Teekay Tankers Ltd Conference Call To Discuss its Definitive Merger Agreement With Tanker Investments Ltd
Jun 01, 2017 AM CEST
TNK - Teekay Tankers Ltd
Teekay Tankers Ltd Conference Call To Discuss its Definitive Merger Agreement With Tanker Investments Ltd
Jun 01, 2017 / 01:00PM GMT
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Corporate Participants
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* Kevin J. Mackay
Teekay Tankers Ltd. - CEO and President
* Scott Gayton
Tanker Investments Ltd. - CFO
* Vincent Lok
Teekay Tankers Ltd. - CFO
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Conference Call Participants
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* Christopher R. Karger
Huber Capital Management LLC - Principal and Portfolio Manager
* Fotis Giannakoulis
Morgan Stanley, Research Division - VP, Research
* Gregory Robert Lewis
Crédit Suisse AG, Research Division - Senior Research Analyst
* John Peniston Humphreys
BofA Merrill Lynch, Research Division - Associate
* Michael Webber
Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Analyst
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Presentation
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Operator [1]
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Welcome to Teekay Tankers Ltd.'s Analyst and Investor 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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Scott Gayton, Tanker Investments Ltd. - CFO [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'll find a copy of the proposed merger of TNK and TIL 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 proposed merger of TNK and TIL presentation available on our website.
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Kevin J. Mackay, Teekay Tankers Ltd. - CEO and President [3]
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Thank you, Scott. Hello, everyone, and thank you very much for joining us today. With me on the call today are Vince Lok, Teekay Tankers' Chief Financial Officer; and Stewart Andrade, Teekay Tankers' Vice President, Strategy and Business Development. During today's call, I will be taking you through the Teekay Tankers and Tanker Investments Ltd., or TIL, proposed merger presentation, which can be found on our website.
Starting on Slide 3. I'm very pleased to announce that Teekay Tankers has agreed 2 strategic transactions. First, Teekay Tankers has entered into a definitive agreement to merge with Tanker Investments Ltd., creating the largest public listed midsized tanker company. The merger will establish a 62-vessel fleet, including TIL's 18 modern midsized tankers, comprised of 10 Suezmax tankers, 6 Aframax tankers and 2 LR2 tankers, and Teekay Tankers' fleet of 44 tankers, inclusive of 3 time charter in vessels.
In addition to increasing fleet size by approximately 40%, the merger will be EPS-accretive and strengthens our balance sheet, which we will discuss further on the next slide. Transaction will be completed by a share-for-share exchange ratio of 3.3 shares of Teekay Tankers common shares for each TIL common share, excluding the 11.3% of TIL that Teekay Tankers already owns.
In addition, Teekay Tankers has acquired from Teekay Corporation, the remaining 50% ownership in Teekay's commercial and technical operations, or Teekay Operations, for $27 million. This acquisition brings all tanker operations directly under Teekay Tankers and completes our evolution into a fully integrated conventional tanker platform.
Currently, Teekay Operations commercially manages an aggregate fleet of 90 vessels and provides technical management of 60 vessels. As consideration to this acquisition, Teekay Tankers issued Teekay Corporation approximately 13.8 million Class B common shares.
Turning to Slide 4. I will discuss the highlights and benefits of the merger with Tanker Investments. The merger is expected to be immediately accretive to earnings per share and was 8% accretive based on pro forma 2016 earnings. With a 62-vessel fleet and a combined asset base increasing to $2.4 billion, Teekay Tankers will be the largest publicly listed midsized tanker company.
Furthermore, the merger will further strengthen the company's financial position by decreasing financial leverage and increasing pro forma liquidity by approximately $117 million. With a larger balance sheet, lower leverage and increased liquidity, Teekay Tankers is even better positioned to take advantage of opportunities at this low point in the tanker cycle.
With an average fleet age of 7.3 years, the TIL fleet will reduce the average overall fleet age of Teekay Tankers' fleet by approximately one year. Transaction is also expected to decrease the all-in cash breakeven by approximately $1,000 per day. Further, with Teekay Operations already providing the commercial and technical management of TIL's vessels, the company expects a seamless integration across these 2 homogeneous fleets.
For further transaction details and key metrics, please refer to the appendix of this presentation. With an even stronger financial foundation, a much larger younger fleet with which to service our customers globally and our now fully integrated tanker operations, we believe Teekay Tankers represents an even more compelling investment in the tanker space.
Moving on to Slide 5. I would like to highlight what Teekay Tankers has been able to accomplish since 2015 in establishing ourselves as the world's leading tanker brand. The company is focused on aligning sea and shore capabilities by bringing ship management back in-house to drive operational excellence, which has been the foundation of the Teekay brand for over 40 years. We've broadened our service offering with the acquisition and growth of a ship-to-ship transfer business, expanding capabilities and our presence in strategically important U.S. Gulf region. With the growth in the U.S. exports and our continued growth in the ship-to-ship transfer business, we have secured several key lightering contracts to bolster our market share to 25% at rates well above the current swap market levels.
Merger with TIL will allow us to deploy more owned vessels in support of this strategic business. We've also refocused our customer strategy, taking a 100% ownership and control of our commercial and technical operations while consolidating all our fleet's commercial management under the Teekay Tankers name. Consolidation of the Teekay brand through these changes has allowed us to offer our customers with a seamless, integrated offering, resulting in higher quality of service and growth in our cargo access.
Since 2015, and including the TIL fleet, we have grown our core vessel segments by acquiring a total of 37 quality midsized tankers while modernizing our fleet. This significant increase in scale has allowed us to further optimize our fleet efficiencies, enhance our service offering to both existing and new customers across more regions and expand our presence in the evolving global trade routes.
Underpinning all of this, we have continued to strengthen our financial position focused on deleveraging, reducing our financial leverage from 72% 2 years ago to 46% as of the first quarter of 2017. Furthermore, the merger with TIL will increase our liquidity approximately $200 million, providing us with increased financial flexibility going forward. Combined, all of these actions taken since 2015 has generated significant value for Teekay Tankers' shareholders and better positions the company to take advantage of future opportunities.
Turning to Slide 6. I'll take a moment to reiterate our outlook for midsized tankers, while we believe the market is set for a turnaround from 2018 onwards. As shown by the chart on the slide, 3 years of very low scrapping had led to a buildup of over 300 midsized vessels aged 15 years or older, which will face scrapping in the coming years. When held up against the current order book of just under 200 vessels, it suggests that midsized tanker fleet growth is likely to remain very low from 2018 onwards, particularly as impending regulations, such as ballast water and low sulfur regulations could encourage scrapping as owners look to avoid costly CapEx requirements.
Although recent weeks have seen an uptick in new tanker orders, most of the orders have been in the VLCC segment, with only 2 Suezmax and 13 Aframaxes orders placed since the start of the year. In addition, the recent wave of consolidation in the tanker sector has shown a preference of public shipping companies to acquire existing fleets instead of ordering additional new buildings.
Furthermore, we believe that ordering will remain limited to a small number of well-capitalized owners, and the financial constraints and shrinking shipyard capacity will help to keep the overall level of orders low compared to historical averages.
Turning to Slide 7. We look at our long-term demand outlook and how changing tanker market trade patterns will provide midsized tanker demand in the coming year. Bars in the map show the expected change in oil supply and demand over the next 5 years as per the IEA's latest medium-term outlook. It shows that there will be an increasing deficit of oil in Asia and growing surplus in the Atlantic basin. We, therefore, expect the trend of increasing long-haul movements from the Atlantic to Pacific, which has been a key feature of the tanker market in the early part of 2017, will continue to grow in the coming years.
Growing oil production in traditional Aframax and Suezmax load regions as shown by the arrows in the map further support midsized tanker demand. This includes an increase in crude oil exports out of the U.S. Gulf as well as growing exports from Brazil, a recovery in exports from West Africa and more volumes in the Black Sea as production of the Kashagan field continues to ramp up.
Turning to Slide 8. We bring together our supply and demand outlook by taking a look at projected tanker fleet utilization. As shown by the chart on the slide, we anticipate 2017 to be the low point in the current market cycle as tanker fleet growth outstrips demand in the second year in a row. However, shrinking order book and the potential for higher scrapping should lead to lower fleet growth in 2018. In addition, we expect tanker demand growth to recover upon the conclusion of OPEC's supply cuts and a continuation of Atlantic to Pacific movements to drive an increase in tanker ton mile demand.
With these factors combined, we believe the tanker market fundamentals are aligning towards an improved market environment in 2018. And Teekay Tankers, with its industry-leading fleet of midsized tankers, will be well placed to benefit from this upturn.
In closing, I would reiterate how excited we are to reach agreement on this accretive merger with Tanker Investments and taking full control of Teekay Operations. These transactions firmly establish Teekay Tankers as a leading company in the midsized tanker segment and positions the company to take advantage of new opportunities in the anticipated market recovery. With our scale, integrated global customer offering and industry-leading operational excellence, Teekay Tankers continues to execute on its strategy and to deliver long-term shareholder value.
Now operator, we're now available to take questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) And we'll take our first question from Gregory Lewis with Crédit Suisse.
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Gregory Robert Lewis, Crédit Suisse AG, Research Division - Senior Research Analyst [2]
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Just 2 questions. One is in terms of the timing, just curious, we're in early June 2017, is this -- was the timing anything to do with the outlook? I'm just curious why now? I mean, this is something that's been out there for 3, 6 -- over a year. Just curious on why now.
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Kevin J. Mackay, Teekay Tankers Ltd. - CEO and President [3]
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Yes, it's a good question, Gregory . The -- our ownership in Tanker Investments has been there since the beginning, and it's obviously something that we have considered over the course of time as we look at growing Teekay Tankers, and more opportunities are there for us to execute on our strategy. So it's something that's been in our mind, obviously, since -- for a long time. And as the special committee within the TIL board made a decision from their perspective that timing was right to execute on their strategy, when we were approached, along with others, to look at this opportunity and to bid on it, we reran our models, looked at where we felt we were in the market cycle and on the basis that it was an accretive merger for us and looking at the forward outlook on the market, we felt that the timing was opportune and it was worth executing on that.
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Gregory Robert Lewis, Crédit Suisse AG, Research Division - Senior Research Analyst [4]
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Okay. Great. And then just one more for me. It's always difficult to talk about this as the ink's not yet dry on this transaction. But as we look at the acquisition of TIL, increases your liquidity, neutrally improves your balance sheet, does this make -- does this put Teekay Tankers in a better position to look at other acquisitions?
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Kevin J. Mackay, Teekay Tankers Ltd. - CEO and President [5]
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Well, I think first and foremost, we look at this acquisition and how it helps us in the current market environment. And as I said, it's accretive on an EPS basis. It helps us to continue our strategy of delevering the balance sheet. Importantly, also, it gave us a significant liquidity boost, which will help us through this challenging period where we've got headwinds in the spot market. And it reduces our cash breakeven by $1,000 a day. So there was a lot of benefits to do the transaction. It puts us in a much stronger financial position not only to weather through the current cycle, but also to look at where it positions Teekay Tankers going forward and the ability to look at other opportunities if and when they arise.
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Operator [6]
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And we'll take our next question from Michael Weber with Wells Fargo.
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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Analyst [7]
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Kevin, just to clarify on, I guess, the answer you just gave on the timing. So the timing on this was driven specifically by an approach from TIL?
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Kevin J. Mackay, Teekay Tankers Ltd. - CEO and President [8]
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Yes. Per our understanding, the board of TIL elected a special committee of their independent directors, who drove a competitive bidding process through a banking support. And we were approached by that banker to enquire of our interest in the acquisition, and it was -- as I said, it was obviously something that we looked at in the past and considered for this.
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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Analyst [9]
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Great. Okay. That's helpful. Now just around the accretions on Slide 11 when you're talking about you generally being accretive to EPS, and I think you're showing 8% here. This data, is it with or without the acquisition of the manager?
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Vincent Lok, Teekay Tankers Ltd. - CFO [10]
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Mike, it's Vince. That's including the 50% of the tanker operations. But that's not that material to the overall transaction, but it is included. And we'll provide more details in the proxy, certainly, when that comes out.
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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Analyst [11]
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Got you. I mean, if I could just -- one last question around the acquisition of the [manager events], just how do you -- how should we think about the actual valuation of that manager? $27 million, I think (inaudible) 50% that implies $7 million, $8 million a year of EBITDA from the acquired manager and being generated for the entire fleet, how did you arrive at that price point? And I guess, I know you mentioned more data in the proxy, but if there's any color as to what actual cost savings you guys will see at TNK from having that on house, that would be helpful.
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Vincent Lok, Teekay Tankers Ltd. - CFO [12]
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Yes. That -- the valuation was reviewed and approved by the independent Conflicts Committee of Teekay Tankers and they used one of the big accounting firms to provide an independent valuation. So if you look back at the 2016 financials for -- of Teekay Tankers, where we own 50%, that generated roughly about $5 million of EBITDA. So you can sort of look at that a little bit to 2017. And now that Teekay Tankers has a large -- larger owned fleet, I think that gives more predictability into those cash flows, and that's a business we plan to continue to grow. We're providing those services to third-party ship-owners, and so we really like that transaction, and we're consolidating those operations into Teekay Tankers along with the hardware.
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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Analyst [13]
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Great. And then the remaining conventional assets there at Teekay, it sounds those are managed by TNK (inaudible).
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Vincent Lok, Teekay Tankers Ltd. - CFO [14]
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As it relates to conventional tankers, yes.
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Operator [15]
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And we'll take our next question from Fotis Giannakoulis with Morgan Stanley.
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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [16]
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Kevin, you mentioned earlier about operational efficiencies from -- as a result of this acquisition and merger. Can you be a little bit more specific given the fact that the fleet was already in the control of the overall Teekay Group? How are you expecting to create these efficiencies?
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Kevin J. Mackay, Teekay Tankers Ltd. - CEO and President [17]
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Yes. I think one of the big factors in saying that we're creating those efficiencies around the seamless integration of this fleet into the Teekay Tankers ownership avoids any of the typical integration costs. We don't have to re-vet these vessels or get oil major approvals to continue trading them. Commercially, they, as you said, have always been within the group. So we avoid a lot of the typical integration costs and challenges that you do when you acquire a vessel or a fleet of vessels. And that was one of the strategic aspects of this transaction that drove us to the deal. The fact that we've operated the ships both technically and commercially, we've had good line of sight on how they operate. We know that TIL has invested well in these ships and asked us to take care of them. So we felt it was an acquisition that had advantages over, if you will, a traditional or a normal asset acquisition.
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Vincent Lok, Teekay Tankers Ltd. - CFO [18]
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There will be some SG&A savings as well, Fotis, probably in the neighborhood of $1 million to $2 million a year, obviously, not requiring to -- we're going to be delisting TIL post acquisition. So there will be some SG&A savings as well.
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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [19]
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Just to clarify, I think that you mentioned earlier that the stake of -- in the technical operation that parent sold to TNK was generating $5 million a year. Is that correct? Is there a -- is this a road map guidance for the cash flow impact between the 2 entities going forward?
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Vincent Lok, Teekay Tankers Ltd. - CFO [20]
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Yes. That's right. The 50% represents about $5 million of EBITDA based on 2016 results. Those results could vary from year to year a little bit depending on tanker rates because the commercial management fees are partially based on the tanker rates. But as I said, we also intend to grow that business going forward. So that never could grow in the future.
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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [21]
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And I assume that on the other way, it's going to be a small ship on the Teekay's parent cash flow. Is that correct?
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Vincent Lok, Teekay Tankers Ltd. - CFO [22]
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Yes, although, in this case, Teekay parent is taking back shares of TNK. So it'd be partially offset by dividends from TNK.
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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [23]
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Okay. That's very clear. Very helpful. And Vince, regarding this separation of -- or adoption -- full adoption of the technical and commercial management by the subsidiary from the parent, is this a road map also for the other companies and try to run their fleets on their own without assistance of the parent?
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Vincent Lok, Teekay Tankers Ltd. - CFO [24]
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No, I don't think so. I think with the other daughter companies and as it relates to the corporate functions for TNK, we believe there's a lot of synergies to provide those services on a combined basis through the parent company. I think in this case, this is a -- most of the value here is in the commercial management of tankers and -- where we also provide these services to third parties. And so it is much more of a business on its own -- ahead of its own P&L in a way. And so it is unique from the other type of services we provide to the other daughters.
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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [25]
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And one last question that has to do with the relationship with the parent. There are still this Class B shares given the fact that now the technical operation is in the hands fully at the Teekay Tanker level. Are there any thoughts of similar exchange of the Class B shares with Class A shares that will help also the parent to increase its liquid participation in Teekay Tankers?
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Vincent Lok, Teekay Tankers Ltd. - CFO [26]
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No. No, there's no plans other than, of course, the -- as part of the TIL merger, Teekay parent does own 8% of TIL and is in favor of this merger. And so it will be exchanging those TIL shares for TNK shares as part of the merger.
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Operator [27]
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And we'll take our next question from Chris Karger with Huber Capital Management.
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Christopher R. Karger, Huber Capital Management LLC - Principal and Portfolio Manager [28]
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Just given that you need approval by Class A shareholders for the transaction, and you've been able to further strengthen your balance sheet and post close of the sale, we expect transaction should have around $230 million of adjusted liquidity. What sort of guarantees can you give Class A holders that you'll use some of this excess liquidity to buy back stock at the current discount to NAV and at sort of the trough of the cycle here in 2017 and heading into what you think is going to be a better '18?
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Vincent Lok, Teekay Tankers Ltd. - CFO [29]
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Stock buybacks are -- it's something that is in the toolbox at all times that we consider when we're looking at capital allocation. As you mentioned this merger does strengthen TNK's balance sheet and gives us a bigger balance sheet, more liquidity, lower leverage. Balanced against that, as you know, there is -- we are expecting a weaker tanker market in 2017, and that is taken into account. But in terms of creating shareholder value, share buyback is certainly one of the tools that we will consider and, obviously, discuss with our board taking that into consideration in terms of where we sit on our balance sheet and what the outlook is.
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Operator [30]
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And we'll take our next question from John Humphreys of Bank of America Merrill Lynch.
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John Peniston Humphreys, BofA Merrill Lynch, Research Division - Associate [31]
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I just had a question around now that you'll have this larger fleet, and you've recently done some sale leaseback transactions, and you mentioned that ship-owners are increasing their secondhand purchases versus new builds. Is it part of this strategy to have a number of vessels that might be attractive for you to sell off?
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Kevin J. Mackay, Teekay Tankers Ltd. - CEO and President [32]
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Well, obviously, we're always looking at our portfolio of assets and trying to understand what the long-term outlook is in terms of values and valuations for the assets. So as you look going forward, as you know, we did the sale leaseback transaction that we spoke about in the earnings call. And given that we're adding 18 modern vessels of an average age of 7 years, that does help improve modernize our fleet. So as we go forward, it does give us more optionality in terms of potentially doing further sale-leasebacks or looking at some of our older assets and integrating the new fleet into the decision-making process around what we do with those older ships given some of the CapEx requirements that are coming up because of industry regulations. I think it's a similar sort of decision-making that a lot of owners are going to be facing with the older vessels and their fleets.
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John Peniston Humphreys, BofA Merrill Lynch, Research Division - Associate [33]
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Got it. And then just sort of double-back on the timing that you sort of see '17 as a trough and '18. What sort of cushion or scenarios you guys run if that recovery doesn't come until '19 given supply could still outpace demand, if, say, OPEC is extended and there are some further headwinds that carry this trough into '18?
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Kevin J. Mackay, Teekay Tankers Ltd. - CEO and President [34]
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Yes, that was definitely something that we considered in terms of our scenario planning looking at this potential acquisition. So as we went through the models, obviously, doing base and high case and low cases, we have modeled out what happens if the tanker market does get extended with these headwinds. And as you know, the transaction does bolster our balance sheet. It does help us inject some liquidity into the balance sheet that should help us transition if this market extends longer than what we're projecting.
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Operator [35]
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And that concludes today's question-and-answer session. Mr. Mackay, at this time, I will turn the conference back to you for any additional or closing remarks.
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Kevin J. Mackay, Teekay Tankers Ltd. - CEO and President [36]
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Thank you very much for joining us today. As I said in my opening remarks, we're really excited about this transaction. And we feel it's put Teekay Tankers in a leading position to take advantage of the opportunities that lie ahead of us. We look forward to speaking to you in a couple of months at our earnings call. Thanks very much.
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Operator [37]
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And that does conclude today's conference. Thank you for your participation. You may now disconnect.
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