Q4 2015 Teekay Tankers Ltd Earnings Call

Feb 19, 2016 AM EST
TNK - Teekay Tankers Ltd
Q4 2015 Teekay Tankers Ltd Earnings Call
Feb 19, 2016 / 04:00PM GMT 

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Corporate Participants
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   *  Unidentified Company Representative
      Teekay Tankers Ltd.
   *  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
   *  Michael Webber
      Wells Fargo Securities, LLC - Analyst
   *  Shawn Collins
      BofA Merrill Lynch - Analyst
   *  Chris Karger
      Huber Capital Management - Analyst
   *  George Berman
      IFS Raymond James - Analyst
   *  Sherif Elmaghrabi
      Morgan Stanley - Analyst
   *  Amit Mehrotra
      Deutsche Bank - Analyst
   *  Spiro Dounis
      UBS - Analyst

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Presentation
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Operator   [1]
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 Welcome to Teekay Tankers Limited's fourth-quarter and FY15 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's Chief Executive Officer. Please go ahead, sir.

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 Unidentified Company Representative,  Teekay Tankers Ltd.   [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 (technical difficulties) during today's call.

 Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from the 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 fourth-quarter and FY15 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, Doug. 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' fourth-quarter and FY15 earnings results presentation, which can be found on our website. Beginning with our recent highlights on slide 3 of the presentation, during the fourth quarter, Teekay Tanker has generated strong free cash flow and adjusted earnings, recording one of the Company's strongest quarters since inception. Teekay Tankers reported adjusted net income of $0.31 per share in the fourth quarter, an increase of 48% from the same period in the prior year. The increase is primarily due to stronger spot tanker rates and an increase in fleet size related to the acquisition of 19 modern midsize tankers during 2015 and continued expansion of the Company's in-charter portfolio from 2015.

 Although it was a strong result, the fourth-quarter net income was negatively impacted by a few nonrecurring and timing differences related to revenues, vessel operating expenses and G&A expenses, totaling approximately $8 million or $0.05 per share. Some of these variances are explained in more detail in the appendix of this presentation.

 We generated free cash flow of $74 million or $0.48 per share during the quarter, up from $31.7 million or $0.35 per share in the same period in the prior year. In December, Teekay Tankers announced and implemented a new variable dividend policy and declared a fourth-quarter dividend of $0.12 per share, up from $0.03 per share in the previous quarter, which was paid on February 12. We also are pleased to announce the acquisition of two modern purpose-built lightering Aframax tankers in mid-December for a total purchase price of $80 million, which complements our recent ship-to-ship transfer business acquisition and further expands our presence in the strategic US Gulf region. Lastly, in January, we completed the previously announced five-year $900 million long-term debt facility to refinance the majority of the Company's fleet. I will provide more details of this later in the presentation.

 Turning to slide 4, I will discuss our new variable dividend policy. Under our new policy, we intend to pay out 30% to 50% of the Company's quarterly adjusted net income, subject to reserves the Board may determine are necessary for the prudent operation of the Company. We will maintain a minimum quarterly dividend of $0.03 per share. Based on the new policy, we significantly increase our fourth-quarter cash dividend from $0.03 per share to $0.12 per share. As the two graphs below illustrate, the new policy provides investors the opportunity to directly participate in the strong earnings from the tanker market while maintaining our ability to delever the balance sheet. We believe this balanced policy will maximize the total shareholder returns.

 The graph on the left shows our projected annual dividend range at payouts of between 30% and 50% of adjusted net income based on varying Aframax-equivalent spot TCEs and our current fleet. This illustrates the Company's high operating leverage, as dividends paid to shareholders increase significantly with rising spot market rates. The graph on the right highlights Teekay Tankers' success in delevering the balance sheet over the past two years, from 72% in the fourth quarter of 2013 to 55% by the end of the fourth quarter 2015. Even with an increased dividend payout under the new policy, we project that leverage will decrease to between 40% and 46% by the end of 2016 assuming a 40% dividend payout and Aframax-equivalent spot TCEs between $25,000 and $35,000 per day. Delevering remains a top priority, and to add shareholder value by increasing net asset value and providing the Company with financial flexibility.

 Turning to slide 5, I will expand on how Teekay Tankers is expanding its strategic presence in the US Gulf. During the fourth quarter, we built on our recent ship-to-ship transfer business acquisition and expanded our US Gulf presence by adding three purpose-built lightering Aframax tankers to our fleet. In December, we completed the acquisition of two lightering Aframax tankers, the Navigator Spirit and the SPT Explorer from Teekay Offshore Partners for an aggregate purchase price of $80 million; and in-charter for five years, another lightering Aframax tanker which is scheduled to deliver between February and March of this year.

 The acquisition was financed through a combination of the assumption of an attractively priced $50 million revolving credit facility from the seller and the Company's existing liquidity. This acquisition is expected to be immediately accretive to Teekay Tankers' earnings and free cash flow per share. Both of these transactions position Teekay Tankers well to take advantage of developing import and export activities in the US Gulf related to the recent removal of export restrictions on US crude oil, which I will touch on later in the presentation.

 Turning to slide 6, I will highlight details of our new debt facility. In January of this year, we completed our new five-year $900 million facility which includes term loan and revolving credit facility components. The new facility, which is 1.4 times oversubscribed, was used to refinance 36 of the Company's existing vessels including 17 vessels acquired during 2015 that were financed with two bridge loans that matured in early 2016, and the Company's main corporate revolving credit facility that was scheduled to mature in 2017. We decided to secure a larger facility, at an attractive rate of LIBOR plus 200 basis points, to refinance both our near-term debt maturities and our main corporate revolver in order to extend the Company's debt maturity profile and provide financial flexibility. The graph at the bottom of the slide shows our debt repayment profile before and after refinancing. As can be seen, our scheduled repayments have been extended over the next five years in comparison to our previous profile, which had a majority of debt coming due over the next two years.

 Turning to slide 7, we look at developments in the crude tanker spot market. 2015 developed into the strongest markets since 2008, as low fleet growth and surging demand combined to provide consistently strong rates throughout the year. Starting with the supply side, the overall tanker fleet grew by approximately 3.3% in 2015. However, fleet growth was weighted towards the product tanker sectors, with the crude tanker fleet growing by a more modest 2%. Looking at the midsize sectors, the Suezmax fleet grew by just under 2% in 2015, while the uncoated Aframax fleet was unchanged in the previous year.

 While low fleet growth was certainly a contributor to the strong rates last year, the main catalyst came from the tanker demand side. Global oil production increased by 2.6 million barrels per day in 2015, the highest level of supply growth in 11 years. The increase in supply from OPEC was particularly beneficial to the crude tanker market, with Saudi Arabia and Iraq supplying an additional 1 million barrels per day between them. As Middle East OPEC countries are located far from the main refining centers in the US, Europe and the Far East, an increase in OPEC crude supply is generally positive to tanker ton mile demand.

 On the demand side, global oil consumption grew by 1.7 million barrels per day in 2015, the highest growth rate since the post-financial crisis rebound in 2010. One of the main drivers to this strong demand growth is low oil prices, which averaged just $52 per barrel last year. This was the lowest average oil price seen in 11 years, and stimulated higher consumption of refined products, particularly for gasoline. Low oil prices led to a number of additional benefits in the crude tanker market, including higher refinery throughput, taking advantage of the strong refining margins, an increase in commercial and strategic stockpiling, and lower bunker fuel costs, which led to significantly lower operating costs and stronger earnings for tanker owners.

 Turning to slide 8, we take a look at demand fundamentals for the year ahead. We believe that many of the strong demand fundamentals which drove tanker rates higher in 2015 will remain in place during 2016. Global oil demand is expected to grow by 1.3 million barrels per day in 2016. While this is a decrease from the 1.7 million barrels per day of growth seen last year, it is above the average growth rate of about 1 million barrels per day seen over the last decade. Similarly, global oil production is expected to remain high, with the potential for even higher volumes from OPEC as Iranian production increases following the lifting of sanctions. The Iranian government stated that it could raise production by up to 1 million barrels per day in 2016, though most analysts see an increase of 0.5 million barrels per day as being more realistic. This additional oil will add to crude export volumes while also helping to keep oil prices low.

 Looking at the balance between oil supply and demand, the expectation is for another year of oversupply in 2016, meaning more oil heading into inventories. At the chart on the top right of the slide shows, global oil inventories are projected to build by 370 million barrels, according to IEA estimates, which is more than the theoretical amount of available storage capacity. As such, we believe that ullage delays will continue to be a factor in 2016, while demand for floating storage may also emerge as storage capacity limits are reached in certain regions. In fact, we have already seeing inquiry for floating storage in the US Gulf as inventories in the region have topped 250 million barrels, pushing the WTI curve into a steep contango. The use of ships as floating storage removes vessels from the spot trading fleet, thus tightening the supply/demand balance and leading to an increase in rates. Finally, a significant oversupply of oil in 2016 should keep bunker fuel costs low, which means continued low operating cost for tanker owners. Overall, the demand side fundamentals appear very favorable for tankers in 2016.

 Turning to slide 9, we look at the changing trade dynamics for midsized tankers in light of the lifting of the US crude oil export ban and the impending completion of the Panama Canal expansion project. In late 2015, the US lifted the ban on oil exports, which has been in place since the 1970s. The US is now free to export crude to international markets, with the most likely destinations being to Europe on Aframaxes, and to Asia on both Aframaxes and Suezmaxes via the expanded Panama Canal, which is scheduled to be completed in June 2016.

 While the initial volumes of US crude exports has been quite limited thus far, with just a few test cargoes being sold, the biggest impact has been seen on US crude imports, which perhaps counterintuitively has increased since the crude export ban has been lifted. This is because the price of WTI in early January increased to parity with Brent crude, meaning that seaboard and crude imports into the US Atlantic coast became more economical than rail movements of domestic shale oil from Bakken. These changes illustrate some of the fluid trade dynamics which are developing for midsize tankers, with US crude imports and exports expected to fluctuate depending on the relative arbitrages between US shale oil and different grades of international crude. For US Gulf refiners, this means the ability to export some of the light sweet crude, which is less suitable for the US Gulf region refineries, taking in more heavy crude from places such as Venezuela and the Middle East.

 We believe that these changes will benefit the US Gulf ship-to-ship transfer market as more lightering vessels will be required to accommodate the influx of larger deep draft vessels carrying heavy crude from afar. Conversely, an increase in crude exports in the US Gulf could then lead to increased requirements for reverse lightering, whereby small parcels of crude are transferred to larger vessels for more economic exports to international markets.

 The expansion of the Panama Canal from Q2 of this year should also be a positive for the midsize tanker sector, as it creates transshipment opportunities for Aframaxes and LR2s. This could include US crude moving west to Asian markets as well as West Coast and South American crudes moving into the Caribbean, and vice versa. In sum, we believe that these developments are very positive for midsize tanker demand and believe that Teekay Tankers, as the world's leading operator and owner of midsize tankers, is well-positioned to capitalize on the changing trade dynamics in both the Atlantic and Pacific basins going forward.

 Turning to slide 10, we present our outlook for tanker fleet utilization in 2016. As you can see from the chart on the slide, tanker fleet utilization increased by 4 percentage points to approximately 89% in 2015 as tanker demand grows bar extra supply. For 2016, we anticipate that supply and demand will be more closely matched, with approximately 4% to 5% growth in each. This means that fleet utilization should remain steady at close to 2015 levels, indicating another year of relatively firm tanker rates.

 Looking further ahead, we acknowledge that there is significant fleet growth to come in the Suezmax sector in 2017. However, we believe that further ordering will be limited, as owners now face costly NOx tier III compliance requirements, which adds an additional $2 million to $3 million to the price of newbuildings. In addition, a tighter credit environment and a lack of private equity interest should act to dampen newbuilding orders. To this point, since the start of the year, there has been no new tanker orders placed, which bodes well for tanker fleet growth post-2017.

 Finally, we have taken a relatively conservative view to scrapping in our fleet forecast assumptions, given the low levels we saw during 2015. However, we believe there could be upsize to scrapping in the coming 24 months for vessels 15 years and older as a result of the entry into force of Ballast Water Treatment legislation, which places significant cost expenditure on vessels docking in these later years of their service life where owners may not see the economic benefit of that added CapEx.

 Turning to slide 11, I will provide an update on spot tanker rates for the first quarter of 2016 to date. Compared to the average realized rates for the fourth quarter of 2015, the first quarter of 2016 to date remains strong. Based on approximately 63% and 54% spot revenue days booked, Teekay Tankers' first quarter to date Suezmax and Aframax bookings have averaged approximately $41,000 and $28,100 per day, respectively. For the LR2 segment, with approximately 54% revenue days booked, our first quarter to date bookings trended slightly higher, with rates on average increasing to approximately $27,000 per day compared to $26,500 per day last quarter.

 We believe Teekay Tankers will continue to benefit from ongoing strength in the tanker market, reflected by positive fundamentals. With the completion of our strategic acquisitions and Teekay Tankers' strong operating leverage, we believe that volatility in the tanker spot market will continue to translate into strong earnings and cash flow for 2016.

 Turning to slide 12, I think it's important to review what Teekay Tankers has been able to achieve and accomplish during the past year. In 2015, Teekay Tankers focused on building our core segments and aligning sea and shore capabilities to drive operational excellence, which has been the foundation of the Teekay brand for over 40 years. We expanded and modernized our core segments by investing approximately $1 billion in 19 modern Suezmaxes, Aframaxes, and LR2 tankers, reducing the average age of our fleet by two years. This increase in scale was supplemented by a well-timed 15-vessel in-charter fleet, adding exposure to a strengthening spot freight market and resulting in additional net income of approximately $42 million in 2015.

 We have refocused our customer strategy by taking back more direct management of our technical operations and consolidating all of our fleets' commercial management under the Teekay name. We also added a new services dimension with the purchase and integration of a ship-to-ship transfer business, expanding capabilities and our presence in the strategically important US Gulf region. A consolidation of the Teekay brand through these strategic moves allows us to offer our customers a more direct Teekay engagement and experience and allows us to provide a higher quality of service. These moves have been very well-received by our customers, and our consolidated approach is already starting to show benefits in the form of better commercial information flow and new business opportunities.

 We have continued to strengthen our financial position and increased net asset value through our commitment to reducing our financial leverage down from 72% two years ago to 55% as of the end of the fourth quarter 2015. Further, we have rewarded shareholders by enhancing our dividend policy to an earnings-based variable dividend, which should significantly increase the dividend payout in 2016. Lastly, we increased our financial flexibility by refinancing the majority of our fleet with a new $900 million debt facility which has extended our debt repayment profile out to 2021. While 2015 was a very busy year for Teekay Tankers, we believe it was a transformational one. We are confident that the levers that we have deployed and the strategy that we have initiated has transformed the Company into a much larger, better organized, and more customer-facing organization that stands on a significantly stronger financial foundation. This positions us well to maximize, benefit of our core markets, and continue to provide enhanced shareholder value.

 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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 Thank you so much.

 (Operator Instructions)

 Jon Chappell, Evercore ISI.

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 Jon Chappell,  Evercore ISI - Analyst   [2]
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 Thank you. Good morning, Kevin.

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [3]
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 Good morning, Jon.

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 Jon Chappell,  Evercore ISI - Analyst   [4]
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 This first one, a detailed numbers question before I get into some strategy, you mentioned the $8 million in timing or one-time expenses in the fourth quarter. And I see this schedule in the back of the appendix, and there's like $3 million in the OpEx and a couple in G&A.

 Maybe it's simpler -- is it possible to give us a go forward run rate on the G&A? It's jumped from $3 million to $4 million to $6 million a quarter. And also on the OpEx, is it right to strip the $3 million of quote-unquote timing expenses and use that as a run rate going forward?

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 Vince Lok,  Teekay Tankers Ltd. - CFO   [5]
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 Sure Jon. This is Vince here. In terms of the G&A expense, we would expect the quarterly run rate to be more in the $5 million to $5.5 million per quarter. The first quarter is usually a little bit higher because the timing incentive dates -- long-term incentive dates compensation and some of that is picked up more in the first quarter. That is the run rate that we would expect at least for 2016. The fourth quarter we saw a little bit of higher G&A expense just based on the higher level of acquisitions and refinancing activity in the latter part of 2015.

 In terms of OpEx, I would -- I think for the first quarter, the run rate should be about roughly $3 million lower than the fourth quarter. A lot of that in the fourth quarter was timing of repairs and maintenance, and you tend to do little bit more maintenance when the ship are in drydock. As you know, we had over 350 drydock days in the fourth quarter which is unusually high, and a lot of that was related to drydocking a lot of the principal ships. So we will have much fewer drydocking days looking into 2016.

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 Jon Chappell,  Evercore ISI - Analyst   [6]
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 Right, completely makes sense. Then Kevin on the strategy front, you have five charter outs expiring in 2016. TNK has always had a balanced mix of chartering and spot. And arguably given even though I share your views on the market (technical difficulty) for this year and next, maybe this cycle's getting a little bit long in the tooth. How do we think about the balance between spot market exposure and renewing some of those time charters as they expire this year?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [7]
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 On the in-charter portfolio, I have explained in the past about our ability to use different levers to either increase or decrease our exposure. I think we have been very successful on the run up in the rates with the growth of the in-charter portfolio. I think going forward it's not a case of maintaining that size for the sake of maintaining it. We will look for opportunities as we continue to evaluate what's been shown to us. Unless we feel that the price we are paying for those in-charters in the period we are taking them in for is worth it, then we would not be adding to that portfolio and we would let the ones that we have run off.

 We do have some pretty good option periods left on the books with the portfolio that we've got right now. I would imagine that we would be exercising them come the due time. I think going forward, it's more a case of looking at any new deals on a standalone basis.

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 Jon Chappell,  Evercore ISI - Analyst   [8]
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 Okay. That makes sense. That was actually my next question, which you answered directly, which is on the in-charter fleet, but the prior one was on the charter out fleet.

 To tie the two together, it does seem like some of these rates -- for example you had an extension of a charter out ship that you had at [$15,500] and you got up to [$25,000], obviously a huge increase. Figuring maybe the charter in market had run away from you a little bit and it makes sense to let those expire. As it relates to your own fleet that is chartered out, do you envision re-chartering a lot of those -- there's five that expire this year, re-chartering those not only to keep the balance of spot and time charter coverage in your own fleet, but also because the charter market seems to have gapped up little bit?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [9]
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 We are always going to have some balance between our spot exposure and our owned vessels being chartered out. Some of that is for coverage reasons, and some of it is also for maintaining strategic relationships with some of our key customers. In the fourth quarter, we actually put away two additional ships at $25,000 for three years, partly to maintain our coverage levels but also it was to keep those ships onto a customer that we feel is very strategic to us.

 We would like going forward this year to look at a range of somewhere between 15% and 30% in terms of our coverage. We are continually evaluating what our forward view of the market is and what opportunities we can take to put ships out or to maintain them spot.

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 Jon Chappell,  Evercore ISI - Analyst   [10]
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 Got it. Thanks a lot, Kevin.

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Operator   [11]
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 Michael Webber, Wells Fargo.

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 Michael Webber,  Wells Fargo Securities, LLC - Analyst   [12]
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 Good morning guys. How are you?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [13]
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 Good morning, Mike.

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 Michael Webber,  Wells Fargo Securities, LLC - Analyst   [14]
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 I wanted to start off with I guess a strategy higher level question around the dividend and dig back in to your charter mix. The floating dividend in this quarter, the first one it seems like you more or less split the uprights there right up to 40%.

 Just curious as we move into the balance of the year, the guidance is relatively wide at 30% to 50%. Just curious as to what you need to see over the course of the year that could move that figure credit towards the higher end or lower end of that percentage range. And as a corollary to that, where the current market looks and or how the current market looks, and is there anything you see right now that could you could see shifting that in one direction or another in 2016?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [15]
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 I think the strategically the main drivers that we would be keeping an eye out and discussing with the board as to our forward path would be primarily would be what we think our forward view of the market is going to be and how well we are progressing with our commitment to pay down the debt. It's really a balance of those two factors.

 Obviously in our discussions with the board, we look at what cash we have to keep available for prudent management purposes and things of that nature. That is why we have given the band -- it's to allow us to make sure we are managing the cash flows of the organization in a prudent manner through various points in the cycle.

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 Michael Webber,  Wells Fargo Securities, LLC - Analyst   [16]
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 That make sense. I guess that weaves into the way were thinking about it. It's in one of your slides, that if your TTE is somewhere between $25,000 to $35,000, it seems to put you on the path to more or less your leverage target is paying out about a 40% dividend. I guess the idea being how long into 2016 would we need to see rates above those levels before you guys would think about inching up the payout?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [17]
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 I think we've got to be honest, our leverage we've done a good job over the last couple years of getting it down. I think we are still -- we could do a lot more work to strengthen the balance sheet. That is going to be our priority, to make sure that financially we are strong and flexible for the natural cycle that we are going to encounter in a tanker market.

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 Michael Webber,  Wells Fargo Securities, LLC - Analyst   [18]
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 Fair enough. One more higher level question, given the two acquisitions this quarter from another TK entity, there's also to Afras it looks like they're going to get sold to third parties. And just curious why you guys passed on those assets. Was it a function of not necessarily fitting the direction you might take the fleet or was it a function of keeping your leverage in check and finding balance?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [19]
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 I think the -- what you're referring to in the Aframax is being put out is the Fuji and Kilimanjaro Spirit. It's not a TK Tankers owned couple of vessels. They are from Teekay Offshore. The acquisition of the two ships from Teekay Offshore into Teekay Tankers, the Navigator Spirit and the SPT Explorer were done really to bolster our buildup of presence in the US Gulf.

 We think that's going to be a really important market for the Aframax sector going forward. It ties in with our acquisition during the summer of SPT. These are purpose built ships with equipment on them that help us be more efficient and more cost efficient primarily in lightering. That was really the driver that drove us to take advantage of that opportunity when Teekay Offshore decided to put their ships up for sale.

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 Michael Webber,  Wells Fargo Securities, LLC - Analyst   [20]
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 That's helpful. Just one more and I will turn it over. Again, it's around your charter mix which you mentioned earlier in an earlier question, and I wanted to come at it maybe a slightly different angle.

 If I go back and look at your forward charter cover Q4 2014 and you guys were coming in at about 60% and 80% for the two segments, this quarter somewhere in the 60% to 50% of the dated books. And you mentioned I believe in your prepared remarks something around 30% to 50% level on a go forward basis for 2016. It certainly seems like you've been increasing your spot exposure into a firm market, which makes sense.

 I'm just curious as we have more supply delivering this year albeit not nearly as much as we've seen in past cycles, when do you think about maybe inching that coverage level back up at some point? And do you think about it in the context that I just laid out, that you've been increasing the spot exposure over the past year and half and there will be an inflection point and you'll move back to a more normalized level?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [21]
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 Just to clarify Mike, our -- when I spoke earlier about our tank charter cover, the figures I was referring to were between 15% and 30% for 2016. In terms of when we actually start thinking about it, we think about it all the time. It's something that isn't just looked at on a quarter by quarter basis.

 It's looked at almost weekly in terms of dynamics of the market, what opportunities come up from customers, where we think we can build some additional strategic relationships with customers that might enhance our business going forward. There is a whole combination of factors that we take into account, as well as maintaining an ability to service our customers with the contracts and the COAs that we have and having enough ships to be able to do that.

 It's a balance of how many ships we've got on the in-charter portfolio that are rolling off, how many vessels in the owned fleet that we want to seek cover on. And it's something the management team and I evaluate I would say on a weekly basis.

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 Michael Webber,  Wells Fargo Securities, LLC - Analyst   [22]
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 Right. And I guess as you evaluate 2016 and you can point that exposure generally and ease it in one direction or another, and it seems like you have into a firm market, which makes sense. As you look at 2016, how do you see that direction moving?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [23]
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 I would like to increase it a little bit. As you mentioned, we were coming out of back end of last year we were in the mid-teens coverage wise. I would like to get that up into the 20[%]s if we can do that.

 I am also cognizant of the dynamics in the oil market and the likelihood of the floating storage opportunities that we are already starting to see inquiry about. I don't -- we have to balance locking in longer-term coverage with missing out on potentially some big spikes that we could see if floating storage really kicks in in a big way.

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 Michael Webber,  Wells Fargo Securities, LLC - Analyst   [24]
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 Okay. I appreciate the time guys. Thanks.

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [25]
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 Thanks Mike.

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Operator   [26]
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 Shawn Collins, Bank of America.

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 Shawn Collins,  BofA Merrill Lynch - Analyst   [27]
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 Great. Thank you. Good morning Kevin, good morning Vince and I hope you guys are well.

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [28]
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 Good morning, Shawn.

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 Shawn Collins,  BofA Merrill Lynch - Analyst   [29]
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 Thanks. I wanted to reference slide 5, which you laid out very well. I know you purchased two Aframaxes in the fourth quarter for the ship to ship business. I just wanted to ask as we talk about what was specific or different about those ships from a technical standpoint that makes them suitable for the ship to ship transfer business and whether in the future they would also be very useful for the transport business if your needs changed? Thank you.

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [30]
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 These three ships, the two purchased ones and the one we took on a five-year charter were all sister vessels that were built in 2008 specifically for the US Gulf lightering trade. Our view of these are they fit in with our strategic approach to that market that we want to grow.

 From an equipment standpoint, the ships have bow thrusters fitted that help them take them more maneuverable and safer to operate during a lightering operation. They have Schilling rudders which also adds to maneuverability. And they have various bits and bobs of equipment for fendering and hose handling capabilities that make the whole lightering operation at sea both safer and more efficient. In terms of how we operate those ships, it gives us an added advantage over traditional lightering operations, reducing our need for ancillary equipment which in turn reduces our cost for getting involved in that business.

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 Shawn Collins,  BofA Merrill Lynch - Analyst   [31]
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 Great. That's helpful. Thank you, Kevin. A second question moving towards the finance side, you did a very sizable financing, $900 million successfully, in what is certainly a very choppy capital market environment. Can you describe the nature of that of those negotiations and more importantly outline the significant financial covenants and whether those are cash flow in nature or more likely debt to asset value in nature? Thank you.

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 Vince Lok,  Teekay Tankers Ltd. - CFO   [32]
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 Sure. That was a very well-timed refinancing which allowed us to stretch out our maturities. As you saw here, it refinances the bulk of our fleet with 36 vessels, which includes the vessels that we acquired during 2015, as well as stretching out maturity of our original main corporate revolver which is due to expire or was due to expire in 2017. We had very strong support from an interest in the banks. As you can see with 1.4 times oversubscribed, so it was very well received.

 We also took the opportunity to terminate some old swaps at the same time that were at higher rates and entered into new swaps. So overall I was able to reduce our cost of capital in that regard despite the margin being higher than the previous revolver.

 In terms of covenants, it's pretty much very similar to our previous covenants. Our main covenant is maintaining a minimum leverage or minimum liquidity level of which is about 5% of total debt. Other than that, it's your typical [hall] covenants, but we have plenty of room especially as we are continuing to delever the balance sheet. Those covenants, we have plenty of headroom on those.

------------------------------
 Shawn Collins,  BofA Merrill Lynch - Analyst   [33]
------------------------------
 Great. That's helpful. The covenant is 50% of what to what?

------------------------------
 Vince Lok,  Teekay Tankers Ltd. - CFO   [34]
------------------------------
 The main covenant is a minimum liquidity covenant, which is 5% of total debt. So it's fairly low figures.

------------------------------
 Shawn Collins,  BofA Merrill Lynch - Analyst   [35]
------------------------------
 Got you. Very accommodating. And that 5% can be fulfilled through cash or revolving needs or liquidity, I presume?

------------------------------
 Vince Lok,  Teekay Tankers Ltd. - CFO   [36]
------------------------------
 That's correct.

------------------------------
 Shawn Collins,  BofA Merrill Lynch - Analyst   [37]
------------------------------
 Got you. Great. And my last question, turning to slide 9, in thinking about the US export ban and how it's been repealed. I'm just wondering -- I know it's just your opinion, but how much of a discount do you think US crude needs to trade to global crude in order to start to get US crude exports really moving and see some material difference in volumes?

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [38]
------------------------------
 To be honest with you, Shawn, I would not comment on oil pricing. I'm not an oil trader. I will leave that to the people that make their bread and butter out of that business. What I think is interesting though is the dynamics of the elimination of the ban is actually drove the opposite.

 We're seeing a lot more movement of oil coming into the US especially on the Atlantic coast where the Bakken crude oil and the transportation costs by rail into the refineries on the East Coast is just outpricing itself against West African crude coming in on Suezmaxes. I think that is I dynamic that is for the foreseeable future anyway in this price environment I don't think is going to change. We are confident that our trading pattern in and around the US for the time being will be more of an import story rather than an export story.

------------------------------
 Shawn Collins,  BofA Merrill Lynch - Analyst   [39]
------------------------------
 Okay. That is helpful. I appreciate that. That's good color. That's great. That's all for me and thank you very much for the time in the insight.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [40]
------------------------------
 Thanks Shawn.

------------------------------
Operator   [41]
------------------------------
 Chris Karger, Huber Capital Management.

------------------------------
 Chris Karger,  Huber Capital Management - Analyst   [42]
------------------------------
 Hello, Kevin. Do management and the board currently view the stock price as cheap or expensive?

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [43]
------------------------------
 I think management and the board would describe it as undervalued.

------------------------------
 Chris Karger,  Huber Capital Management - Analyst   [44]
------------------------------
 Undervalued. Okay. As investors, we share that view, and we'd like cash flow to be allocated to projects with the highest return on capital. And we think that buying back stock is probably the least risky and highest returning use of capital today. What is prohibiting Teekay from entering into a buyback program, and as owners of 17.5 million shares, what can we do to be supportive in helping the Company execute on a repurchase program?

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [45]
------------------------------
 I think we'd take you to the strategy that we've had over the last 18 months. We have clearly articulated that our primary focus at this point is to delever the balance sheet and put us in a stronger financial position for the typical cyclicality that we experience in the tanker market. I think once we look at where we stand on a leverage basis, then obviously as you have seen us do with the dividend policy, we will look to increase shareholder value by other means, and one of those could be share buybacks at some point.

------------------------------
 Chris Karger,  Huber Capital Management - Analyst   [46]
------------------------------
 Got it. Okay. Understood. Maybe we can discuss that further off-line in the future.

 I've got one quick one for Vince. Just related to the Voyage expense line item moving up from $2.6 million to $9.6 million in the fourth quarter, I appreciate the appendix, but that was not specifically discussed. Is there anything that's unusual on that line item?

------------------------------
 Vince Lok,  Teekay Tankers Ltd. - CFO   [47]
------------------------------
 Yes. You also notice that the board's charter revenues increased as well in the fourth quarter compared to the third quarter. The reason for that is because we had a few vessels that traded temporarily outside of the pools when they came out of dry docking. Subsequently they entered back into the pool. That is why you see those two line items, both revenues and Voyage expenses go up correspondingly.

------------------------------
 Chris Karger,  Huber Capital Management - Analyst   [48]
------------------------------
 Perfect. That makes complete sense. Thank you guys. I appreciate it.

------------------------------
 Vince Lok,  Teekay Tankers Ltd. - CFO   [49]
------------------------------
 Thank you Chris.

------------------------------
Operator   [50]
------------------------------
 George [Berman], IFS Raymond James

------------------------------
 George Berman,  IFS Raymond James - Analyst   [51]
------------------------------
 Good afternoon gentlemen and congratulations to a great year and a good fourth quarter.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [52]
------------------------------
 Thank you.

------------------------------
 George Berman,  IFS Raymond James - Analyst   [53]
------------------------------
 I've got a couple questions related also same situation as the previous caller. With your company stock currently trading at 3 times earnings and you just having completed a very strong refinancing that pushes out all payments by another five or six years, your aftermarket stock offering is I take it off the table, right?

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [54]
------------------------------
 Yes.

------------------------------
 George Berman,  IFS Raymond James - Analyst   [55]
------------------------------
 Okay. A client of mine -- I don't own the 17.5 million shares that the previous caller had, but a client of mine that owned shares at $6 or $7 a share have little comfort in getting $0.12 more in a cash dividend looking at a drop in stock price of about 50% despite you describing a upcoming strong 2016 and maybe not as strong as 2015, but still very strong.

 And going at the previous caller, it would seem to me that the best use of your cash and cash flow would be to say repurchase a chunk of the 50 million shares, 60 million shares that you've sold over the last couple of years at significantly higher prices. The current valuation of your Company and many other tanker companies does not seem to be any relation to what's happening in the market in particular as you describe as oil demand is increasing further and oil needs to be moving from place A to place B in many shapes and forms more and more, thus requiring more ships.

------------------------------
 Vince Lok,  Teekay Tankers Ltd. - CFO   [56]
------------------------------
 We understand. I think we have seen a lot of tanker stocks trade down along with the general selloff in the stock markets since the early part of 2016. It seems to be a little bit of a disconnect given the strong earnings that you're seeing and the strong fundamentals going forward into 2016. We agree with some of your comments there about that.

 Share buybacks is one of several ways to create shareholder value. We recognize that. It's one of the multiple tools that we can use to maximize total shareholder returns. That is something that Teekay group of companies has used in the past successfully.

 As Kevin said, we have a number of priorities that we want to achieve. Ultimately, we are here to create shareholder value, so that is well noted your comments. That is taken into consideration going forward.

------------------------------
 George Berman,  IFS Raymond James - Analyst   [57]
------------------------------
 I would almost call it that the market value of your Company could be considered ridiculous here. Your connection to tanker investments, can you just describe that for me? Was it just an investment on your side? I think you are managing a part of their fleet as well, and they have been very aggressive with buying back stock.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [58]
------------------------------
 I think just to remind everybody, our investment in TIL started with a $25 million seed capital along with Teekay Corporation. Last year we added to that an additional $10 million of investment. We have been very pleased with that investment and how that has tracked. We also get the benefit of the scale of having those 18 or so vessels in our commercial pools as well as the technical management of those ships.

 At this point, it's an investment that we keep an eye on. We understand that their approach and their strategic direction is different from Teekay Tankers. I understand that they are actually looking to sell down the organization and sell their assets.

------------------------------
 George Berman,  IFS Raymond James - Analyst   [59]
------------------------------
 Right. How much is that investment you just mentioned? You've invested a total of $35 million, how much is that worth at today's market price?

------------------------------
 Vince Lok,  Teekay Tankers Ltd. - CFO   [60]
------------------------------
 We own around 11% now after the recent -- TIL's recent share buyback. The valuation -- TIL is trading below net asset value. So I think the mark-to-market is on a US dollar basis, is at our cost currently. But that does not also take into consideration the warrants that TNK holds, so there's an additional upside in addition to the original investment that we made.

------------------------------
 George Berman,  IFS Raymond James - Analyst   [61]
------------------------------
 Okay. Plus you're deriving income from managing their fleet as well, correct?

------------------------------
 Vince Lok,  Teekay Tankers Ltd. - CFO   [62]
------------------------------
 Yes. That is correct. Teekay Corporation is providing some of the corporate services, but in terms of the ships, they are in the pools and also the technical management.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [63]
------------------------------
 We received both commercial fees for trading the ships in our pools as well as technical management fees for husbandry on the ships.

------------------------------
 George Berman,  IFS Raymond James - Analyst   [64]
------------------------------
 Okay. Can you maybe comment in the last couple, three weeks here, rates in the shipping market have dropped off quite a bit. Is that -- was that due to the Chinese New Year or just a general slow down or what happened there in your opinion?

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [65]
------------------------------
 My view is whether it's Suezmaxes or Aframaxes or LR2s, February typically is never the best month of the year. It's a seasonal dip. We come off the winter or the December highs, if you will, going into January. This year there was -- Chinese New Year that had an impact. I think it's a temporary dip in the market. It shouldn't have any bearing on how 2016 turns out.

------------------------------
 George Berman,  IFS Raymond James - Analyst   [66]
------------------------------
 Okay. And you eluded in some of your charts to freight moving through the newly reopened Panama Canal. That would be specifically for your Aframax and MR and LR tankers going to Asia, correct?

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [67]
------------------------------
 It could be. There may also be the possibility of existing Panamax trades being moved up to Aframax size tankers. You can dimensionally also fit Suezmaxes through the canal, although you do sacrifice a couple hundred thousand barrels of oil, so you're going through light loaded.

------------------------------
 George Berman,  IFS Raymond James - Analyst   [68]
------------------------------
 Okay. Last question, you own half of one VLCC. How is that working out?

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [69]
------------------------------
 Very well. The vessel is joint venture vessel that we own 50% of with an Asian shipping company Wah Kwong. The vessel is currently on a long-term tank charter to Cosco.

------------------------------
 George Berman,  IFS Raymond James - Analyst   [70]
------------------------------
 Okay. Just to maybe make a recommendation, maybe in the current strong environment, one might consider taking that 50% ownership out and buy back your stock and save yourself 12% dividend payments and buy at significantly below book value.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [71]
------------------------------
 Thanks, George. We will take your guidance under advisement.

------------------------------
 George Berman,  IFS Raymond James - Analyst   [72]
------------------------------
 Okay. Other than that, thanks very much for your time.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [73]
------------------------------
 Thank you.

------------------------------
Operator   [74]
------------------------------
 Sherif Elmaghrabi, Morgan Stanley.

------------------------------
 Sherif Elmaghrabi,  Morgan Stanley - Analyst   [75]
------------------------------
 Hello gentlemen and thanks for taking my call. Obviously by now most of my questions have been answered, but it's interesting what you said about the interest in floating storage in the US Gulf. Is this primarily for larger tankers or have you seen interest for midsize tankers as well? If it is, would you consider putting tankers on floating storage or is there something stopping you from doing that?

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [76]
------------------------------
 I think what we've seen so far has been more in the larger [cargo] ships. It's certainly more economical to do that. We are seeing more of that happen primarily in the US Gulf and around the STS trades. That's where we get insight into that.

 In terms of whether we do it on our vessels, a lot depends on location, what our forward view of the market would be and how long the customer is asking the storage period to be. There are few things that we would have to consider before jumping in on that.

------------------------------
 Sherif Elmaghrabi,  Morgan Stanley - Analyst   [77]
------------------------------
 All right. Very good. That is all I had. Thanks very much.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [78]
------------------------------
 Thanks.

------------------------------
Operator   [79]
------------------------------
 Amit Mehrotra, Deutsche Bank.

------------------------------
 Amit Mehrotra,  Deutsche Bank - Analyst   [80]
------------------------------
 Well. Thank you. I still have a few questions believe it or not. First is on TCEs that were achieved in the quarter. I know there are many factors that may impact the realized rates relative to the average quoted in the quarter, but wondering if you can give some color on why there was underperformance really across the industry and I guess there was a pretty volatile quarter.

 Was there a big difference in terms of cadence and fixtures and maybe some higher inventory bunker costs, if you could give some color on that? And then Vince, as you look out on TCEs to compare how the TCEs will compare to the quarter rates into Q1 on the days that you have them booked, could we see maybe some disproportionate benefit with the sharp drop off in bunker costs intra quarter in the fourth quarter, if you could provide some help there.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [81]
------------------------------
 Generally as we stated, the fourth quarter was pretty good across all sectors that we are involved in the midsize class. One of the things that we did notice in the fourth quarter primarily with the Aframaxes and the Suezmaxes, September was a weak month. We came off some of the highs that we have seen earlier in that quarter.

 So ships that were booked in late September, voyages of 30 to 35 days were running through the first half of the fourth quarter, which tended to pull the front end of the curve down. Certainly we pick back up again across the sectors and had a robust November and December.

------------------------------
 Amit Mehrotra,  Deutsche Bank - Analyst   [82]
------------------------------
 Okay, and what about prospectively on booked days? Are there any exogenous factors that may impact the TCE relative to the quoted market?

------------------------------
 Vince Lok,  Teekay Tankers Ltd. - CFO   [83]
------------------------------
 Not necessarily. You touched on bunkers, and bunkers of course, there is a bit of a lag effect with inventories and all of that, but like you said, lower bunker costs obviously is favorable for TCE and voyage costs. The other big factor as I alluded earlier on the call is the number of voyage days in Q4 versus Q1.

 We provided some guidance on page 15 on in the presentation on a number of drydocking off-hire days. We had over 380 days actually off hire in the fourth quarter, and you can see that is going to decrease significantly throughout the quarters in 2016. So we're going to have more available days in 2016 that will help revenues.

------------------------------
 Amit Mehrotra,  Deutsche Bank - Analyst   [84]
------------------------------
 Okay. Good. And just one last one, on the financial leverage chart, I know the chart shows anywhere between 40% to 46%, and that obviously is how the math works on the TCEs.

 Wondering if that is essentially what the math looks like or if that is really your target because obviously there's an opportunity cost associated with deleveraging. And wondering how you prioritize getting to that 40% net leverage relative to other investment opportunities that over time actually may be more accretive to the equity.

------------------------------
 Vince Lok,  Teekay Tankers Ltd. - CFO   [85]
------------------------------
 That's projection, so that is the math. We are not saying that's necessarily a target, although as Kevin said, it is one of our many priorities is to further strengthen our balance sheet to give us more financial flexibility.

 As Kevin said, we had to balance several things, the financial leverage, the dividend payout as well as what our charter mix is going forward. So it's a number of factors. We think that is one of the things that is important is for us to further strengthen our balance sheet going forward.

------------------------------
 Amit Mehrotra,  Deutsche Bank - Analyst   [86]
------------------------------
 Do you think the target that you guys have in mind as you look over the next 12 months does have a [four] handle on it, or are you not willing to commit to that based on the various options you have?

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [87]
------------------------------
 It's certainly -- we are not going to commit to it a fixed number, but it certainly is the direction where we want to get it to in the next 12 months.

------------------------------
 Amit Mehrotra,  Deutsche Bank - Analyst   [88]
------------------------------
 Okay. All right guys. Thanks so much.

------------------------------
 Vince Lok,  Teekay Tankers Ltd. - CFO   [89]
------------------------------
 Thanks.

------------------------------
Operator   [90]
------------------------------
 Spiro Dounis, UBS Securities.

------------------------------
 Spiro Dounis,  UBS - Analyst   [91]
------------------------------
 Hey guys, hopefully -- we just tripped the hour, so hopefully these are quick and easy to answer. Just wanted to draw on three themes that continue to pop up. One, stable income through SPS, and the second one was being a full service vendor. Third was more exposure in the Gulf coast. I'm just wondering what else fits into that strategy when you go up-and-down the value chain? Is there anything or any interest in FSOs or terminal operations that might look interesting to you?

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [92]
------------------------------
 No. On the FSO side, it's not something that we would go into. We would leave that to others with the expertise in that area.

 We do as part of our acquisition of SPT have a team of folks that look at terminal consultancy, which is a very small piece of the business, but it is something that expertise was brought in to look at. I don't think it's something that's going to materially transform our core business away from running tankers.

------------------------------
 Spiro Dounis,  UBS - Analyst   [93]
------------------------------
 Okay, so if anything, maybe we see more of the same in terms of investment and not necessarily anything new here?

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [94]
------------------------------
 Yes. We are focused on really the acquisitions and the businesses that we bought into last year. Really integrating those into the organization right now and bedding down to get the most value out of them so we can return some of that value to shareholders.

------------------------------
 Spiro Dounis,  UBS - Analyst   [95]
------------------------------
 Got it. And the last one, once again on floating storage, you talked around it a bit. But I guess the real economics on floating storage really worked well with the VLCC. And I'm just wondering does it get cost prohibitive in any way to load up two Suezmaxes or whatever it might be in the Gulf coast and then reverse lighter those onto VLCC for floating storage or do the costs add up to too much to make that work?

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [96]
------------------------------
 It depends on the oil trader and which part of the world they are looking to do the trade on. One of the things that -- if I go back to 2010 when we last saw floating storage as an issue, in the US Gulf, we saw an awful lot of VLCCs getting loaded, but the assumption was those ships were loaded for six months and they were left sitting there.

 Oil traders actually actively trade in and out of those positions, which increases the amount of lightering and SDS volume that actually transacts on Aframaxes. The economic rationale for VLCC isn't because it's purely 2 million barrels of oil stored on the V. The traders use those positions to trade around, whether it be on Suezmaxes or Aframaxes.

------------------------------
 Spiro Dounis,  UBS - Analyst   [97]
------------------------------
 Okay. Got it. So I guess it goes beyond just the wide contango. The math isn't necessarily that easy. I guess it gets more complicated than that.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [98]
------------------------------
 Yes.

------------------------------
 Spiro Dounis,  UBS - Analyst   [99]
------------------------------
 Got it. Appreciate the color. Thanks guys.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [100]
------------------------------
 Thanks.

------------------------------
Operator   [101]
------------------------------
 There are no further questions at this time.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [102]
------------------------------
 Thank you for listening in. We look forward to speaking to you next quarter.

------------------------------
Operator   [103]
------------------------------
 Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line. Have a great day.




------------------------------
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