (Operator Instructions). As a reminder, this call is being recorded.

 Now, for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Mackay, Teekay Tankers Limited Chief Executive Officer. Please go ahead, sir.

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Unidentified Company Representative   [2]
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 Before Mr. Mackay begins, I would like to direct all participants to our website at www.teekay.com, where you will find a copy of the third-quarter 2015 earnings presentation. Mr. Mackay 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 differ from those in the forward-looking statements is contained in the third-quarter 2015 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, Cameron. Hello, everyone, and thank you very much for joining us today. 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' third quarter of 2015 earnings results presentation, which can be found on our website.

 Beginning with our recent highlights on slide 3 of the presentation, Teekay Tankers reported adjusted net income of $0.30 per share in the third quarter, a substantial increase from the third quarter of 2014 adjusted net income of just $0.03 per share. The improved results were primarily due to stronger tanker spot rates combined with an increase in our spot tanker fleet as a result of the acquisition and delivery of modern vessels during the first 9 months of the year, and an increase in our in-charter portfolio.

 We generated free cash flow of $59.4 million, or $0.44 per share during the quarter, up from $16.2 million, or $0.19 per share, in the third quarter of 2014.

 In early August we announced the strategic acquisition of 12 modern Suezmax tankers for a total cost of $662 million, and completed the delivery of all 12 vessels in just under 9 weeks, with the last vessel delivering into our fleet on October 15.

 In addition, we also completed the acquisition of a leading global ship-to-ship transfer business, SPT, for $45.5 million. I'll provide an update on the integration of these acquisitions later in the presentation. With the well-timed acquisition of the 12 Suezmax tankers, which will increase our Suezmax operating days, we expect to generate significant free cash flow in what we anticipate to be a strong winter tanker market.

 Turning to slide 4, I will discuss the execution of our two strategic acquisitions. Teekay Tankers emerged as the successful bidder of the Principal Maritime Suezmax fleet, at an attractive en bloc price of $662 million. Our track record for seamlessly completing large-scale S&P transactions was key to our winning bid.

 Following the transaction announcement, we assimilated all 12 vessels into TNK's platform over a span of only 9 weeks. This in itself was no easy feat, given there were 12 individual purchase transactions, registry filings and other delivery protocols which were required before the vessels could be fully assimilated into our fleet. The successful delivery of these vessels in such a short timeframe, speaks to the exceptional cross-functional expertise held within Teekay Tankers.

 In addition to the three Suezmax tankers that required scheduled drydocking this year, in order to maximize long-term earnings we accelerated the drydock of five additional Suezmax tankers, thus negating potential expensive ballast water treatment modification expenditures, until 2019, as well as undertaking some eco modifications to improve the vessel's fuel efficiencies.

 I would like to point out that our third quarter results were negatively impacted by this heavier-than-normal docking schedule, as well as the timing difference related to the issuance of new common shares early in the third quarter in connection with the Principal Maritime and SPT acquisitions. All told, these timing differences reduced our third-quarter earnings by approximately $0.05 per share.

 On the table on the right-hand side we have detailed the number of ships, as well as ship equivalents, third quarter and fourth quarter of 2015, and the first quarter of 2016, to show the impact of these drydocks and to highlight that the majority of these vessels will be out of dry dock and operating for the bulk of the anticipated strong winter tanker market.

 For a detailed schedule of TNK's docking through 2016, I refer you to appendix on page 11 of this presentation.

 (technical difficulty) significant increase in our fleet since 17 vessels we have acquired in the past year, will allow us to gain further economies of scale and reductions in our G&A going forward.

 Moving on to our other acquisitions, we have commenced integration of the ship-to-ship transfer business acquired in July. We have realized cost synergies associated with combining certain functions, and are in the process of rebranding SPT into Teekay Marine Solutions.

 This acquisition is expected to contribute future revenue synergies as we integrate the acquisition into TNK's well-established platform. Both of these strategic acquisitions will be accretive to earnings and cash flow per share, and we are excited for TNK to being realizing the full benefits of these transactions in the coming quarters.

 Turning to slide 5, I will discuss how Teekay Tankers continues to execute on its strategy while delivering shareholder value. As shown in the graph on the left, we have been increasing Teekay Tankers' net asset value by delevering our balance sheet. Our financial leverage has significantly decreased over the past 2 years from a high of 72% in the third quarter of 2015 to 53% as of September 30 this year.

 Looking at the chart on the right, our vessel acquisitions and in-charter vessels have translated into significantly more favorable operating leverage. For every $5,000-per-day increase in spot rates, Teekay Tankers' free cash flow increases by approximately $0.57 per share.

 With the delivery of our newly-acquired Suezmax tankers into the spot market, and strong rates going into 2016, we expect to continue earning significant free cash flow, which will help further reduce our balance sheet leverage to a more appropriate level. With our continued success in delevering the balance sheet, we plan to review Teekay Tankers' dividend policy with our Board of Directors in December 2015.

 Turning to slide 6, we look at developments in the crude tanker spot market. Crude tanker spot rates softened slightly in the third quarter, which is consistent with the seasonal weakness we traditionally see at this time of year as refineries head into a period of scheduled maintenance.

 However, rates remain strong on a historical basis, as illustrated by the chart on the left, which shows average third-quarter spot rates over the past 6 years. Suezmax rates averaged over $12,000 per day higher than in the same period in 2014, while third-quarter Aframax rates averaged $7,000 per day higher.

 These higher rates reflected the strong industry fundamentals which continue to underpin the tanker market -- namely, low fleet growth, low oil prices, strong refining margins, and strategic and commercial stockpiling.

 Looking at the chart on the right, tanker rates began to strengthen again towards the end of the third quarter, led by the VLCC sector, which saw rates exceeding $100,000 per day in late September and early October.

 The high VLCC rates stem from an increase in Chinese demand for Middle Eastern, West African, and North Sea barrels, along with weather and port delays in Asia, and a significant increase in crude loadings from South Iraq. Although earnings in the mid-size sectors initially lagged the VLCCs, we have now started to see an increase in both Suezmax and Aframax earnings, with rates climbing in the past couple of weeks to the highest levels seen since July.

 Turning to slide 7, we look at our expectations for the upcoming winter market, which we believe will be strong due to both fundamental and seasonal factors. Looking first at the fundamentals, the IEA forecast global oil demand to increase by about 250,000 barrels per day during the fourth quarter, as shown by the graph on the left. The increase in demand is largely due to the combination of colder weather in the Northern Hemisphere and the conclusion of refinery maintenance.

 While Chinese oil demand softened slightly in the third quarter, imports remain steady at about 6.7 million barrels per day. This suggests that stockpiling programs are providing underlying support to the Asian tanker market, as the Chinese Government looks to take advantage of low oil prices by adding to its strategic petroleum reserves, or SPRs.

 In addition, the relaxation of import restrictions for Chinese independent, or so-called teapot refineries, could increase crude imports into China and lead to a diversification of supply sources for Chinese crude imports. Such diversification may be a positive driver for both Aframax and Suezmax demand specifically, as these new market entrants look to source smaller parcel sizes directly from regional producers.

 Looking at the chart on the right, we see that the strongest months for crude tanker rates are typically December and January, and we therefore anticipate that the best is still ahead of us in terms of tanker earnings.

 Seasonal factors such as winter weather and transit delays typically build during the fourth quarter, particularly as daylight hours shorten and we see more fog in major tanker thoroughfares such as the Bosphorus Strait and the Houston Ship Channel.

 In addition, we are already seeing port delays in areas such as Northwest Europe and China due to intermittent discharge and ullage issues, which is further helping to tighten tonnage supply and provide increased volatility to rates.

 Putting together the combined impact of seasonal factors with continued low oil prices driving strong oil demand and limited fleet growth, we expect a firm winter tanker market through the remainder of the fourth quarter and into the early part of 2016, marked by periods of high rate volatility.

 Turning to slide 8, I will provide an update on spot tanker rates for the fourth quarter to date. Compared to average realized rates on the third -- for the third quarter of 2015, Suezmax, Aframax and LR2 rates for the fourth quarter of 2015 to date have been lower. However, most recently, mid-size crude tanker rates have strengthened and remained firm into the November fixing window.

 As the darker gray bars on the graph illustrate, fourth-quarter rates to date across all three segments are already higher in 2015 when compared to the fourth quarter of 2014 actual results. Increased seasonal demand, as well as ongoing stockpiling programs, should continue to support a strengthening in spot rates, ultimately improving our fourth-quarter earnings in the Aframax and Suezmax segments.

 To illustrate this, we highlight the red dotted areas on the graph, which represent projected fourth-quarter earnings when our bookings to date are combined with current estimated forward rates for our unfixed fourth-quarter vessel dates.

 With the assimilation of our strategic acquisitions well underway, and Teekay Tankers' strong operating leverage and increased spot exposure, we are confident that the continued strengthening of spot rates will translate into a significant increase in our earnings and cash flow through this winter rally.

 With that, operator, we're now available to take questions.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions). Jon Chappell, Evercore ISI.

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 Jon Chappell,  Evercore ISI - Analyst   [2]
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 Good to see the comments about the dividend, looking at it again in December. Also, the thing that stood out most, about your leverage down to 53%, despite taking down 12 ships in the last quarter, so you're really close to, I think, what's the perceived target of about 50%.

 Just want to hear your thoughts, and also Vince's thoughts, because you've been there different periods of time -- Kevin, you're still somewhat relatively new, been there during the growth phase; Vince has been there since the beginning -- on how you think about fixed dividends versus what TNK was first set up as, with the floating percentage dividend.

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 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [3]
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 Want to take that one?

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 Vince Lok,  Teekay Tankers, Ltd. - CFO   [4]
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 Hi, Jon. Yes. As you know, TNK started out when it IPO'd in 2007 with a floating dividend. At that time it was a full payout. And as we indicated, we won't likely return to a full payout dividend.

 But in terms of the -- a fixed versus variable, for a company like TNK, which is -- at least right now, is predominantly trading spot, probably a floating dividend makes more sense for TNK. But as Kevin mentioned, that's something we need to discuss with the Board at the Board Meeting next month, and we'll report back after that.

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 Jon Chappell,  Evercore ISI - Analyst   [5]
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 Sounds good. Two other followups. I noticed, tucked away in the press release, you sold one of the MR tankers. Clearly, you have some older ships in the fleet still -- some late 1990s-build. Maybe on the crude side, hold onto those, given the strength of the market right now.

 But when you think about fleet replacement, maybe the MRs don't necessarily fit with the structure right now. Would you look to monetize those in the near future, like you did with this last one? Then also, with the 1990s-build ships, do you hold on, try to top tick the cycle, or do you try to replace those sooner rather than later?

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 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [6]
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 It's really an overall portfolio question that you're asking, Jon. And the MRs are no different to the way we look at the rest of the fleet. Obviously, they're not core, but they've been earning some good returns in the [pools] that we've had them in. So, we're harvesting the cash out of those while they've provided that sort of positive return. We have sold one. We are looking at the other two and seeing what opportunities are there, to take value out of them.

 And as far as the rest of the fleet goes, at this point in time we're looking to harvest the cash that we can generate from the crude space. In our -- in the back of our minds, and as we go through our management evaluations on this topic, we're always looking at our fleet age, rebuilding and renewing the fleet, and how we go about that. When do we take older assets off the table, at the right point? So, it's something that's always on the table, on a monthly and quarterly management conversation.

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 Jon Chappell,  Evercore ISI - Analyst   [7]
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 Okay. Understood. Final thing for Vince -- noticed the short-term debt jumped pretty significantly. I'm assuming there's some expiration or even bullet payment due. It's not the big bullet payment, I don't think. It's still not until late 2017. So, that wouldn't show up there. What's behind the big jump in the short-term debt, and is that something that can be refinanced away, or do we have a big capital outflow coming up?

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 Vince Lok,  Teekay Tankers, Ltd. - CFO   [8]
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 Yes. That's relating to the bridge loan facilities relating to both the 12 Suezmaxes from Principal as well as the five ships we acquired earlier this year. So, those two bridge facilities expire at the end of January. So, we're actually in the market right now to refinance those, and that's going quite well.

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 Jon Chappell,  Evercore ISI - Analyst   [9]
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 All right. Thanks, Vince. Thanks, Kevin.

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Operator   [10]
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 Mike Webber, Wells Fargo.

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 Mike Webber,  Wells Fargo Securities, LLC - Analyst   [11]
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 Just -- I wanted to follow up on, I guess, with a couple of questions. First around -- actually around the leverage, but also just around the way you guys think about growth from here. I know it's a bit early because you're still digesting the Apollo fleet. But you can make the case, asset values are probably, under the previous context, probably more attractive here than even a couple of months ago.

 So, I'm just curious whether you think we're still in an attractive environment to acquire assets. You've got one of the only tanker currencies that trades at a premium to NAV and can use it. So, I guess within that context, if there are attractive opportunities out there, would the strength of the currency basically make any dividend decision independent of any future growth?

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 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [12]
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 I think, as a tanker man, obviously, there is some opportunities out there, and we evaluate all of them as they come across our attention.

 But as you -- I think you pointed out quite rightly, Mike, we're -- we've just digested or are digesting a fairly sizeable transaction, and trying to make sure that we maximize the value out of that transaction. So, our immediate focus is really on integrating those 12 ships and getting them out into the market earning good rates.

 In terms of where the market's at, I think there's still upside to the second-hand market. It's lagged a little bit relative to where rates are -- where time charter rates are. And I think there's interest in the market there. But it's a question of narrowing that bid-ask spread. I think owners are looking maybe a little bit too bullishly, and they could be patient because they're earning good income while they hold onto the ships.

 But I think there's -- we're still below the 10-year average. And I think we've got some room to move up. But our focus, immediately, is to make sure these 12 ships and the SPT transaction get fully integrated and start returning value to the organization and the shareholders.

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 Mike Webber,  Wells Fargo Securities, LLC - Analyst   [13]
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 Sure. And then -- and Vince, I think Kevin effectively answered this, but just to be clear, December's -- or, the Board Meeting's a way off. I'm just trying to think -- the dividend increase is independent of anything that could happen between now and then, for all intents and purposes?

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 Vince Lok,  Teekay Tankers, Ltd. - CFO   [14]
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 Yes. And maybe just to elaborate a little bit more on this -- the dividend question, as Kevin showed, we've had a -- we've had good progress in terms of delevering our balance sheet. At the end of September we were at 53%. So, we still have more delevering to do on the balance sheet.

 But, given the significant amount of free cash flow that we're generating right now, and just looking at the third quarter, $0.44 a share of free cash flow, and that's going to increase more in the fourth quarter compared to our current dividend of $0.03. We think we can do both in terms of increasing the current dividend, as well as continuing to delever the balance sheet. So, it's striking that -- the right balance between prudent management of the balance sheet as well as rewarding shareholders with the higher dividends.

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 Mike Webber,  Wells Fargo Securities, LLC - Analyst   [15]
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 Okay. That's fair. Kevin, I wanted to touch on the -- it's relatively new, but the shutdown -- the strike shutdown in Brazil around the Petrobras production.

 Just curious what your take on that is -- whether that ends up eroding some long-haul ton miles simply because it's tougher to transition on export grades, into that business, and whether that would be the headwind for crude, and maybe a positive for product tankers, or whether there are frictions around that, that maybe makes it tougher to tell.

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 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [16]
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 I think it depends on whether we -- the strike is a long-term issue or a short-term issue. I think, if it's a long-term thing, it could have an impact, more so on VLCCs than on Suezmaxes. I think, of the 500,000 barrels a day that they export out of Brazil, I think only 30% or thereabouts is -- 35% is on Suezmax-sized ships and Aframaxes. So, that's more of a VLCC impact.

 Personally, I don't think it'll be a long-term outage. Oil companies don't like striking workers reducing oil production. So, I think there's an incentive for management to work with the unions and come up with a solution. I can't speak directly to Petrobras, but they have a lot of other issues on their table; they don't need to add to this by dragging out a labor strike.

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 Mike Webber,  Wells Fargo Securities, LLC - Analyst   [17]
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 That's fair, for sure. The -- and Kevin, just one more, and I'll turn it over. Just generally, just given the mixed fleet and when you look at your long-term utilization projections for both crude and product, I'm curious how you think about the dirty trading [in] Afras and Panamaxes.

 And when we -- when do you think we could see those transition back towards product? Specifically it's, when you guys think about that market, is there a timeframe in mind when you think you could see some of that incremental supply from the dirty to the clean trade?

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 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [18]
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 Right now, I don't see it happening. Obviously the LR2s enjoyed a great third quarter. I think they spiked at about $50,000 a day, which could have incentivized some people to transition over. But I think longer-term, certainly through 2016, I see the crude space being the stronger of the two markets.

 I -- you've also -- you've got to look at the newbuilding program. It's mainly LR2s on the smaller ships that are coming out. The crude Aframax is nonexistent. So, I think those ships will have to be assimilated, and we'll obviously try and look to go clean as they enter the market. Initially they don't want to dirty up, straight out of the yard.

 So, I think there's a bit more pressure on the clean side than there is the crude in the near term. And certainly our desire is to keep our ships more on the crude end than on the clean.

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 Mike Webber,  Wells Fargo Securities, LLC - Analyst   [19]
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 Okay. That's helpful. Thanks for the time, guys. Appreciate it.

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Operator   [20]
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 Spiro Dounis, UBS.

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 Spiro Dounis,  UBS - Analyst   [21]
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 Sorry, one more on the dividend. I'm sure it won't be the last question on the call. Just in terms of sizing it up -- and I realize you can't fully comment on it -- but just as we're thinking about the factors that would allow you to scale a dividend up, and how high it can go, you obviously don't have a big CapEx program or anything in front of you. It looks as if you're getting close to your leverage target in terms of debt repayment. It sounds like that's going to get refinanced, in terms of the bullet.

 So, for me it seems like those are a lot of factors that would allow you to really scale up the size in a big way, of that dividend. But just wondering, what are the factors that may be keeping you down closer to earth.

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 Vince Lok,  Teekay Tankers, Ltd. - CFO   [22]
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 Yes. I can't comment on specifics, of course. But I would just reiterate, as I said, we're generating a lot more free cash flow than our customer dividend of $0.03. So, there is capacity to increase the dividend as well as continue to delever the balance sheet.

 I would say our leverage metrics -- at 53%, we still have more delevering to do. So, it's -- we're not where we would like to be. But, given the amount of free cash flow that we're generating and expected to generate over the next several quarters, you're right, we will probably delever the balance sheet quickly; but at the same time, have room for a dividend increase. So, I can't comment on the specifics.

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 Spiro Dounis,  UBS - Analyst   [23]
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 Okay. No worries. I tried. And then just -- we saw the $1 billion framework loan facility that Teekay signed back in September. And it looks like the funds will be available to you as well as the other daughter companies, but specifically for vessels constructed or converted in the Chinese shipyards.

 So, newbuildings has not been something that normally comes up with you guys. Just wondering if we could see you tap into that facility at any point, if that's something you've even considered.

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 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [24]
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 No, it's not a conversation that I've had with our sponsor to date.

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 Spiro Dounis,  UBS - Analyst   [25]
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 Okay. Fair enough. Last one, just on the continuous offering program. Seemed like a really tool to have, and I guess you've come to the end of that life. Just wondering if there's plans to maybe initiate another one and if we could see it maybe get sized up.

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 Vince Lok,  Teekay Tankers, Ltd. - CFO   [26]
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 Yes, it is a great tool. It gives us a lot of flexibility. We typically, as you know, have these continuous offering programs in place for each of our daughter companies, and we will likely continue to have that in place. It doesn't necessarily mean we use it every single quarter. It really depends on whether we have good use of proceeds, and also the trading levels of the stock.

 So, you're likely -- that's probably going to be a pretty permanent part of our financing strategy for all three daughters.

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 Spiro Dounis,  UBS - Analyst   [27]
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 Great. That's it for me. Thanks, guys.

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Operator   [28]
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 Fotis Giannakoulis, Morgan Stanley.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [29]
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 Just want to ask -- my questions have been answered; I just want to ask, what is your share account right now? Just a modeling question.

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 Vince Lok,  Teekay Tankers, Ltd. - CFO   [30]
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 Yes. For the fourth quarter, the weighted average share account is going to be a little bit over 150 million shares.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [31]
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 And the total number of shares outstanding at the end of the quarter?

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 Vince Lok,  Teekay Tankers, Ltd. - CFO   [32]
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 At the end of September, are you referring to?

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [33]
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 Yes.

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 Vince Lok,  Teekay Tankers, Ltd. - CFO   [34]
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 I don't have the exact number, but of course it's going to be pretty close to that 150 million, I would say. We had -- we issued some more shares in the fourth quarter relating to a few of the Principal ships, because we're issuing them on a ship-by-ship basis. So, I wouldn't expect it to be -- it wouldn't vary that much from the 150 million I mentioned.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [35]
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 Okay. Thank you very much.

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Operator   [36]
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 Amit Mehrotra, Deutsche Bank.

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 Amit Mehrotra,  Deutsche Bank - Analyst   [37]
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 Looking at the fourth-quarter update for the off-hire days, you provided some nice stats on the Q4 with respect to the booking.

 But if we just look at the gross headwind from the extraordinary costs related to those drydockings, and plus, I guess, the unabsorbed costs associated with the financing, are we talking about the same $0.05 hit in the fourth quarter?

 And so, earnings kind of look -- given that the revenue looks a little bit better in the fourth quarter, will 4Q be looking more like the second quarter, and so we'll see a sequential uptick as we move to the end of the year?

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 Vince Lok,  Teekay Tankers, Ltd. - CFO   [38]
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 Well, if you're referring to the Principal ships, the best guidance there is on slide 4, where we only had 33 revenue days relating to those 12 ships in Q3. And that's increasing to close to 900 ship days, or almost 10 ship equivalents.

 So, that's probably a good guide in terms of the additional contribution both in revenues and costs, all the way down the P&L. The share account -- most of the shares were issued during the third quarter, related to Principal. So, that -- there shouldn't be additional share account increase materially in the fourth quarter. So, that's a benefit for the fourth quarter.

 The other thing is, we'll get another month of contribution from the SPT acquisition in the fourth quarter. So, there's a number of factors in addition to stronger spot rates, that should contribute to a stronger fourth quarter.

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 Amit Mehrotra,  Deutsche Bank - Analyst   [39]
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 Okay. Great. And then, just one followup, or a couple of followups. One is on the dividend. Kevin, you -- just want to understand the move on the dividend -- what that implies -- potential move on the dividend -- what that implies in terms of what stage you guys are in your growth.

 And I just want to ask specifically, of the surplus cash flow that you guys are generating, and it's significant, how much conceptually are you looking to retain for deleveraging and/or acquisitions? And so, I'm not asking for a specific dividend or whatever, because I know you guys can't provide that. But if you can just provide some insight in terms of how much of that surplus cash flow you guys think you want to retain, given where you are in your life cycle. Thanks.

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 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [40]
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 I think we've said -- we've tried to make our message as consistent as possible. Going back to when I first joined, we talked about growing the organization. We talked about the runway that we had in the tanker market. And I think we've executed on that strategy to grow the organization.

 But we've also said that we have now moved into a focus on deleveraging and returning value to shareholders from that growth. So, really, the question is, are we going to stick to that strategy?

 And I think Vince and my comments in the release are fairly consistent with what we've said. We're going to focus on using that extra cash to delever as rapidly as possible; but also, we recognize we've got to return some additional value through a re-look at our dividend policy. And we hope to have that conversation with our Board at our quarterly December meeting.

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 Amit Mehrotra,  Deutsche Bank - Analyst   [41]
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 Okay. Yes. That sounds really good. Thanks. The last question for me -- I guess no call on a crude tanker company's finished without a discussion about supply. And the supply, at least on the Suezmax, has been creeping up over the last several months. And last week, and this week, we've seen some additional ordering. Are you -- the Aframax looks pretty good next year.

 I mean, just, can you give us your updated thoughts on -- from 3 months ago versus 3 months ago? Are you getting a little bit more concerned at the back half of next year, specifically on the larger vessels, or are you still confident on the demand side being able to absorb that?

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 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [42]
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 Yes. I don't think 3 months has changed our view materially. No. There is -- we've always recognized that the back end of 2016, there was going to be ships coming in from then through 2017. But I think on the demand side we're confident that we don't forecast the -- an OPEC cut in production. And on that basis, lower oil prices remaining low should be good for bolstering demand going forward.

 So, I think our view hasn't changed from the summer. We still think we've got a runway to run here. But our focus is right now making sure that the ships that we are taking care of and that we're assimilating into the program, get into this winter market that we think's going to be pretty strong.

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 Amit Mehrotra,  Deutsche Bank - Analyst   [43]
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 Right. Okay. Very good. Thanks, guys. Good quarter. Appreciate it.

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Operator   [44]
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 Shawn Collins, Bank of America.

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 Shawn Collins,  BofA Merrill Lynch - Analyst   [45]
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 So, I wanted to ask about the ship-to-ship transfer business. Two questions. One, I just wanted to ask ballpark, how much annual fee-based revenue that you are roughly expecting in third quarter and fourth quarter.

 And then, second, I wanted to ask how active you have been with the business so far, as I know you're just integrating it, and how would we think about it as in, how many ship cargoes you have transferred, or how many customers you have work with, or just any color there, to get a better sense of how the business operates. Thank you.

------------------------------
 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [46]
------------------------------
 I'll take the commercial end of that and you can talk about the finance. Yes. I think the integration has gone really well. I think the purchase of the organization was received very well by the staff and immediately we recognized synergies; not from a cost perspective or revenue, but also just integrating our communication flows on commercial desks.

 The business has really got three focus areas. One is US Gulf integration with our Aframax portfolio. The second piece is more of a global support service that we offer. And the third piece is a consulting and lightering business in the LNG space. So, we've -- some of that, we weren't too familiar with. We're very familiar with the Aframax and the global support service piece.

 And we've identified some synergies with customers that we already have in-house, that we think we can grow our business both on the US Gulf side as well as the global supports. But we've also identified customers in other parts of the world that we haven't penetrated on the tanker side.

 So, I think -- I don't have the specific revenue numbers at hand -- Vince can give you that -- but it's been positive around the conversations we've had with our management, and the integration's going very well.

------------------------------
 Vince Lok,  Teekay Tankers, Ltd. - CFO   [47]
------------------------------
 Yes. In terms of the financial contribution of SPT in the third quarter, it was pretty much in line with what we expected. We will provide more segmented information in our 6-K filings, so you can look at the results specifically for the lightering business.

 But essentially, the EBITDA for the 2 months in the third quarter -- if you exclude the restructuring charges of about $300,000 in that quarter, our EBITDA was about $1.8 million. So, if you annualize that, it's a little bit over $10 million, which is in line with the guidance we gave last quarter of $10 million to $12 million, taking into account that there's further revenue synergies to be achieved, especially on the full-service lightering side of the business.

 So, the SPT business does impact various line items in the income statement. So, we'll provide more details in our 6-K filing.

------------------------------
 Shawn Collins,  BofA Merrill Lynch - Analyst   [48]
------------------------------
 Great. That's helpful. Thank you, Vince and Kevin. A second question. I wanted to ask about Chinese and India strategic oil storage. A few weeks back, there was some press citing crude tankers sitting offshore in China, waiting to go to port, and that they had to wait due to the Chinese storage tanks being reasonably full up.

 On the other hand, some other industry folks cited that it was more a weather issue as opposed to Chinese storage being full up. I just wanted to ask you guys for some color on this, and what you thought of the delays, and what it looks like right now, if you could. Thank you

------------------------------
 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [49]
------------------------------
 I think it was a combination of both, to be honest. There was weather that caused some delays in and out of berths. There was also obviously a surge of imports coming in over that period, that caused some backlog.

 I think the difficulty with China is understanding what is strategic and what is commercial, in terms of their reserves and their stockpiling. What we may have seen is some commercial storage tanks being filled rather rapidly and taking time to deplete. But I think, ongoing, the story around China is that they're not finished with their stockpiling program on a strategic level. And I think in 2016 it's -- we're going to see about 250,000, 260,000 barrels a day pushing through phase 2 for that storage.

 So, I think we're always going to get weather delays and in winter -- coming into the winter season now, I think those delays could be exacerbated in all parts of the world, which is going to tighten up vessel supply. And I think the story around China is, the underlying strategic build is going to be ongoing, in our view.

------------------------------
 Shawn Collins,  BofA Merrill Lynch - Analyst   [50]
------------------------------
 Great. That's helpful. Very helpful. Good. That's all for me. Thank you for the time and the insights.

------------------------------
Operator   [51]
------------------------------
 Chris Damas, BCMI Research.

------------------------------
 Chris Damas,  BCMI Research - Analyst   [52]
------------------------------
 I'm an energy analyst and I've just recently started following this sector, so if my questions are basic I apologize in advance. Do you have a normalized utilization rate for the same-store sales kind of tanker number, without the 12 new Princimar vessels for the Q3? I know we have to back out about 1,100 revenue days. Hello? You're shocked at my question.

------------------------------
 Vince Lok,  Teekay Tankers, Ltd. - CFO   [53]
------------------------------
 Yes, we're just -- we're trying to understand the question. Are you referring to number of revenue days?

------------------------------
 Chris Damas,  BCMI Research - Analyst   [54]
------------------------------
 Well, the utilization rate. You had 49 vessels on -- in the spot fleet, showing seven of those were the new Princimar vessels. You say only 33 revenue days. Do you have it offhand? I'm doing the calculation. If I adjust the number for seven new vessels in Q3, it's 644 days. We're looking at about 3,900 revenue days from the existing fleet before the Princimar acquisition. And there was about -- I had it here -- 3,600, 3,700 days.

 So, do you have any drydocks? Another way of looking at it -- do you have any drydocks or off-hire with the existing fleet in Q3, on the spot fleet?

------------------------------
 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [55]
------------------------------
 Yes. I think it -- I'd point you to our appendix on our drydocking schedule, which gives you the number of off-hire days related to docking. Obviously, of the seven ships that came in, I think four of them went straight into dry dock, and obviously can't be counted. So --

------------------------------
 Chris Damas,  BCMI Research - Analyst   [56]
------------------------------
 Well, if you add up the spot revenue days, there are 3,044 days of revenue days on the spot fleet for Q3. And I believe the number of available days would have been about 3,900. So --

------------------------------
 Vince Lok,  Teekay Tankers, Ltd. - CFO   [57]
------------------------------
 Yes, I think -- and we can help you offline, maybe. But -- just to keep it short. On slide 11, if you assumed -- you could take the whole fleet, and then you deduct the 381 of off-hire days for drydocking, that would get you to your net revenue days for the fourth quarter.

------------------------------
 Chris Damas,  BCMI Research - Analyst   [58]
------------------------------
 Well, we'll take that offline. Second question -- how do you handle ballast runs in these revenue day numbers? Let's say it's 33,000 a day for an Aframax and there's a ballast run. Is that averaging over the ballast run? I know that's a basic question.

------------------------------
 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [59]
------------------------------
 It's -- our utilization numbers are based on ship available days. So, any days that the vessel is not idle due to unscheduled maintenance -- everything is included, whether they're waiting on loading; whether they're on ballast, or on (inaudible), it all gets rolled in.

------------------------------
 Chris Damas,  BCMI Research - Analyst   [60]
------------------------------
 So, if there was a ballast run, the actual payment per day for the front leg would be way more than 33,000.

------------------------------
 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [61]
------------------------------
 Yes. But typically we look at voyages on a round-trip basis (inaudible).

------------------------------
 Chris Damas,  BCMI Research - Analyst   [62]
------------------------------
 Yes. I'm just saying, a lot of triangulation is occurring. So --

------------------------------
 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [63]
------------------------------
 Yes.

------------------------------
 Chris Damas,  BCMI Research - Analyst   [64]
------------------------------
 It's good to know what we're paying for. Second thing -- the Tokyo Spirit apparently went aground off Portugal. Is -- was there any significant damage on that?

------------------------------
 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [65]
------------------------------
 There was damage. The vessel was -- ran aground on the way to drydocking, thankfully. So, there was no oil on board, and no pollution. And, more significantly, no one was hurt. Yes, there was damage sustained to the shell plate at the bottom of the ship. But she's sitting in -- off Portugal right now. She's actually in dry dock today, being assessed for repairs.

------------------------------
 Chris Damas,  BCMI Research - Analyst   [66]
------------------------------
 Okay. Thank you very much.

------------------------------
Operator   [67]
------------------------------
 Richard Diamond, Strait Lane Capital.

------------------------------
 Richard Diamond,  Strait Lane Capital Partners - Analyst   [68]
------------------------------
 Given the earnings power of TNK right now, the stock is trading as if we're in the ninth inning of a ballgame due to the challenges of the order book. If TNK were a baseball game, what innings do you think we're in? And how should we dimension the order book? Thank you.

------------------------------
 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [69]
------------------------------
 I beg to differ on the challenges of the order book. I don't think it's -- it is increasing. But I think if you look at it, global tanker fleet growth at just over 5% is in line with historical averages. So, it's not an anomalous growth number that we're concerned about having to integrate into the global fleet.

 I certainly wouldn't characterize Q4 2015 as the bottom of the ninth. I think, as we've tried to articulate, that we see on the demand side 2016 will be strong in terms of oil supply and oil demand, which drives tanker demand. So, I think there's room to move here.

------------------------------
 Richard Diamond,  Strait Lane Capital Partners - Analyst   [70]
------------------------------
 I actually agree with you. But recently, in the last couple of days, there's been a panic about the order book and people's expectations for 2016 and 2017. So, I'm glad we're in agreement. Thank you.

------------------------------
 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [71]
------------------------------
 No problem. Thanks, Richard.

------------------------------
Operator   [72]
------------------------------
 Noah Parquette, JPMorgan.

------------------------------
 Noah Parquette,  JPMorgan - Analyst   [73]
------------------------------
 My questions have mostly been answered. I just had a quick modeling one. So, two of the Principal ships still were delivered after the quarter-end, right? And so, the cash flow -- how's that going to show up in the cash flow statement? Is that -- the CapEx for that going to be in Q4?

------------------------------
 Vince Lok,  Teekay Tankers, Ltd. - CFO   [74]
------------------------------
 That's correct, yes. Those two ships will show up in Q4 cash flow statement.

------------------------------
 Noah Parquette,  JPMorgan - Analyst   [75]
------------------------------
 Can you guide to what that number will be, just -- ?

------------------------------
 Vince Lok,  Teekay Tankers, Ltd. - CFO   [76]
------------------------------
 Well, it's two out of the 12. So, each ship is roughly $40 million, $50 million each.

------------------------------
 Noah Parquette,  JPMorgan - Analyst   [77]
------------------------------
 All right. Okay. Thanks.

------------------------------
 Vince Lok,  Teekay Tankers, Ltd. - CFO   [78]
------------------------------
 Most of that is drawing on the debt facility. Was that your question?

------------------------------
 Noah Parquette,  JPMorgan - Analyst   [79]
------------------------------
 Yes. That's the last. Thanks.

------------------------------
Operator   [80]
------------------------------
 Omar Nokta, Clarksons Platou Securities.

------------------------------
 Omar Nokta,  Clarksons Platou Securities - Analyst   [81]
------------------------------
 Just a quick question, regarding your earlier comments about the continuous offering program. I understand it seems to be a good tool to have. We're just wondering now, with the way cash flows are and how they're on the rise, do you think perhaps that you don't necessarily need that type of program, especially with the cash flow coming in, really starting to accelerate the equity buildup?

------------------------------
 Vince Lok,  Teekay Tankers, Ltd. - CFO   [82]
------------------------------
 Yes, you're right. We don't need to use it. And I think -- I wouldn't expect us to use it in any material way over the next little while.

------------------------------
 Omar Nokta,  Clarksons Platou Securities - Analyst   [83]
------------------------------
 Okay. All right. Thank you. That's it for me.

------------------------------
Operator   [84]
------------------------------
 (Operator Instructions). Magnus Fyhr, GMP Securities.

------------------------------
 Magnus Fyhr,  GMP Securities - Analyst   [85]
------------------------------
 Just had a question on the Principal fleet. Tanker Investment had some issues with the integration due to delayed vetting approvals. Do -- of the 900 days for the fourth quarter, should we expect all of those being revenue-generating? Or, is there some repositioning there, where we should be a little more conservative?

------------------------------
 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [86]
------------------------------
 No, I think you can expect those to assimilate well into the spot market. Obviously the ships coming out of dry dock are going to have to position to load ports.

 But in terms of vetting issues, we don't anticipate anything based on the other ships we've taken have gone straight into load port. That was one of the successes of this transaction, was our ability to take in the ships and not take that commercial hit. The hit that we did take was around the decision to drydock the ships, that now gives us a 5-year runway to maximize the earnings on them.

------------------------------
 Magnus Fyhr,  GMP Securities - Analyst   [87]
------------------------------
 Okay. Great. Thanks for clarifying.

------------------------------
Operator   [88]
------------------------------
 Thank you. There are no further questions at this time. Please continue.

------------------------------
 Kevin Mackay,  Teekay Tankers, Ltd. - CEO   [89]
------------------------------
 Okay. Thank you very much, operator. Thanks, everyone.

------------------------------
Operator   [90]
------------------------------
 Thank you. Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line, and have a great day.




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