Q1 2016 Teekay Tankers Ltd Earnings Call

May 19, 2016 AM EDT
TNK - Teekay Tankers Ltd
Q1 2016 Teekay Tankers Ltd Earnings Call
May 19, 2016 / 03:00PM 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
   *  Christian Waldegrave
      TK Corporation - Head of Resarch

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Conference Call Participants
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   *  Jon Chappell
      Evercore ISI - Analyst
   *  Noah Parquette
      JPMorgan - Analyst
   *  Amit Mehrotra
      Deutsche Bank - Analyst
   *  Charles Bergman
      Wells Fargo Securities - Analyst
   *  Fotis Giannakoulis
      Morgan Stanley - Analyst
   *  John Humphreys
      BofA Merrill Lynch - Analyst
   *  Gregory Lewis
      Credit Suisse - Analyst
   *  Chris Karger
      Huber Capital - Analyst

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Presentation
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Operator   [1]
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 Welcome to Teekay Tankers Ltd.'s first-quarter 2016 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 Ltd.'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 first-quarter 2016 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 first-quarter 2016 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 Christian Waldegrave, Head of Research, TK Corporation. During today's call I will be taking you through Teekay Tankers first-quarter 2016 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 $46 million, or $0.29 per share, in the first quarter of 2016 compared to $39 million, or $0.34 per share, in the same period of 2015. We generated free cash flow of $66.2 million, or $0.42 per share, during the quarter versus $53 million, or $0.46 per share, in the same period of the prior year period. Our first quarter 2016 results were negatively impacted by higher than expected off-hire days due do to unscheduled repairs in both are owned and in-charter fleets, as well as various seasonal factors. In the second quarter and we expect our owned fleet to return to near full utilization levels.

 In accordance with our variable dividend policy, Teekay Tankers declare a dividend of $0.09 per share in the first quarter of 2016, which will be paid on June 3 to all shareholders of record as of May 30. In keeping with our focus on creating shareholder value by increasing underlying net asset value, we continue to strengthen our balance sheet by using our cash flow to pay down debt. During the first quarter of 2016 Teekay Tankers' net debt was reduced by approximately $50 million. Lastly, we continue to see positive fundamentals in the tanker market, which we expect to remain in place through the balance of 2016.

 Turning to slide 4. The crude spot tanker market remains well supported by strong oil supply and demand fundamentals, even though mid-sized tanker earnings were negatively impacted by a number of factors during the first quarter, resulting in a decline in Aframax and Suezmax tanker rates as compared to the same period of last year. Mild weather in the northern hemisphere due to a strong El Nino weather pattern led to subdued heating oil demand and fewer weather delays compared to the previous winter. Heavier than normal maintenance and weaker margins also led to reduction in refinery throughput during the first quarter, particularly in Europe. However, as shown by the chart on the right slide, this should start to ease in the next 2 to 3 months with much higher refinery throughput expected ahead of the summer driving season.

 Finally, regional oil supply disruptions in the Atlantic Basin, particularly in Venezuela and Nigeria, had more of an impact on Aframax and Suezmax demand then on VLCCs. While this has affected rates in the Atlantic, the Pacific market continues to be well supported by high exports in the Middle East and very strong import demand in China and India, as is evidenced by the approximate $4000 per day difference between Pacific and Atlantic Aframax returns earned in Q1.

 Turning to slide 5, we take a look at tanker supply and demand fundamentals for the remainder of 2016. Starting with demand, rising oil consumption and ongoing stockpiling programs in China and India are expected to drive both oil and crude tanker demand during 2016. Demand in both countries rose by approximately 400,000 barrels per day year on year in the first quarter of this year, reflecting 55% of the total increase in global oil demand. For the year as a whole, global oil demand is expected to increase by 1.2 million barrels per day and create additional demand for tankers.

 Looking at oil supply, exports from the Middle East continue to be very strong as Iran pumps up production following the relaxation of sanctions. OPEC production reached a seven-year high of 32.8 million barrels per day in April, which is positive for large crude tanker demand. On the flipside, non-OPEC oil production continues to decline, led by the United States where production recently dipped below 9 million barrels per day for the first time since late 2014. This is potentially positive for tanker demand, as the US looks to replace a lost domestic barrels with seaboard imports, as has been seen in the first four months of this year.

 Turning to tanker supply, fleet growth expected to increase in 2016 and 2017 with delivery set to increase while scrapping is expected to remain relatively low as rates remain at historically healthy levels. However, the delivery schedule in 2016 is weighted more towards the VLCC segment, with the bulk of Suezmax growth due to come in 2017.

 Looking further ahead, a lack of access to capital in the industry has resulted in virtually no new tanker orders in 2016, with only 1.1 million deadweight tons placed in the first quarter of this year. If this trend continues, it should result in very low tanker fleet growth beyond 2017, at a time when a significant portion of the mid-sized tanker fleet approaches the end of its useful trading life, potentially setting up for a longer period of balanced tanker supply.

 I will now turn the call over to Vince to discuss the financial portion of the presentation.

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 Vince Lok,  Teekay Tankers Ltd. - CFO   [4]
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 Thank you Kevin, and good morning everyone. Beginning on slide 6 I will take you through the high-level financial highlights of the first quarter as compared to the fourth quarter of 2015. We posted another strong quarter, reporting adjusted net income of $46 million in the first quarter compared to $48.5 million in the fourth quarter of 2015. Gross quarter net revenues decreased by a total of $5.8 million, primarily due to lower average realized spot rates in Q1 which were partially offset by an increase in revenue days in Q1 due to our heavy dry-docking schedule in Q4.

 Looking at the expense side, our first-quarter OpEx decreased by $3.5 million due to higher repairs and maintenance activities and transitional costs incurred in Q4 resulting from the acquisition of the 12 Suezmax tankers in the latter part of 2015. Time charter hire expense decreased by $2.7 million due to the expiry of various in-charter contracts in Q1 of 2016. Depreciation increased by $1.9 million primarily due to a full quarter of dry-dock amortization costs related to vessels which completed their dry-docks in the prior quarter. For more details on changes in adjusted net income as well as our outlook for Q2, please refer to pages 12 and 13 of the appendix of this presentation.

 Turning to slide 7, I will just discuss our outlook for cash flows and financial leverage. Our ability to maintain a low break-even rate and generate strong cash flows provides Teekay Tankers the ability to both manage our balance sheet and return cash to shareholders through our variable dividend policy. As Kevin noted earlier, for the first quarter of 2016 Teekay Tankers declared a cash dividend of $0.09 per share, which equates to approximately 30% of our adjusted net income for the quarter.

 A graph on the left side of the slide shows our projected free cash flow yield and dividend yield generated by our current fleet for a range of Aframax proponent spot TCEs based on an assumed dividend payout of 30% of adjusted net income and a share price of $4. Even based on relatively low TCE rates, the Company is expected to generate healthy cash flows over the next 12 months, which would provide both an attractive cash dividend and further delevering of our balance sheet.

 A graph on the right of the slide highlights the strengthening of Teekay Tankers' balance sheet over the last two years and further potential reductions in leverage that would result at different projected spot rate assumptions going forward. Assuming we maintain our current 30% of adjusted net income dividend payout ratio, Teekay Tankers' leverage is projected to decrease to between 39% and 44% at the end of 2016, assuming spot Aframax fulfillment rates of between $25,000 and $35,000 per day. Using our cash flows generated to further delever our balance sheet remains a top focus, as it enhances our net asset value and provides Teekay Tankers with future financial flexibility.

 I will now turn the call back to Kevin to conclude.

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [5]
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 Turning to slide 8, I will wrap up with an update on spot tanker rates in the second quarter of 2016 to date. Although spot rates have fallen from their 2015 highs, they are expected to remain robust on the back of supportive fundamentals through the balance of this year, with market volatility expected to continue as we had just witnessed and the sharp increase in European Aframax rates in recent days.

 Based on approximately 59% and 57% spot revenue days booked, Teekay Tankers second-quarter to date Suezmax and Aframax bookings have so far averaged approximately $33,700 and $24,100 per day respectively. For our LR2 segment, with approximately 52% spot revenue days booked, second-quarter to-date bookings have averaged approximately $22,600 per day.

 In closing, we expect that 2016 overall will be a relatively good year for crude tanker rates, driven by the positive fundamentals of high oil supply, strong oil demand, relatively low oil prices, new trade routes and moderate fleet growth. As a result we expect our fleet to continue to generate healthy cash flows which will support our dividend and enable further strengthening of our balance sheet.

 With that, operator, we are now available to take questions.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions)

 Jon Chappell, Evercore.

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

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [3]
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 Morning.

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 Jon Chappell,  Evercore ISI - Analyst   [4]
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 Kevin, first strategic question. It seems like a lot of the charter in-fleet expires over the next couple of months or so. You obviously have a lot more operational leverage than you did at this time last year, given the acquisition of the principal fleet.

 So how do you kind of think about the charter in market going forward? Given the volatility that we've seen recently, is that something that you're just happy to just kind of let fade away and let the owned fleet do the work? Or is it something that you look to potentially re-up at certain points?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [5]
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 Our portfolio, I think I've said this on past calls, Jon, we look at it as a series levers that we can pull or push and the in-charter portfolio is one that I think we've been very successful at as the market strengthened. Those contracts, as you said, are starting to roll off now. And looking at where we can access rates on [tonnage] today, it doesn't look quite as attractive as it did 12, 18 months ago. So at the moment we haven't done anything.

 But it's something that our chartering teams globally sit down and discuss on a weekly basis and bring that information up to management. And we review it on a case-by-case. It's not something that we switch off permanently, because rates turn for a period. It's something that we're continually evaluating.

 So if a good deal comes up and we think there's a margin to be made, you could see us take on some more exposure. We haven't done so to date.

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 Jon Chappell,  Evercore ISI - Analyst   [6]
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 Right. That commentary around how they look today relative to 12 to 18 months ago is what I was looking for. Just two more then.

 One on the dividend. Obviously you have this pretty broad range, 30% to 50%. With the initial dividend off the fourth quarter results it was right around 40%, now it's dropped down to 30%. When Vince walked through kind of the sensitivity analysis on the capital structure, it look like the base case was 30% going forward. Has something changed as far as maybe access to financing, views on the market that we should maybe start thinking about the lower end of that range as opposed to the midpoint, which maybe had been where we were looking three months ago?

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 Vince Lok,  Teekay Tankers Ltd. - CFO   [7]
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 Hi, Jon. As a reminder, the last quarter dividend was declared in December. So it wasn't declared at the same time as we reported earnings for the fourth quarter. So back in December the $0.12 last quarter was, I would say, rounded up a little bit and was based on early estimates for the results of the fourth quarter. So it wasn't as scientific. So it ended up being about 37%, 38% of adjusted net income.

 When we came up with the range of 30% to 50%, I think our intention is to be on the lower end of that range while our financial leverage is still above the 50% level here. And so that's why for the slide that you see on slide 7, we are assuming that we're going to stay in the lower end of that 30% to 50% range probably for the next few quarters. But as our balance sheet further delevers and further strengthens, I think that allows us more flexibility to move up that range over time.

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 Jon Chappell,  Evercore ISI - Analyst   [8]
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 Okay. That makes sense. And then finally Vince, one more clarification on something. When you talked about the first quarter, you had made mentioned to kind of elevated off-hire days and then -- it almost made it seem like that was kind of one time in nature, potentially [ring] sense to the first quarter. But that if we look through this appendix and we look at the second quarter relative to the first, it looks like OpEx will be up another $1.5 million quarter over quarter. So is this still kind of a continuation of maybe one-time type elevated maintenance? Or is this kind of a new run rate to think about going forward as the fleet's brought in-house for technical management?

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 Vince Lok,  Teekay Tankers Ltd. - CFO   [9]
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 Well, I guess first of all, we did have some unusually higher off-hire days in the first quarter. I would call those more one-offs that are not expected to occur in the second quarter. And we have given some guidance on slide 11 on the number of off-hire days. We do have one vessel that is in extended dry-docking in the second quarter. That's reflected in slide 11.

 On the OpEx side, we have the guidance for the second quarter is a slight increase from the first quarter. Some of that is from the laddering side of things as well, which is offset by higher expected revenues. And the rest of it is really just timing of repairs and maintenance activities, as well as transitioning further vessels into in-house technical management. So those are more or less transitional costs that won't be on a run rate basis going forward. So I think it's a combination.

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 Jon Chappell,  Evercore ISI - Analyst   [10]
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 When does that transition to technical management come to an end? So we can kind of see more of a normalized run rate there?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [11]
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 Yes. We are aiming to get done, Jon, by the end of the third quarter, it should be fully completed.

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 Jon Chappell,  Evercore ISI - Analyst   [12]
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 Okay. All right, great. That's all I had. Thanks Kevin, thanks Vince.

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [13]
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 Thanks, Jon.

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Operator   [14]
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 (Operator Instructions)

 Noah Parquette, JPMorgan.

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 Noah Parquette,  JPMorgan - Analyst   [15]
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 Thanks. I wanted to ask a follow-up on off-hire days. Can you talk a little bit about the situation in the Atlantic affecting the smaller vessels? Is any of the off-hire related to repositioning? Or is there anything that you've done operationally to optimize how those vessels earn going forward? And I guess could you give us some color about where those spot vessels operate right now? Thanks.

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [16]
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 I think the first part of your question, Noah, the off-hire was essentially, a large bulk of it, was the one vessel that has been in the extended dry-dock for most of this year. She should complete by the end of May, possibly early June. That made up the bulk of those lost revenue days.

 We also lost a couple of ships from third-party owners in our pools. Those ships were off-hired for well over a month and in an individual ship, one of our Suezmaxes, sustained some damage from an overzealous tug in China. So we had to take her out of service for, I think, 12 days to do some shell plate repairs.

 So it was a combination of a series of things that drove up the off-hire. Looking at Q2, to date, to date we've only had, on our own to vessels, aside from the vessel that remains in dry-dock, we've only had three off-hire days quarter to date. So we don't see that number staying elevated for the rest of this year.

 And can you just repeat your second portion of your question?

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 Noah Parquette,  JPMorgan - Analyst   [17]
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 I just wanted maybe some color on where the spot Suezmax and Aframaxes are operating right now? If they are still kind of in the Atlantic or they are in other areas.

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [18]
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 Yes. Essential in the simple answer is they're both global trading ships. So we spread them out. We've got offices in Singapore and Houston that manage those ships commercially. And depending on where we see forward demand, we try and position ships to try and catch those upswings in the market.

 At the moment I think our percentage ratio in Aframaxes is roughly 50/50 between Atlantic/Pacific. But that has been as different as 70/30 in either region.

 Suezmaxes are much more fluid because they have longer haul voyages, and really they are global traders. They trade West Africa, within the Atlantic. They trade Agee Far East. The Suezmaxes really started to open up some new trade routes. So to assign fleets to certain regions is not something that we try and do.

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 Noah Parquette,  JPMorgan - Analyst   [19]
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 And then on the period coverage side, it looks like you signed one vessel this quarter for decent charter. What's your strategy there? I mean, is this a time where you want to increase your period charter coverage, or is it sort of opportunistic?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [20]
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 Well, as I said to Jon on the previous question, it's something that we monitor weekly.

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 Noah Parquette,  JPMorgan - Analyst   [21]
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 I mean for charter out. For charter out, not --

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [22]
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 Charter in, charter out, it's the same. It depends on our forward view of market and where we think that those opportunities lie. We also take into consideration our need to maintain relationships with some of our strategic partners.

 So when they come to us and ask for some period cover, that is one of the criteria that we take into consideration. At this point, the opportunity that we saw earlier in the quarter, we saw it as an opportunity to build a new relationship with a new customer at some decent rates that we thought we were worth locking in for a two-year period.

 We also, when we look at our portfolio and how much cover we have, we also have the lightering business, the STS business in the US Gulf now. And those -- that team has been successful in renegotiating some of our existing contracts and adding new contracts. So that gives us additional cover on fixed-rate business that employees revenue days equivalent to 2 or 3 ships.

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 Noah Parquette,  JPMorgan - Analyst   [23]
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 Okay. And then just lastly, the color around the 30% dividend payout is great. Can -- how do we think about, in the event EPS falls to the level -- would the -- is there a minimum dividend? I mean is the $0.03 previous fixed dividend sort of a minimum level that we can think of? Thanks.

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 Vince Lok,  Teekay Tankers Ltd. - CFO   [24]
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 Yes, that's right. As we announced last quarter, the minimum dividend is $0.03 a quarter.

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 Noah Parquette,  JPMorgan - Analyst   [25]
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 All right, awesome. Thank you.

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Operator   [26]
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 Amit Mehrotra, Deutsche Bank.

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 Amit Mehrotra,  Deutsche Bank - Analyst   [27]
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 Yes. Thanks so much. Good morning, guys. First question. Obviously the cash generation is staggeringly good relative to sort of the overall size of the enterprise. And I think the outlook for that, at least through the second quarter, is also pretty good. And also with the dividend payout, I guess now at the maybe lower end, with a focus on deleveraging can be accelerated.

 So just against that backdrop, wondering what you're thinking about on the growth side of the equation, given the decline in asset values? Or maybe are you just basically made your moves this cycle and are now in sort of harvesting mode? Kevin, just trying to understand where you think you are at this point?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [28]
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 I think I articulated it last quarter on the conference call. I think we've taken on some major growth last year. We are adding 19 modern ships, both in the Suez and the Aframax segment.

 So I think we'll, between that acquisition, or those acquisitions and the STS business, really our focus this year was always going to be looking at trying to integrate those businesses and maximize the value that we can get out of them. So while I don't obviously rule out growth at some point in the future, I think our -- I'd reiterate our view right now is looking at what we've just bitten off and try and chew it as best we can to maximize shareholder value from those acquisitions.

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 Amit Mehrotra,  Deutsche Bank - Analyst   [29]
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 Yes, okay. That's clear. And then just related to that, with the decline in asset values, I know you mentioned in the release, I think with respect to financing drying up and things like that. And the market, though, is I guess -- I'm wondering if the market is turning a little bit more negative? And are asset values sort of a precursor to a potential more significant moderation in rates?

 And I understand the fundamentals and the supply and demand and things like that. But at the also -- other end of the spectrum, there are significant stockpiles and there are significant supply coming on next year. So just wondering how you are taking sort of the year-to-date developments in the market, and whether you are getting a little bit more -- you're tempering your bullishness at all, or do you think we're in for higher for longer?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [30]
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 No, I think we've been fairly conservative in our view for where the fundamentals lie. They are still strong. But obviously we acknowledge that there is a new building program coming on, mainly for Suezmaxes in 2017. But demand seems to be strong to balance that off.

 I think the issue around the asset prices and secondhand values is a lack of access to capital which is drying up liquidity in that market. There is a few owners out there with older tonnage that needed to get rid of them and they've decided that rather take a discount to fair market value and sell those assets on.

 There hasn't -- I think there's been one modern vessel of VLCC that was sold this year. But the rest have all been older than 13, 14 years old. So I think there has been a decline. The secondhand values based on those transactions that have been done have been lower.

 But I think a lot of owners are looking at it and saying, 18 months ago or year ago, yes they would sell a ship if they wanted to, if the price was right. But this year rates are still very strong relative to historic norms. And they have the luxury to not sell. So you've got this wide bid/ask spread. And on the buying said, a lack of liquidity reducing the number of potential buyers.

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 Amit Mehrotra,  Deutsche Bank - Analyst   [31]
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 Yes. And how do you think -- just last question for me. But how do you think TNK is positioned if you do see moderating? Obviously with the 100% decremental margins you end up being essentially all rate movements. There's a big difference between having a moderating but healthy market and a moderating market that's dips dangerously below or close to break-even levels.

 And just wondering, there are various options that people and companies use vis-a-vis the charter strategies to maybe protect some downside and introduce some visibility. I'm just trying to juxtapose those with how you guys are looking at positioning your fleet and your vessels in the market.

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [32]
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 I think I go back to my point that we use our different levers. We've, as you've seen us do last quarter, we've put away a ship on period cover for a couple of years. We're negotiating lightering contracts that add fixed-rate income that are locked in for 12- to 24-month periods.

 We also, in terms of our fleet profile, try and optimize and build our business around triangulations that give us an optimized earnings from the spot market. So I think it's -- you'll see us do different things at different points to try and manage that. But fundamentally underlying all of that is we've got very low break-even levels. So if the market does, or were to come off significantly, I think we're still in a position where we'll be generating enough cash flow to maintain our dividend at the lower end of the range per the policy.

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 Amit Mehrotra,  Deutsche Bank - Analyst   [33]
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 Right. Okay. That's great. Thank you very much. Appreciate it.

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Operator   [34]
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 (Operator Instructions)

 Charles Bergman, Wells Fargo.

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 Charles Bergman,  Wells Fargo Securities - Analyst   [35]
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 Good afternoon, guys. The majority of my questions have been answered, so just a quick one on the market. You mentioned the inverse impact of Venezuelan and Nigerian outages on the Suezmax and Aframax market. But have you seen any positive impact from Canadian bitumen averages on US Gulf imports, either from the Caribs or longer haul from the Arab Gulf?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [36]
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 Not immediately. We have seen the recent spike in Europe, but that was more fuel oil-based. We have seen an increase generally in US Gulf imports, US Atlantic versus imports every month this year. So that I don't think is driven by Canadian wildfires. But the (technical difficulties) impact over of the last few weeks, we haven't seen it in the Aframax or the Suezmax segment yet.

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 Charles Bergman,  Wells Fargo Securities - Analyst   [37]
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 Got you. Thank you for that color. And just the last question. You had mentioned on the last call that (technical difficulties) two MRs for sale. Are those still on the market for sale, or have you withdrawn those?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [38]
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 No. We're still looking to dispose of those as non-core assets.

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 Charles Bergman,  Wells Fargo Securities - Analyst   [39]
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 Good for me. Thank you for the color, gentlemen.

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

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Operator   [41]
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 Fotis Giannakoulis, Morgan Stanley.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [42]
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 Yes. Hello gentlemen, and thank you. Is it possible to give us -- to tell us how much you earn -- what was the EBITDA of the ship-to-ship business in the first quarter, and give us an outlook for going forward?

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 Vince Lok,  Teekay Tankers Ltd. - CFO   [43]
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 Hi, Fotis. Yes. I would say when you look at the ship-to-ship lightering support business, the EBITDA for the first quarter was a little bit light. It was about $1.2 million for the quarter. Now, that excludes the full-service lightering side of it. To include the full-service lightering, that's close to the $3 million for the quarter. So I would say we're still ramping up that side of it.

 Maybe Kevin, you want to comment going forward.

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [44]
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 Yes. I think, as been said, if you look at the whole package, full-service as well the global support services, we're actually -- we're trending towards where we had guided the market on an annual EBITDA of around $10 million. And I'm actually quite pleased with that, given that the first quarter, we're just starting to ramp up our business. I mentioned earlier we are renewing sort of our existing contracts, but we're also adding and going after new contracts that should increase that volume. So I'm quite pleased with progress so far.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [45]
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 So we expect that this ramp-up is going to happen the next couple of quarters, and what is the timing?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [46]
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 Yes. I think contracts generally in the US Gulf lightering industry are varied. Some customers choose to do them at the early part of the year, some customers wait until late summer. So it's something that we'll -- it's partly seasonal, but it'll also -- it'll be spread out through the year.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [47]
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 Okay. Thank you. And I want to follow up on the question about the asset prices. There are some reports from brokers talking about the kind of 40 vessels across all asset classes between crude and product for sale right now. Is this number correct? And where do you expect to see asset values going forward? And if you can comment also on the new building activity, and what is -- how the shipyards viewing your building prices right now?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [48]
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 I don't think I'm probably the best person to tell you exactly how many vessels are for sale at each segment. I think brokers could probably do a more accurate run-through for you on that.

 One of the things about the secondhand market is owners talk about vessels being for sale. But if they don't get the rates or -- sorry, the price that they're looking for, the vessel is no longer for sale. So whether that's 20 ships or 40 ships or 50 ships, it's a fluid market depending on price.

 I think when the market was strong in the fourth quarter there was a lot of owners asking questions around selling of assets. But without any liquidity, those assets aren't moving and those ships are still trading, earning very respectable returns in the spot market.

 In terms of new building, obviously we read like everybody else in the press, that the shipyards are looking at order books that are diminishing going into 2018. But I think the positive from a tanker perspective is that with no liquidity -- or sorry, no credit in the market, owners aren't going out to order. And as for the public companies with share prices at the levels that they are, it's not something that the public companies are looking to leverage off of. So none of the public companies are doing anything. So I think it bodes well for fleet supply in 2018, 2019, through the decade if this continued low ordering progresses through the rest of this year.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [49]
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 All right. And one last question about the supply and demand in slide 5 that you have your presentation. I understand that these are REA numbers. What you saw on the left-hand side is that your crude supply staying relatively flat, but at the same time the crude demand is rising at the same time that the fleet growth is increasing.

 How do you expect this to play out, given the fact that the Contango has pretty much disappeared right now? What is the risk of even [total] draw? And also if you can comment about the delay that we see in the discharge of several cargos? If you can comment in which asset classes these delays are more intense between Aframaxes up to VLCCs?

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [50]
------------------------------
 Christian, why don't you take the first part and I'll come back in for the --

------------------------------
 Christian Waldegrave,  TK Corporation - Head of Resarch   [51]
------------------------------
 Sure. In terms of the supply/demand balance, I mean, the positive thing from our point of view is that crude oil demand continues to grow at a pretty healthy rates, especially into India and China. I think it's encouraging that oil demand in India grew more than any other country in the first quarter of the year. While Chinese imports continue to stay high as well, both for domestic consumption, which has been pretty strong especially for gasoline and also for stockpiling while the oil price stays relatively low.

 You're right to point out that the oil supply has flattening, but there's a bit of a divergence to what's happening in OPEC to non-OPEC. OPEC Middle East countries continue to increase their output, and actually Iran has come back probably a bit quicker than most people thought. And that's where we supplying a lot of cargos, which needs to be transported by sea and long haul as well, which is positive to tankers. And it's really some of the Atlantic Basin producers like Nigeria, Venezuela, but also the United States where the supply is flattening.

 And in the near term that's been a bit of a negative for the Suezmax because it means less cargos out of West Africa. But if those outages continue and those US production declines, it might mean that some of those barrels need replacing. And some reducing that you might get some of those Middle East barrels coming west in order to fill the shortfall of outages in the Atlantic. So again, in the near term what is a negative for the Suezmaxes could, in the long term, be an overall positive for (inaudible) demand.

 In terms of the inventories, I think we are expecting -- most people expected a balancing at some point. But I think that will come more in 2017. And I think for 2016, as Kevin said, the fundamental still look pretty good.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [52]
------------------------------
 With regard for this two-year, your question about delays on specific asset classes, I think the bulk of delays and congestion we're seeing is around the larger crude sector Suezmaxes and VLCCs, predominantly. Out of Iraq there is some delays in for those ships we've heard loading out of Iran. And the bulk is really coming from China. As far as Aframaxes go, obviously the (inaudible) is down to one day transits in and out. There's nothing -- we're in the summer months, there's no impact there. And the US Gulf seems to be moving quite freely, which is one of the reasons why that market has softened a bit. Turnaround times have picked up there because of the lack of fog and bad weather that you get in the winter months.

------------------------------
 Fotis Giannakoulis,  Morgan Stanley - Analyst   [53]
------------------------------
 Thank you very much, gentlemen. That has been very helpful.

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

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Operator   [55]
------------------------------
 John Humphreys, Bank of America Merrill Lynch.

------------------------------
 John Humphreys,  BofA Merrill Lynch - Analyst   [56]
------------------------------
 Hi, Kevin and Vince. Just wanted to talk about the non-delivery cadence. Some carriers have spoken about the order book numbers that are reported by research agencies might be a little bit higher than reality, given some ships that are on order might not be delivered when people anticipate. I was wondering if you could just sort of go into that a little bit?

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [57]
------------------------------
 Yes. Just to give you a 50,000-foot answer on that before maybe Christian can dig in a bit more. Generally the order books that are published are based on contract signings and on an average annual basis, we see somewhere between 25% and 30% slippage, whether it's for delays at construction or financing concerns or changes in owners' views, asking the shipyards to delay the new building. So generally we tend to look at the order book with about a 30% slip in each segment going through. Christian, do want to add to that?

------------------------------
 Christian Waldegrave,  TK Corporation - Head of Resarch   [58]
------------------------------
 No, I would just reiterate what Kevin said. If you look at the chart on slide 5 when we are projecting the fleet growth we are taking into account slippage and anticipating that some of those deliveries either don't come in on time or perhaps a small number, like you said, don't deliver at all. So we do take that into account in our assumptions when we are looking at (inaudible).

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [59]
------------------------------
 One other factor to take into consideration is the tightness in the credit markets. As these orders start to build and payments are due based on the contracts, if there is a lack of liquidity in the credit markets, that could have an impact on the slippage volumes for that order book across all the segments.

------------------------------
 John Humphreys,  BofA Merrill Lynch - Analyst   [60]
------------------------------
 Great, thank you. That's very helpful. And sort of related to that, if you could touch on where you see sort of the fleet, you mentioned new build programs in 2017 with that coming in for Suezmaxes. If you look at the age of the fleet in 2017 and 2018, what type of runway do you think is there? How ready is that fleet to last? Or do you think scrapping is -- would accelerate with an order fleet?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [61]
------------------------------
 Well, if you look at, there's roughly 70, I think 70 Suezmaxes on the order books through 2018. If you actually look at the age profile of the Suezmax fleet, about 70 of the existing fleet are 16 years, or will be 16 years or older by 2017. And when you pass the 15-year-old mark and start looking at intermediate survey requirements every two years, the potential for ballast water treatment to add an additional couple of million dollars to your docking, as well as restricted trade with oil companies not taking ships, a lot of oil companies not taking ships beyond 15 years, it -- as the market ameliorates, owners think twice about putting their ships through that kind of capital expense. So we may see some of those older tonnage slipping off as the new ones come in, and getting a more balanced picture.

------------------------------
 John Humphreys,  BofA Merrill Lynch - Analyst   [62]
------------------------------
 Great, thank you. And then just one last one, sort of macro. If we continue to see oil prices rise and they push towards $50, maybe even $60, where do you see Teekay's business there? Where it looks like your forecasting in pretty healthy oil demand, looking at slide 5. If that line tempers, where does that put your spot and charter market?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [63]
------------------------------
 I think there is no true correlation between oil price and tanker rates. So I think we've seen high oil prices and good, strong tanker rates in the past and we've seen the opposite. So is not something that's tied directly to the price.

 In terms of demand, ultimate (inaudible) [oil] consumption or gasoline consumption in China, India, Russia and the US are all up and continue to trend upwards. Which I think is positive on the transportation fuel side, which should drive oil consumption, and therefore tanker demand.

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 John Humphreys,  BofA Merrill Lynch - Analyst   [64]
------------------------------
 Great. Thank you.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [65]
------------------------------
 Thanks.

------------------------------
Operator   [66]
------------------------------
 Gregory Lewis, Credit Suisse.

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 Gregory Lewis,  Credit Suisse - Analyst   [67]
------------------------------
 Yes. Thank you, and good morning. Just a question on the Suezmax market. At this point, right, I mean, clearly I think Suezmaxes have always been viewed as really a swing vessel that can compete down with Aframaxes and can compete up against VLCCs. As we look at where the Suezmax rates are versus the smaller Aframaxes and the larger VLCCs, are we seeing ships ballast away from basins to try to chase these rates? I mean, is that something Teekay is doing? Or is it just, hey, we're going to hold tight and wait for others to chase these rates? It just seems a bit odd that how weak the Suezmax market is versus the others.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [68]
------------------------------
 Yes, a good question. The -- I can't speak for other owners but from a Teekay perspective, we've never been one to chase a market. Because typically you chase it, if you're doing it everybody else will be doing it and therefore you end up just turning down the, in this case it would be the Pacific market.

 I think what you've seen is the reason the Suezmaxes have lagged is that there has been a build-up of tonnage in the traditional West African trade. And with the Nigerian outage, that has impacted with more ships bidding on less cargos.

 But the economics to ballast from there around to the Middle East to try and capture market there can be severely restrictive. So I think most owners have held out, waiting for a return to some volume. and I think as we see European refineries start to ramp up going into the summer months, we will see more volume coming to the market. But traditionally we don't try and chase markets. It's -- our experience is, it doesn't pan out in the long run.

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 Gregory Lewis,  Credit Suisse - Analyst   [69]
------------------------------
 Okay, great. And then just another one for me real quick on -- I guess it looks like you might see some French refinery strikes. Do you guys sort of have a view on that? I mean, is there any sort of reference we can think about in the past where we've seen French refinery strikes and what impact that has on the market, or is it -- any sort of thoughts or color around that would be helpful.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [70]
------------------------------
 I think at a high level it's part of the oil industry and the tanker trade. As we've seen with Nigerian outage, that is not something that is new to Suezmaxes or to tankers in general. We've seen militants blow up pipelines in the past and oil companies declare a force majeure.

 These things won't last. They disrupt. They cause short-term pain and reduction in rates in certain pockets. But they come back online.

 Similarly we've seen the French go on strike in the past, and it's lasted anywhere from a couple of days to a couple of weeks. But other than that, I wouldn't comment in detail about what's going on in the French refining sector.

------------------------------
 Gregory Lewis,  Credit Suisse - Analyst   [71]
------------------------------
 Okay, great. Hey, guys. Thank you very much for the time.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [72]
------------------------------
 Thank you.

------------------------------
Operator   [73]
------------------------------
 (Operator Instructions)

 Chris Karger, Huber Capital.

------------------------------
 Chris Karger,  Huber Capital - Analyst   [74]
------------------------------
 Hi, Kevin. You've talked today about sort of maximizing shareholder value and Vince put a curve on there showing the free cash flow yield, which is now even higher with today's stock action. I guess I'm wondering how the Board can justify not having a share repurchase program in place, and having a continuous offering program in place considering the stock levels, and then how to maximize shareholder value paying down low cost, well turned out debt versus buying back stock at the current free cash flow yield to the best use of capital? Thanks.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [75]
------------------------------
 Hi, Chris. Yes, I think the conversation that we've had with the Board is around what is the most prudent thing to do with cash flow that we are generating. And as we compare ourselves with peers, we still feel that our balance sheet needs further strengthening.

 Obviously our Q1 results weren't as strong as we were hoping because of our lack of revenue days, or reduced revenue days. So that all plays into the conversation that we've had around maximizing shareholder value for the long term and using that cash flow as a priority to pay down our debt.

 That's not to say that we look at our other levers to reward shareholder value. We do that through our dividend. And possibly at some point we'll look at share buyback as well. It's something that is a lever at our disposal. But the Board felt it was prudent, given the cyclicality of the tanker market, that long-term shareholder value could best be served at this point and in this environment by paying down our debt as a priority.

------------------------------
 Chris Karger,  Huber Capital - Analyst   [76]
------------------------------
 Got it, understood. I guess I just still feel like just to have the lever in place, even if you're not pulling it right now, would be the most prudent move, much like the continuous offering program that you guys have used effectively at higher share prices. But that's our view as shareholders. Thanks, guys.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [77]
------------------------------
 Thanks, Chris.

------------------------------
Operator   [78]
------------------------------
 There are no further questions at this time. Mr. Mackay, I'd like to turn the conference back to you for any additional or closing remarks.

------------------------------
 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [79]
------------------------------
 Okay. Just thank you everybody for the call. And we'll speak to you next quarter. Thank you.

------------------------------
Operator   [80]
------------------------------
 Thank you. And this concludes the conference call for today. Thank you for your participation. You may now disconnect your lines.




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