Q2 2016 Teekay Tankers Ltd Earnings Call

Aug 04, 2016 AM EDT
TNK - Teekay Tankers Ltd
Q2 2016 Teekay Tankers Ltd Earnings Call
Aug 04, 2016 / 05:00PM GMT 

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Corporate Participants
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   *  Ryan Hamilton
      Teekay Tankers Ltd. - Manager, Finance and Investor Relations, Teekay Corporation
   *  Kevin Mackay
      Teekay Tankers Ltd. - CEO
   *  Vince Lok
      Teekay Tankers Ltd. - CFO
   *  Christian Waldegrave
      Teekay Tankers Ltd. - Head of Strategy and Research, Teekay Corporation
   *  Brian Fortier
      Teekay Tankers Ltd. - Controller, Teekay LNG Partners

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Conference Call Participants
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   *  Jon Chappell
      Evercore ISI - Analyst
   *  Mike Webber
      Wells Fargo Securities, LLC - Analyst
   *  Fotis Giannakoulis
      Morgan Stanley - Analyst
   *  Amit Mehrotra
      Deutsche Bank - Analyst
   *  John Humphreys
      BofA Merrill Lynch - Analyst
   *  Magnus Fyhr
      Seaport Global Securities - Analyst
   *  Noah Parquette
      JPMorgan - Analyst

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

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 Ryan Hamilton,  Teekay Tankers Ltd. - Manager, Finance and Investor Relations, Teekay Corporation   [2]
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 Before Mr. Mackay begins, I'd like to direct all participants to our website at www.teekaytankers.com, where you will find a copy of the second-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 statement is contained in the second-quarter 2016 earnings release and earnings presentation, available on our website.

 I'll now turn the call over to Mr. Mackay to begin.

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [3]
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 Thank you, Ryan. Hello, everyone, and thank you very much for joining us today. With me here in Vancouver are Vince Lok, Teekay Tankers' Chief Financial Officer, and Christian Waldegrave, Head of Strategy and Research at Teekay Corp.

 During today's call, I will be taking you through Teekay Tankers' second-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 $31.6 million, or $0.20 per share, in the second quarter of 2016, compared to adjusted net income of $41.3 million, or $0.35 per share, in the same period of the prior year. We generated free cash flow of $59.6 million during the quarter compared to $57.9 million in the same period of the prior year.

 Our results for the quarter were lower primarily due to lower average spot tanker rates compared to the same period of the prior year, partially offset by an increase in our fleet size as a result of the acquisition of 19 midsize tankers during 2015.

 In accordance with our variable dividend policy, Teekay Tankers declared a dividend of $0.06 per share for the second quarter, representing a payout of 30% of adjusted net income, which is consistent with the previous quarter. The dividend will be paid on August 19, 2016 to all shareholders of record as of August 15, 2016.

 In June, Teekay Tankers agreed to sell one of its non-core MR product tankers for proceeds of $14 million which, when combined with cash flow generated during the quarter, is expected to further de-lever our balance sheet to 51% on a net debt to book capitalization basis.

 We've also continued to manage our fleet employment mix using a variety of levers. Over the last few months we have secured four new term charters, increasing our fixed rate cover to approximately 30% over the next 12 months, which I will discuss in further detail on the next slide.

 Turning to slide 4, we look at developments in the crude tanker spot market. As shown on the charts on the slide, midsize tanker spot rates declined during the second quarter of 2016 and have continued to soften into the early part of the third quarter. However, it should be noted that rates in the first half of the year have been above the 5-year average and are well above the lows seen in the period 2011 to 2013.

 The decline in rates during the second and third quarters is in line with normal seasonal patterns, though a number of factors have served to exacerbate the weakness in midsize tankers in recent weeks.

 Firstly, supply outages in the Atlantic basin have reduced cargo availability for both Aframaxes and Suezmaxes; repeated attacks on all infrastructure; and reduced output in Latin America due to the impact of low oil prices, have reduced Atlantic supply by around 700,000 barrels per day since the start of the year, which is the equivalent of one fewer Aframax cargo per day.

 Atlantic supply outages were particularly acute in July, with around 20 fewer Suezmax cargoes from West Africa, and around 20 fewer Aframax cargoes in the US Gulf Caribbean region to the average cargo count seen in the first half of the year.

 Secondly, high global oil inventories have weighed on refining margins and led to a decline in refinery throughput, which has been negative for crude tanker [demand]. According to the IEA, global refinery throughput registered a year-on-year decline during Q2 for the first time in 3 years.

 Although rates are trending lower during the summer months, we expect an uptick during the fourth quarter as we have seen in previous years. Stronger oil demand during the northern hemisphere winter and an increase in weather delays will act as catalysts for this uptick, while ongoing low oil prices should continue to be positive for both global oil consumption and stockpiling during the second half of the year.

 In recent months, Teekay Tankers has taken several steps to mitigate this softer rate environment and maximize earnings through a weaker point in the cycle. Firstly, we have concluded three new out-charters, comprising one Suezmax and two Aframaxes, as well as a time-charter swap agreement which effectively provides a fixed charter rate on approximately one Aframax vessel equivalent, also at attractive rates.

 Secondly, we have increased our fixed-rate lightering coverage for our US Gulf lightering business, which we are continuing to expand. Using these various commercial levers, we have increased our fixed-rate coverage in the next 12 months to approximately 30%, up from 21% in the same period last year.

 Turning to slide 5, we take a look at medium-term tanker supply fundamentals. As shown by the chart on the left of the slide, the latter half of 2016 and 2017 are set to see an increase in midsize tanker deliveries, as ships ordered in the past 2 to 3 years deliver into the market. Together with a potential rebalancing of global oil markets, this would suggest a challenging outlook for 2017.

 However, as the graph on the right illustrates, the lack of scrapping during the strong rate environment of the last 2 years has built up a significant number of older ships that will face increasing marginalization in their trading patterns as they age.

 In addition, they will have to confront challenging capital cost demands to pass expensive special surveys, as well as the potential significant expense of new equipment to comply with ballast water treatment regulations. In a softer market, we would therefore anticipate an increase in vessel scrapping that's helping to mitigate the impact of the order book as it delivers in the next 2 years.

 Looking ahead beyond 2017, the order book for vessel deliveries in 2018 and 2019 is currently very light due to low levels of tanker ordering so far this year. In fact, 2016 is on track for the lowest level of new tanker orders since the mid-1990s. With the access to new capital remaining a challenge, and potential for some rationalization of shipyard capacity in the months ahead, we view this as positive for long-term tanker supply fundamentals, sowing the seeds for another uptick in the tanker market once the current order book has been absorbed.

 I will now turn it 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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 Thanks, Kevin, and good morning, everyone. On slide 6, I will discuss our financial priorities. Our focus remains on generating total shareholder returns with strong cash flows to both de-lever our balance sheet and return cash to shareholders through our variable dividend policy.

 As Kevin noted earlier, for the second quarter of 2016 Teekay Tankers declared a cash dividend of $0.06 per share, which equates to approximately 30% of our adjusted net income for the quarter.

 The graph on the left side of the slide shows our projected free cash flow yield and dividend yield for a range of Aframax equivalent spot TCEs, based on an assumed dividend payout of 30% of adjusted net income and a share price of $3 per share. Even based on relatively low spot 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.

 The graph on the right-hand side of the slide highlights the strengthening of Teekay Tankers' balance sheet since the fourth quarter of 2013, and further potential reductions in leverage that can result at different projected spot rate assumptions over the next 12 months.

 Assuming we maintain our current 30% of adjusted net income dividend payout ratio, Teekay Tankers' leverage is projected to decrease to between 39% to 45% by the end of the second quarter of 2017, assuming we realize Aframax spot TCE rates between $20,000 a day and $30,000 per day. Using our cash flows generated to further de-lever 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 7, I'll wrap up with an update on spot tanker rates for the third quarter of 2016 to date. Although spot rates have been on a decline quarter on quarter, seasonal demand and weather delays are expected to provide support to rates in the fourth quarter of 2016.

 Based on approximately 45% and 39% of spot revenue days booked, Teekay Tankers' third-quarter-to-date Suezmax and Aframax bookings have so far averaged approximately $23,600 and $17,900 per day respectively. For our LR2 segment, with approximately 40% spot revenue days booked, third-quarter-to-date bookings have averaged approximately $18,100 per day.

 In closing, although we expect some weakness in the near term, Teekay Tankers is taking the appropriate steps to increase its fixed-rate cover by locking in cash flows, thereby reducing our cash flow breakeven TCE. As a result, we expect our fleet to continue to generate healthy cash flows, which will enable further strengthening of our balance sheet and support for our dividends.

 With that, operator, we'll now turn it over to take questions.

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

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 Jon Chappell,  Evercore ISI - Analyst   [2]
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 Vince, you're pretty clear on the financial plans for the next couple quarters, so I'm going to focus my questions on the operational side. First of all, Kevin, is it possible to explain the dynamics of that TCE swap agreement that you agreed to this quarter, for the Aframax? And also, was that kind of a one-off or are there other opportunities like that available?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [3]
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 I think it is a unique deal that was done, that you don't typically find readily available. It's something that our commercial teams have worked hard to try and develop with various counterparties. Having said that, it's essentially a swap agreement where we get a fixed charter hire on a monthly paid -- on a monthly basis, paid in advance, reconciled against how the spot market performs.

 Now, it did take us several months to work the actual mechanics of the deal with our counterparty. And as such, the -- we're quite pleased because it was done at a time when rates were higher than what they are today, so the differential between our charter hire and where spot rates are today is -- has been very lucrative.

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 Jon Chappell,  Evercore ISI - Analyst   [4]
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 Is that swap agreement reflected in the appendix sheet with the fleet employment profiles of one of those Aframaxes?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [5]
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 Yes, it is.

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 Jon Chappell,  Evercore ISI - Analyst   [6]
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 Do you mind identifying which one, just so we have an idea for what the rate was on that particular -- ?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [7]
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 Yes. It's the fourth one down on the list.

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 Jon Chappell,  Evercore ISI - Analyst   [8]
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 Okay. Very helpful. Thanks. And then, also, we're kind of in this interesting period right now where the seasonal weakness did -- exacerbated, I think, some global macro headwinds. But you just -- you spoke about your views on the fourth quarter getting better. You've spoken about how, post-2017, the supply/demand sets up really well, which we agree with.

 So, then, just wondering how you're trying to position the fleet there -- from there. Would you look to do even more time charter-out? Maybe get closer to a 50% that maybe TNK had historically had in the first few years of its existence?

 And then, how do you kind of view the time charter-in business as well? Is that something that you're going to pull back from at the moment, or the current weakness -- is that presenting opportunities where you could even increase your operating leverage, given the optimistic view on the market going forward?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [9]
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 I think overall, Jon, we started out the year with a goal internally to reach roughly 30% cover for the year, and then reassess where the markets were at that point. You can't go out and just pick time charters as and when you want them. You have to look at what's available and what you're being offered relative to what your forward view of the market is.

 I think, looking at our view, if we could get lucrative time charters that we can lock in some additional cash flow -- yes, I think we'd certainly entertain that. But it's also -- I've spoken in the past about TNK looking at various levers that we can pull, and different types of commercial deals that we can do to manage our exposure.

 And at this point in the cycle our investment in the lightering business is something that I'm excited about, and it's another avenue that we have access to, to lock in cash flow at reasonable returns that other owners don't have access to. So, that's another lever that we can pull.

 And then, going forward in terms of our in-charter portfolio, that's very much a trading book that we look at, and it's based on individual opportunities that we see coming along. So, you may see us take cover if we think we can get deals done with mechanics that give us an attractive return relative to our forward view.

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 Jon Chappell,  Evercore ISI - Analyst   [10]
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 Okay. And just a quick followup, and then I'll turn it over. Can you just speak to what the time charter market looks like as far as both liquidity and availability of time charters, but also the rates, as you kind of put them up against today's spot market? I mean, obviously, I think we'd agree that today's spot market is somewhat artificially low. But if the time charter rates have come down closer to those levels, that may present more of an opportunity than a risk.

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [11]
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 Yes. I think you never -- or, I would never look at the time charter market in the depths of the summer doldrums. You've got to look at what you think the market's going to be over the next 12 or 24 or 36 months that you're looking to put tonnage away on. But I think, obviously, it's tracked down during the course of the year. And that's why at the back end of last year we went out and -- part of our coverage strategy was going out when rates were high, prior to December, and locking in three time charters for 3 years, just to secure that baseline income.

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 Jon Chappell,  Evercore ISI - Analyst   [12]
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 Got it. All right. That's very helpful. Thanks, Kevin.

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Operator   [13]
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 (Operator Instructions). Mike Webber, Wells Fargo.

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 Mike Webber,  Wells Fargo Securities, LLC - Analyst   [14]
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 Vince, I've got -- just got one for you to start, and then, Kevin, I'll transition to some operating stuff. But, Vince, around the dividend, obviously kind of came in towards the lower end of the range you guys toss out that -- in terms of kind of soft guidance.

 I'm curious as to what we should expect there on a go-forward basis. I would suspect probably something towards that kind of 30% to -- I think we're down from 38% last quarter to 30% this quarter. So, I would imagine somewhere in that range. But correct me if I'm wrong.

 And then maybe more broadly, when you think about the dividend here, given the landscape and what Kevin just went through, can you kind of compare and contrast for us how you think about it differently now, or similarly now, compared to this time last cycle, which -- in which there was ultimately a cut to the dividend? Just be -- it'd just be helpful -- just kind of get this cycle versus last cycle, kind of a view from you, in terms of where the balance sheet stands now versus then, and where the market -- what the market outlook looks like now versus last cycle.

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 Vince Lok,  Teekay Tankers Ltd. - CFO   [15]
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 Sure. First of all, on the dividend range, it's consistent with what we communicated last quarter, which is, over the near term, we expect to be paying out at the lower end of the range, which is the 30% we did last quarter and this quarter. And again, over the next few quarters we would expect to be around that level as well, because of our desire to continue to de-lever the balance sheet, and that's going to be one of our main focus areas. We think it's important, especially in this environment, that we have a strong balance sheet to maintain financial flexibility. So, that's what we should expect going forward.

 In terms of the cycle, I think we're in a very good position as we sit right now. I mean, if you look back, when we originally IPO'd the Company we had a much higher dividend payout. It was a full payout that ultimately wasn't sustainable when we hit the low point in the market. And so, therefore, we moved to a fixed dividend. The current dividend policy is much more conservative at 30% to 50% of net income with a minimum of $0.03 per quarter.

 And I think when you look at the market outlook, as Kevin articulated, we do see some weakness in 2017; but then, given the lack of new orders in the market, it's a bit of a blip, and we expect the market to rebound back in 2018. So, it's a relatively short period of weakness, if we see something there. So, I think that puts us in a good position to maintain our dividend policy through this period.

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 Mike Webber,  Wells Fargo Securities, LLC - Analyst   [16]
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 Okay. Thank you, Vince. I appreciate that. And then -- and Kevin, just kind of to piggyback on that, Vince mentioned and you talked about in your prepared remarks the idea that you expect some weakness, obviously, seasonally now, and then in 2017.

 Inventory draws and kind of seasonal weakness aside, can you maybe kind of parse out how much of that expected weakness comes from maybe kind of just lumpiness within global trade flows in inventories versus maybe a leg down in crude demand relative to, say, kind of the IEA or the PIRA number or any kind of -- anywhere within that range of kind of 1.3 to 2 million barrels a day? How much of that softness in 2017 are you expecting comes from just softer demand?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [17]
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 I'm actually -- on a macro level, Mike, I'm more focused on the supply side than I am on the demand changes. I think global oil demand is growing. It will fluctuate throughout the course of the year. But I don't think the issue going forward is going to be necessarily demand. Economies around the world seem to be ticking along, not at a hugely robust pace, but sufficient to keep demand growing. Gasoline demand is going up globally.

 I think the issue that we'll be facing is vessel supply and inventory overhang, specifically in the product sector, which drives refining throughput. So, I think we might have to go through a period of some rationalization on inventories. But the underlying strength of demand should eat into those inventories fairly quickly. And then, obviously, we've got to deal with an uptick, albeit short, in the new supply of ships that are coming out.

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 Mike Webber,  Wells Fargo Securities, LLC - Analyst   [18]
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 Okay. That's helpful. Thanks for the time, guys.

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Operator   [19]
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 Fotis Giannakoulis, Morgan Stanley.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [20]
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 I want to ask you about the increase over in Contango, the last few weeks. We have seen the spreads rising significantly, yet the charter market has not moved at all. Do you see any requests for floating storage given the fact that the rates right now are so low, and that could potentially be that traders -- they can find profitable to charter vessel for floating storage?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [21]
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 Hi, Fotis. No. Talking to the lads on the chartering desk, we haven't seen a lot of enquiry directly for floating storage. What we are seeing is a tendency to ask for storage on the back of a voyage. So, the option to extend the discharge time, or the delay going into a discharge port. But it's fairly short-term and it's not specific to one trade or one region at the moment.

 And Christian, do you want to add anything on the Contango structure, or --?

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 Christian Waldegrave,  Teekay Tankers Ltd. - Head of Strategy and Research, Teekay Corporation   [22]
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 Yes. I think it's become more interesting than it was a few months ago, just given that the freight rates have come down. And so, that obviously brings the dollar per barrel per month down. I think on a VLCC now, you probably -- the breakeven on a Contango, say, would be about $0.65 a barrel per month.

 The Contango is not quite there to do it, but I think it's getting closer. So, it's definitely something that could emerge in the second half of the year. But, like Kevin said, we're not seeing any firm enquiries for it yet.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [23]
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 Thank you. I also want to ask about the product inventories that they seem that -- to have increased significantly, both in the OECD and also in China. How do you expect this to affect the tanker market, both for the product trade with the potential exports of these products, but also for the demand for crude primarily from China?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [24]
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 I think, generally speaking, as I said to Mike earlier, Fotis, if we're going into a period where the product oil inventories are relatively high compared with historic norms, that does put pressure on crude supply as refiners work off that backlog.

 So, I think in the short term, which is what we're seeing right now, you're seeing a drop in demand for crude oil as refining margins weaken and refiners use inventory on hand to meet their needs. But I think the underlying fundamental is that base demand for certainly gasoline and jet fuel is growing, as more people travel; more people are driving cars. I read somewhere yesterday that 60% of new car sales in the US is SUVs and light trucks.

 So, that bodes well for the demand structure, which I think will obviously help to absorb some of this overbuild that refiners have produced based on high margins they had earlier in the year.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [25]
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 And I want to focus also on the sale of this -- of the one MR. You still have another MR in your fleet, and some LR vessels. Is the focus of the Company going to increase in the -- on the crude tanker space, and gradually exiting the product tankers? Or it's just MR that is non-core business?

 And how do you view the two -- the relative performance between product carriers and crude carriers, both in terms of rate development, but also in terms of repairs, given the -- where asset prices are in the two segments?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [26]
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 Yes. I think the sale of the MR, as we put in the release and our remarks is -- it's not a core midsize tanker for Teekay Tankers, and we want to concentrate on our Suezmax and Aframax LR2 segment. So, we will look to offload the additional MR that we have, because it's not a trade that we feel we can grow scale in or that we want to focus on.

 In terms of the relative balance between product returns and crude returns, at the moment we're seeing the LR2 market outperform the Aframaxes. Earlier in the year it was the other way around, and that's one of the things we do like about our LR2 purchases that we made, late 2014, early 2015. The LR2 vessel gives us that flexibility to trade in and out of the different markets over periods of time, and we're very pleased with those purchases. Because, to date, we've been able to take advantage of spikes in both sets of markets as and when they come.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [27]
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 Thank you very much.

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Operator   [28]
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 Amit Mehrotra, Deutsche Bank.

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 Amit Mehrotra,  Deutsche Bank - Analyst   [29]
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 Thanks for taking my question, gentlemen. Just had a couple quick ones. One, just wanted to get an update on where you think the breakeven levels are. I mean, I took a look at obviously the cost profile in the first half, excluding some of the -- maybe the non-recurring items, and if you analyze that it looks like the breakevens are around $22,000 per day on a cash basis and around $28,000 a day on a net income basis. Just wanted to see if you can add some color to that or just provide those numbers.

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 Vince Lok,  Teekay Tankers Ltd. - CFO   [30]
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 Yes. Those numbers are obviously changing a little bit as our fleet mix changes with some new out-charters and some in-charters coming out. If you look at on a cash breakeven, which is OpEx, with in-charters and G&A and interest expense, we're roughly around $10,000 a day. So, very low breakeven. If you were to add debt amortization to that, that would add roughly about $10,000 a day. So, you're looking at an all-in of about $20,000 cash flow breakeven on an Aframax equivalent basis.

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 Amit Mehrotra,  Deutsche Bank - Analyst   [31]
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 Right. And so, $25,000 to $30,000 on a net income basis, right?

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 Vince Lok,  Teekay Tankers Ltd. - CFO   [32]
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 That sounds -- on an Aframax basis, that sounds high, actually. (Inaudible).

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 Amit Mehrotra,  Deutsche Bank - Analyst   [33]
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 I'm just talking about on (inaudible) basis, in terms of what you guys actually -- I mean -- and sorry if I'm trying to overcomplicate this question, but I'm just trying to understand. Because your dividend is tied to your net income. And so, what I'm trying to understand is, at what point do dividends disappear at, on an average rate basis?

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 Vince Lok,  Teekay Tankers Ltd. - CFO   [34]
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 Okay. Well, first of all, our dividend policy has a minimum dividend of $0.03 per share per quarter. So, our dividend wouldn't drop below the $0.03. But if your question is, where does it sort of cross when we hit that floor, on an Aframax equivalent basis it's probably in the high teens -- at that level.

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 Amit Mehrotra,  Deutsche Bank - Analyst   [35]
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 Okay. Thanks. And then one more, if I could, with respect to the increased coverage relative to where it was maybe at this point over the last couple of years. I know if you sort of look at the seasonal movements this year and compare that to -- I guess it's not really fair to compare it to last year's, what I'd term as kind of a super-cycle.

 But if you look at this year's seasonal movements relative to history, and then sort of overlay on that some exogenous factors, disruption, and things like that, it doesn't seem like we're at overly, overly bearish level. And so, I'm just trying to [foot] what may not be that weak of a market than what sentiment would suggest, and if you sort of adjust for those factors versus sort of the increase in coverage.

 I'm just to get -- understand if, Kevin, your view of the market has moderated over the last 3 months. Because nothing has really changed, and is it just really that -- the decline in the rates you've -- have been so severe that maybe you're starting to question your own conviction. Just if you could offer more color on that.

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [36]
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 Yes. Sure. I think I sort of alluded to it in one of the previous questions. Our time charter approach, or our coverage approach, isn't something that we start to worry about when rates come off. It's something that we look at on a monthly basis in high markets and low markets.

 And starting last year, when rates were nice and high going into the fourth quarter, we were able to secure some long-term attractive time charter cover with some strategic customers. Going into this year, we wanted to increase some of the shorter-term cover.

 We -- being realistic, we did see an increase in the supply of tonnage coming in late 2016 and 2017, and our strategy then was to put some more tonnage on the coverage pile as opposed to the spot-exposed pile. But it is something that we monitor very closely on an ongoing basis. Not panicking when rates drop, and not getting overly excited when rates get too high. It's managing the portfolio through the cycle. And it's trying to make sure that when we look at individual deals, we weigh it against what we feel are the risks on the forward 12 months or 24 months, versus the overall exposure of the fleet. And that percentage number will shift as we go through the cycle.

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 Amit Mehrotra,  Deutsche Bank - Analyst   [37]
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 Okay. Great. And one quick one for me, in terms of the earlier question comparing and contrasting the crude with the product tanker market. When the product tanker market was quite strong last year, specifically the LR2, from my understanding, it's somewhat easier -- it's easier for an LR2 to -- just Aframax, to go to trade in the product market. And obviously, to come back, it's a lot harder. Did you see a lot of that happening last year?

 And just, how should we think about if those two markets get fairly out of whack with each other over the next 12 to 18 months -- if that happens, what can we expect in terms of how those ships trade?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [38]
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 Yes. I think if you compare the returns on the two different classes, obviously, even taking into account the spike you saw on product rates last -- I think it was last third quarter, overall the crude tankers have outperformed.

 So, I think you -- one of the insights that we get, running a pool of ships -- we do see other owners' input into trading between clean and dirty. Teekay takes the approach of using our operational expertise to manage those dips and curves in the various markets, to maximize our returns. Other owners tend to look at their ships as -- or their investment in an LR2, as being tied solely to the product sector.

 So, different owners bring a different approach to whether they dirty up their ship or keep them clean. Some remain very adamant that they are clean players. Eventually, I think some come to the assessment that they need higher returns and may swap them over into the crude market if that's the one that consistently outperforms.

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 Amit Mehrotra,  Deutsche Bank - Analyst   [39]
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 Right. I guess it's a fluid issue, no pun intended. But I appreciate the answers. Thanks, guys.

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Operator   [40]
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 John Humphreys, Bank of America Merrill Lynch.

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 John Humphreys,  BofA Merrill Lynch - Analyst   [41]
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 I just wanted to go into the other revenue line. There's a little over $10 million this quarter -- the ship-to-ship transfer revenue. If you could just sort of walk me through if that's a good run rate going forward, and kind of the dynamics there, and what you see going forward.

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 Vince Lok,  Teekay Tankers Ltd. - CFO   [42]
------------------------------
 Yes, you're right that most of that is relating to the ship-to-ship transfer lightering business. I don't know -- Kevin, you want to comment, going forward?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [43]
------------------------------
 Yes. I think one of the reasons that we looked at buying the TMS -- Teekay Marine Solutions -- business is that relative consistency of return from the various businesses that they're involved in. There will be some seasonal changes within the segments that they operate in, but our forward view is that it should be a fairly consistent run rate.

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 John Humphreys,  BofA Merrill Lynch - Analyst   [44]
------------------------------
 Great. Thank you. And then the next one -- you touched on this a little bit earlier, where you hope to see the seasonal lift in fourth quarter and the first quarter to offset the oncoming deliveries. If I just look at last year's Suezmax rates, could you just give me a little more clarity on where -- basically, how much you think weather and the seasonal lift could offset delivery? Should we be -- I mean, are we looking at 2015 rates; 2014 -- just to get an idea of where you expect the spot markets to be.

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [45]
------------------------------
 No, I -- we don't -- or, I wouldn't try and suggest a fixed number of where we think the rates are going to be. There are so many variables that come into the market that can either drive rates to climb higher or not sustain where we saw rates come in last year.

 I think on a macro level we have to look at where supply and demand is. Demand, I think, will pick up. You have the seasonal factors that eat into the supply of tonnage, i.e. weather delays, which cause congestion, increase or decrease daily operating hours coming in and out of ports -- that all sucks up supply.

 How you match that relative to the volume of ships coming in -- you'd have to factor in how many ships -- crude ships that come out of a shipyard and decide to trade on a clean cargo first as opposed to a crude cargo. There's too many variables to actually pick a projected TCE for any specific month in the cycle.

 I think what we do tend to look at is trends, and if you go back historically, the increased demand from the northern hemisphere winter and all the associated changes in the logistics efficiency of the system, all tend to come into play in the fourth quarter and the first quarter, and that's what gives us a boost in rates.

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 John Humphreys,  BofA Merrill Lynch - Analyst   [46]
------------------------------
 Okay. Thank you very much. And then the last one just being the -- your 50% ownership in the VLCC. It looks like you had a $1.5 million profit sharing recognized. Given the weakness in VLCC spot right now, it seems as though we'd expect that to go away. If you give me sort of any clarity on where you see that equity income line going in the third and fourth quarter.

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [47]
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 Yes, I think we've got a base rate on that vessel of -- I think it's $40,000 -- sorry, $37,500 a day. So, if you look at where VLCC rates have been over the last few weeks and are projected to be over the next few weeks, obviously that's going to be below that number. So, I don't think we'll see a repeat of the $1.5 million that we saw last quarter. But, as we've said, the fourth quarter, we do expect to pick up, and that number hopefully could return or even be higher.

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 Vince Lok,  Teekay Tankers Ltd. - CFO   [48]
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 And just to clarify, the profit share is actually recognized every 6 months as opposed to every quarter. So, the next one would be, if we see any profit share, it would be in the fourth quarter.

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 John Humphreys,  BofA Merrill Lynch - Analyst   [49]
------------------------------
 Great. I appreciate that clarity. That's it for me. Thank you very much.

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Operator   [50]
------------------------------
 Magnus Fyhr, Seaport Global.

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 Magnus Fyhr,  Seaport Global Securities - Analyst   [51]
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 Most of my questions have been answered, but I just had one question on the chartered-in vessels. You mentioned you've seen good performance on the LR2 during the quarter. I think you had one ship that's expiring in August that's still on the fleet list. What's your thinking on the LR2 market and to -- still have that to, I guess, extend that charter, or is there an option to do so?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [52]
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 No, I think we're -- our view on that vessel is, we're going to return it at the end of its -- on the end of its current period. The other LR2 that we have is booked against an out-charter and is covered -- locked in at a good return for us, so, at the moment, our focus is really around what we're doing with our own fleet.

 We haven't as yet seen a good opportunity to take in some additional tonnage, be it Aframax or LR2s. I think the summer doldrums have kicked in and a lot of people are out of the market, and I think we'll wait until probably later in the year before we'll start seeing an uptick in that sort of opportunity.

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 Magnus Fyhr,  Seaport Global Securities - Analyst   [53]
------------------------------
 Okay. Thank you.

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Operator   [54]
------------------------------
 Noah Parquette, JPMorgan.

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 Noah Parquette,  JPMorgan - Analyst   [55]
------------------------------
 I wanted to ask -- on slide 5 you had that nice chart with the existing fleet greater than 15 years offsetting the order book. Can you talk a little bit about what situation we need to see to get that average age scrap down below significantly 20 years? I mean, the common theme I'm hearing from you guys, and it's similar to some of your competitors, is that this downturn is going to be short -- quick. And what needs to change in terms of sentiment for that scrapping to really pick up?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [56]
------------------------------
 I think it comes down to costs relative to return. A lot of these ships are past the 15-year mark. They're looking at docking surveys every 2 1/2 years; and, depending on the condition of the ships, typically a fair amount of steel work and CapEx associated with that. I think, in addition to that, we've got ballast water treatment that, granted, to date has been pushed back, but should come into force in the not too distant future. And that is a significant additional expense that owners are going to have to face.

 So, I think a lot will depend on where the market's at, as and when these owners face these cash crunches, and whether their dry bulk segment is allowing them the ability to invest in their tanker fleet at that age.

 But I think you also will see marginalization of older tonnage. In a softer rate environment, charterers typically get a lot pickier about the age profile of the fleet they have on the water, carrying their oil. And as such, idle time, waiting days, all increase for owners with older tonnage, which drops their return significantly below what you and I see as an average spot market.

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 Noah Parquette,  JPMorgan - Analyst   [57]
------------------------------
 Okay. And then, to that point, you have a number of ships in your fleet there at that age level, or approaching it, how do you think about those vessels in the next couple of years?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [58]
------------------------------
 Yes. We've assessed those vessels. Obviously, we've had those three ships since they were built. We've taken good care of them over the life of those assets, and we don't feel that our capital exposure going into a drydock with those ships will be too significant.

 So, we're comfortable to hold onto them in the near term. That's why we kept them post their third special. But it's something that we evaluate, ongoing. It'll be something that we evaluate again when it comes time to drydock them for their intermediate. It's not a given that once they've passed one drydocking, that -- automatically keep them through the next one.

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 Noah Parquette,  JPMorgan - Analyst   [59]
------------------------------
 Yes. And then just kind of a modeling question, really quick. On your balance sheet, the accounts receivable in particular have grown quite a bit the last couple of quarters. Due from affiliates has somewhat too. Is that -- can you just tell me what's driving that? Is that going to stay at this level, or is that a source of cash potentially in the next couple of quarters?

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 Brian Fortier,  Teekay Tankers Ltd. - Controller, Teekay LNG Partners   [60]
------------------------------
 Well, hi, Noah. It's Brian Fortier, Teekay Tankers (inaudible) take that. On the accounts receivable line, that [pre-CC] in June compared to March is almost entirely an insurance receivable related to the vessel that was involved in a [grounding] accident, and there's a similar increase in accounts payable this quarter.

 On the due from affiliates line, the increase compares to -- June compared to March, is almost entirely the timing of inter-Company settlements -- settlements that we received [early] July brought that balance back down to March levels.

 I guess, just to point out that most of that remaining balance, that run rate balance, represents working capital advances provided to our various pooling arrangements. And as our fleet size has grown over the past year or so and as a result, the number of vessels that we have in pools has increased, the average balance of the due from affiliates account has grown compared to the same periods last year. And we get those working capital advances back when our vessels leave the pools.

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 Noah Parquette,  JPMorgan - Analyst   [61]
------------------------------
 Okay. Just really quick, can you say how much of your LR2 fleet is trading crude now versus product?

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [62]
------------------------------
 Yes. The -- on our owned fleet basis, we have six out of the seven ships that we own are currently trading crude. I'm not sure about on a pool basis, what that number is. I can check and get back to you on that.

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 Noah Parquette,  JPMorgan - Analyst   [63]
------------------------------
 That's very helpful. Thank you.

------------------------------
Operator   [64]
------------------------------
 So, this concludes today's question-and-answer session. Mr. Mackay, I'd like to turn the conference back over to you for any additional or closing remarks.

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 Kevin Mackay,  Teekay Tankers Ltd. - CEO   [65]
------------------------------
 Thank you very much for listening in, and we look forward to talking to you again next quarter. Thanks very much.

------------------------------
Operator   [66]
------------------------------
 Ladies and gentlemen, this concludes today's call. Thank you for your participation.




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