Welcome to Teekay Tankers Ltd.'s Q1 2023 Earnings Results Conference Call. During the call, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. At that time, if you have a question, participants will be asked to press star one to register for a question. For assistance during the call, please press star zero on your touch-tone phone. As a reminder, this call is being recorded. Now, for opening remarks and introductions, I would like to turn the call over to the company. Please go ahead.
Before we begin, I would like to direct all participants to our website at www.teekaytankers.com, where you'll find a copy of the Q1 2023 earnings presentation. Kevin and Stuart 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 Q1 of 2023 Earnings release and earnings presentation available on our website. I will now turn the call over to Kevin Mackay, Teekay Tankers President and CEO, to begin.
Thank you, Ed. Hello, everyone, and thank you very much for joining us today for Teekay Tankers' Q1 of 2023 Earnings Conference Call. Joining me on the call today are Stewart Andrade, Teekay Tankers CFO, and Christian Waldegrave, our Director of Research. Moving to our recent highlights on slide three of the presentation. Teekay Tankers generated total adjusted EBITDA of approximately $206 million in the Q1 , an increase of approximately $26 million from the Q4 of 2022. We reported our highest-ever quarterly adjusted net income of nearly $175 million or $5.13 per share, an increase from a record Q4 of 2022 adjusted net income of approximately $148 million or $4.32 per share.
Our strong results have enabled us to reduce our net debt by almost 50% since last quarter to $182 million. We've also finalized a revolving credit facility for up to $350 million to refinance 19 vessels as we continue to exercise purchase options on vessels in sale-leaseback arrangements. With strong Q4 spot rates and our high operational leverage, Teekay Tankers generated almost $194 million of free cash flow, including approximately $19 million from our eight chartered-in vessels. As previously mentioned, for every $5,000 above our free cash flow breakeven of approximately $15,000 per day, we expect to generate $2.64 in free cash per share annually.
Given the substantial progress the company has made in building financial strength and how well we are positioned to benefit from the strong tanker market, Teekay Tankers has transitioned to a capital allocation approach under which our existing focus on financial strength and disciplined future fleet reinvestment is supplemented by returning capital to shareholders. Namely, in this quarter, we have initiated a fixed quarterly dividend of $0.25 per share. In addition, based upon a holistic assessment of the company's position, including the last Q performance and our expectations moving forward, the board has also approved a special dividend of $1 per share. Finally, we've put in place a $100 million share repurchase program, which provides us with an additional lever to create shareholder value.
For mid-size tankers, spot rates during Q1 2023 were the highest ever for the Q1 of a year and remained firm, albeit volatile, in the early part of Q2. We've recently seen record high U.S. crude oil exports and crude volumes out of Russia remain strong, adding significant support to mid-size tankers. Global oil demand remains on track to increase by 2 million barrels per day this year, driven in large part by China's economic recovery and increased travel following the relaxation of COVID lockdowns. Perhaps most importantly, fleet supply fundamentals remain in excellent shape, with low fleet growth virtually ensured for at least the next few years. Turning to slide four, we look at recent developments in the spot tanker market. Spot tanker rates remained at historic highs in the first three months of 2023.
As mentioned, spot rates in Q1 were the highest ever recorded for the Q1 of the year, driven by record high crude oil exports in the U.S. Gulf, an increase in long-haul movements from the Atlantic to the Pacific, spurred by rising Chinese crude oil imports and an increase in Russian crude oil exports, which are now moving almost exclusively on long-haul voyages to Asia. Mid-size tanker spot rates have remained firm at the start of the second quarter, albeit with high levels of volatility, which is typical in a tight tanker market environment. We anticipate spot rates to remain volatile due to continued strong fleet utilization interspersed by typical seasonal factors in the coming months. Turning to slide five, we provide a summary of our spot rates in the second quarter to date. Average second quarter to date rates have remained historically strong.
Based on approximately 44% and 41% of revenue days booked Teekay Tankers at Q1 to date, Suezmax and Aframax size vessel bookings have averaged approximately $62,400 per day and $58,500 per day respectively. Importantly, I would highlight that TNK has eight ships currently chartered in at an average cost of $24,300 per day with a mark-to-market value of approximately $68 million. Six of these vessels are currently trading the spot market. Turning to slide six, we look at some of the factors that have been supporting midsize tanker demand over the past few months. Firstly, U.S. crude oil exports have been on a rising trend in recent months, and in Q1 reached a record high average of 4 million barrels per day, with some weeks reaching over 5 million barrels per day.
Almost half of these volumes were shipped to Europe directly on Aframax and Suezmax tankers, leading to an increase in midsize tanker ton-mile demand, with additional volumes being transported long haul to Asia on VLCCs. Secondly, Russian seaborne crude oil exports have increased since the start of the year, with exports in Q1 reaching 3.4 million barrels per day, an increase of half a million barrels per day from Q4. Furthermore, over 90% of these volumes are now flowing long haul to India and China following the implementation of the EU ban on Russian crude oil imports, creating significant ton-mile demand for midsize tankers, given that VLCCs cannot load directly from shallow draft Russian ports.
While TK Tankers does not transport Russian oil, the stretching of the mid-size tanker fleet as a result of new trading patterns to import replacement oil to Europe, coupled with a growing shadow fleet of ships to service Russian trades and which typically or generally trade less efficiently than the regular fleet, have benefited the wider mid-size tanker market. Although Russia announced an oil supply cut of half a million barrels per day from March of 2023 onwards, this is currently not being reflected in Russian crude oil export volumes, which remained firm in the early part of Q2. Turning to slide seven, we look at the outlook for oil demand and supply through the remainder of this year.
As per the IEA, global oil demand is projected to grow by 2 million barrels per day in 2023 to a record high of just under 102 million barrels per day. Non-OECD countries, led by China, are expected to account for 90% of this growth, with OECD demand being impacted by slower economic growth due to high inflation and rising interest rates. Oil demand is expected to accelerate during the second half of the year, with Chinese economic growth gathered pace, with reported GDP growth of 4.5% in Q1, providing a positive sign of an accelerating Chinese economy. Looking at oil supply, the OPEC+ group announced a surprise oil production cut of 1.16 million barrels per day from May through the end of the year in response to lower oil prices and uncertainty of the global economy.
This may negatively impact seaborne oil volumes, and although the impact will primarily be felt in the VLCC sector, given that the majority of the cuts are from Middle Eastern producers, there could also be a negative knock-on effect for all crude tanker segments in the coming months. Turning to slide eight, we look at the positive tanker supply and demand fundamentals, which we believe lay a strong foundation for extended market strength over the next few years. Fleet supply fundamentals remain very positive. The global tanker order book, when measured as a percentage of the fleet, remains at a record low of approximately 4%. Although the pace of new tanker ordering has picked up since the start of the year, most shipyards are now effectively full through the end of 2025.
Furthermore, the number of new orders that have been placed is relatively small when compared to the fleet of older vessels which will need replacing in the coming years. Therefore, at this stage, we do not feel this recent ordering uptick as having a material impact on overall fleet supply in the medium term. The combination of a small order book and little spare shipyard capacity through mid-2026 virtually ensures low fleet growth over the next two-three years, with approximately 2% fleet growth expected this year and negligible levels of fleet growth in both 2024 and 2025.
As shown by the chart on the right of the slide, tanker demand growth is expected to far outweigh fleet supply growth over this time period, setting the stage for increased fleet utilization, which should drive an extended upturn in tanker spot rates over the medium term. I'll now turn the call over to Stuart to cover the financial slides.
Thanks, Kevin. Turning to slide nine, we highlight the company's high operating leverage and what that means for TNK's capacity to generate cash flow and create shareholder value in a strong tanker market. With 96% of our fleet trading in a firm spot market, our earnings in recent quarters demonstrates the power of having 51 vessels trading in the spot market, generating significant free cash flow. As an illustration of that, if Q1 2023 spot rates continue for the full year, we would generate approximately $24 per share of annual free cash flow, equating to a free cash flow yield of over 60%. Our strong cash flows have been used to strengthen TNK for the long term by rapidly paying down debt. In addition, they've allowed us to optimize our capital structure by exercising purchase options on vessels we had previously put into sale-leaseback financing agreements.
By Q4, we expect this optimization to have reduced our break-even rate by approximately $400 per day. Turn to slide 10, we look at Teekay Tankers updated capital allocation plan. As we have previously communicated, throughout 2022, our capital allocation was focused on building balance sheet strength. I am pleased that we have made excellent progress in that regard. Since the beginning of 2022, we have generated over $480 million of free cash flow, reduced our net debt by over $400 million to $182 million, and reduced our net debt to balance sheet capitalization from about 40% to less than 13%. Highly supportive market conditions and our operating leverage enabled us to accelerate our progress. We are now pleased to revise our capital allocation plan.
Our updated capital allocation plan will maintain a focus on building financial strength for future fleet reinvestments when market conditions are supportive. We are initiating a $0.25 per share fixed dividend. This dividend enables us to continue building financial strength while also consistently providing a return of capital to our shareholders. A holistic assessment that considered the company's performance in recent quarters and our outstanding progress in building financial strength, combined with our tanker market outlook and the company's future capital needs, resulted in the board declaring a special dividend of $1 per share. While it is not our intention to utilize special dividends as a regular recurring supplement to our fixed quarterly dividend, we have chosen to do so at this time, providing not just immediate value to our shareholders, but also establishing a further means by which TNK can optimize its capital allocation.
Finally, we have put in place a $100 million share repurchase program, which provides us with another capital allocation tool, enabling us to act opportunistically to take advantage of equity market dislocations when TNK has excess capital. I will now turn the call back to Kevin to conclude.
Thanks, Stewart. In summary, Teekay Tankers is in a great position with our sizable fleet of well-maintained, quality Aframax, LR2, and Suezmax tankers to benefit from strong tailwinds supporting the mid-size tanker market. Robust tanker market fundamentals indicate multi-year support for a healthy tanker market environment, which should enable us to continue creating shareholder value by generating meaningful cash flows, returning capital to shareholders, and seeking opportunities to reinvest in our business and fleet in a disciplined manner. With that operator, we are now available to take questions.
Of course. Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, it is star one if you would like to ask a question. We'll pause just for a moment to allow everyone an opportunity to signal for questions. With that, we'll go ahead and take our first question from Jon Chappell with Evercore ISI. Please go ahead.
Thank you. Good morning, everyone. Before I start, I make a point not to pander on these calls, I have to say, after several quarters of questions around your capital allocation, it's great to see a result there. It looks really great, congrats on that. Stewart, if I could start with you. You know, a lot of the work that you've done on the balance sheet has put you in this position now to change the capital allocation strategy. 19 vessels that you've taken back from sale-leaseback, that'll be done, I guess, by Q3 of 2023. Can you just remind us how many would remain then, starting in Q4, under the sale-leaseback arrangements?
Again, any timing on the ability to exercise options to end that structure as well?
Hi, Jon. Yeah. Thank you very much. We only have eight vessels left in sale-leaseback structures as of the end of the year, and those come up with purchase options available in toward the end of Q1 2024. We'll be in a position if we, if we, you know, think appropriate to buy those ones back early next year.
Okay. All eight?
Eight. There will be eight remaining in total under sale-leasebacks at the end of this year.
Okay. All eight of those will be done by one. You have the option to do all eight of those by the end of 2024. Within 12 months.
Correct. Yeah. In March-
Great.
In March 2024, we have purchase options on all eight of them. That's right.
Fantastic. Okay, great. Thank you. Kevin, for you mentioned the volatility, and you know, obviously there has been a lot of volatility and headline volatility, so to speak, as well. It seems that every time we kind of get a little mark-to-market update, it's like the VLCCs and the, and the MRs, kind of the barbell, have been more extreme, whereas the Suezmaxes and the Aframaxes, although they have been volatile by definition at a much higher range and in a much tighter range. What do you ascribe that to? Is it strictly that the most direct beneficiaries of a lot of the, you know, kind of redrawing of the trade map have been those two mid-sized crude asset classes?
Do you think that that kind of sets a stage for a higher high and higher low scenario within those two specific segments going forward?
Yeah. Hi, Jon, and thank you for your comments earlier. Yeah, it's interesting when you talk about volatility and you've compared the barbells of Vs and MRs. You know, if you look at Aframax, if you want volatility, we were, you know, bouncing along only 10 days ago at around about OPEX levels, and now we're over $120,000 a day in US Gulf. That's volatility. I think we're seeing it across all segments, not just at the bookends. I think on average, what we are seeing is that the aggregated monthly numbers or the quarterly numbers for the mid-sized tankers, specifically Aframax and Suezmaxes, have just held up stronger.
I think that speaks to the direct impact that these new trade routes, as a result of the Ukraine war, has really been focused on that more flexible vessel that the Aframax and the Suezmax presents. You know, I said in my remarks, we don't take part in the Russia trade directly. It's causing a dislocation while others choose to go there. It's drawing them away from traditional markets. Our concentration in US Gulf in our lightering business, and in the Atlantic as well as the Far East, has helped us to keep the Aframax, you know, our presence in the Aframax market when it does spike, to give us the kind of returns that we're demonstrating on this call today. Yeah, I think.
Long story, it really is. The last 12 months have really been a story about the mid-sized tankers, not so much all sectors all at the same time. They've had periods of strength. I think, as I mentioned in my remarks, the OPEC cuts are gonna primarily affect the VLCCs. I think the Aframax and Suezmaxes, while on a sentiment basis may be impacted, on a ton-mile basis, may continue to be strong for the rest of the summer and into certainly the Q4.
Yeah, that makes a ton of sense. Thanks again, Kevin. Thanks, Stuart.
Thanks, Jon.
Josh.
We'll go ahead and move on to our next question from Omar Nokta with Jefferies. Please go ahead.
Thank you. Hi. Hi, Kevin. Hi, Stewart. Maybe just a touch of pandering from my angle as well. I would say congrats because you guys set off on this strategic approach maybe at least five or six years ago, looking to balance or strengthen the balance sheet. You really ignored a lot of, you know, a lot of risks of taking advantage of uplifts that we saw in 2019, 2020. You just stuck the course and here you are now. We've gotten to this position of being almost in a net cash situation. Kudos to you guys.
Did wanna ask about, you know, clearly you have the buyback, you've got the special that you just declared, and you've got the ongoing $0.25 dividend. You're still just based off of the way this market is, you're generating a lot of free cash flow. How are you thinking about how that free cash gets utilized? Obviously, you just announced this capital allocation, so I'm not expecting you to just start talking about what to do with the excess cash. Just in general, how do you think about that free cash as it gets generated? Does that just go straight to the balance sheet? Effectively, your debt's almost gone, so does the cash just build, or do you now start to look at acquisitions and fleet renewal?
Thanks for the comments, Omar. Yeah, we're very happy with the progress we've made over the last few years, and we think we're in a good position. In terms of the excess cash flow that we'll generate, I do expect if the tanker market stays strong, that we'll quickly find ourselves in a net cash position. As we mentioned in our prepared remarks, it's really with an eye to making disciplined reinvestments in our fleet as we go forward. You know, we can step back a little bit now and look at a bit more of a longer term view of what's gone on with the company over the last several years.
We've tried to be very disciplined and focused on building our balance sheet strength, and we haven't invested in a tanker since the end of 2017. We do need to reinvest, but we're gonna be very disciplined as we do that. Going forward, we wanna continue to operate from a position of balance sheet strength, which means it will require, you know, a fair amount of equity, in order to make those reinvestments. We'll be patient, we'll look for opportunities, and when those opportunities arise, we'll be, you know, we think we'll be positioned to take advantage of them.
Thank you. That's good. I guess just in terms of the those opportunities, don't wanna press too much, because you do have the flexibility to not take your time. you know, in terms of, say, fleet additions, you can do the charter-ins as you've done here recently. You can buy ships out in the open market, or you can order new ones. Euronav earlier this morning had mentioned looking at new buildings within the Suezmax segment. How are you guys looking at new buildings in general? Is that something that is compelling at this point? Or if you were to put capital to work, is it more towards secondhand, or do you continue with the in-charter approach?
Hi, Omar. Yeah, thanks as well for the comments. We said this before. When it comes to our fleet renewal task, we're really agnostic. You know, historically, TNK has bought secondhand ships, it's ordered new ships, and it's done M&A, and I don't think that changes going forward. The challenge at the moment is, in our view, new building prices relative to historic terms are expensive as to our secondhand values. You know, obviously different owners have different views, but from where we sit, we don't have plans on our books right now to go into the new build market at these kind of price levels.
Thanks, Kevin. Thank you. Maybe just one final follow-up just on the new credit facility, the $350 million that will refinance the 19 sale-leaseback vessels. You're going to be winding those down obviously, you, over the next couple of quarters. H ow much of that $350 million are you expecting to draw initially for the full? Once you've paid off the leases on the 19? Just?
Well, it'll depend how cash flow goes into Q3 and Q4, but we are able to reacquire the vessels from the sale-leaseback arrangements initially with just a small draw on our existing revolver and not drawing anything on the $350. It'll be either a very small draw on the existing $90 million revolver or nothing. If we continue to see strong cash flows into Q3 and Q4, I would expect that we wouldn't need to draw anything.
Makes sense. Cool. Well, thanks, Stewart. Thanks, Kevin. I'll turn it over. Congrats again.
Thanks so much.
Appreciate it.
Our next question is gonna come from Ken Hoexter with Bank of America. Please go ahead.
Hey, great. Good morning. Again, I'll echo congrats on the reshaping of the balance sheet. Great job on sticking with it. Kevin, or Stewart, you know, you 96% spot exposed, I don't know, maybe your view of how long this lasts for in terms of, you know, it's obviously you're confident by sticking with the spot. Do you look for some time charter opportunities to lock in these rates? You know, maybe your thoughts on the longevity of this kind of market.
Yeah. Hi, Ken. Yeah, as we said in our prepared remarks, the way the fundamentals are set up, and I think we said on previous calls, the change in the trade patterns, as a result of the Ukrainian war, we feel in our opinion are durable. Yeah, we do have confidence that the spot market is going to be the best place for our assets to trade and then for us to maximize our cash flow generation. We always keep an eye out for opportunities. We haven't seen any of late where we thought that it was worth putting vessels out. We feel we can best that performance over the next 12 months, by staying spot.
We have done, you know, some short-term three-month deals that sort of outperformed the spot market. We're always looking to do things. In terms of the longer term, you know, 12-month-plus type of deals, we don't feel that the market is rewarding us enough for committing the assets at this point in the cycle, and that's based on the confidence we have in the spot market going forward.
Great. I guess maybe to take that one step further, right? The confidence in the order book, right? You know, I think it was just mentioned that you're hearing some peers start to place orders. You're still looking at it as historically expensive. Does that fear of the rising eventual order book start to pressure your rates in your view? Or is that change your outlook on things as you get more carriers going in and placing orders? Or maybe just walk us through your thoughts on how you see the market panning out.
I think, you know, we recognize that there has been an uptick in ordering in recent months. You know, our view for the next two to three years is that we're gonna, we're gonna enjoy a very strong period of minimal or nonexistent fleet growth. Beyond that, nobody knows. As I said, there has been an uptick. When you compare the uptick, and you annualize that, maybe Christian can jump in later and give us some numbers around it, but when you compare it to previous years or historical norms, it... the order book still isn't large.
As long as that remains the case, we also look at where the fleet profile is for tankers, and there is a large grouping of ships that are heading towards 20 years old and beyond that will eventually leave the fleet. You know, when you compare the number of ships on order or that need to be ordered to replace that fleet, that will leave the day-to-day trading fleet, you know, we can take a lot more ordering from here before we have a large negative impact.
Great. My last one is, just with the OPEC cuts, do you see any risk of any, I don't know, VLCCs pressing into the market? I know it's a different trading market, but any pressure from that fleet pushing into the market? Thanks for the time, guys.
Yeah, sure. It's a good question. You know, OPEC cuts will definitely impact the V's because most of the cuts are coming out of Middle Eastern producers. The V's are naturally gonna look for other markets to try and penetrate. We will see them, you know, start to move into West Africa. We have over recent months seen more VLCC volumes being picked up in the U.S. Gulf going to Europe. You know, as the V's struggle for alternative markets, they will, they will start to trade into other areas, which in our view, and I think we said this, that could put a sort of a lid on how high this spot market could go in terms of the mid-size tanker space.
I think overall, our confidence, is that, you know, especially for the Aframaxes, they're not a vessel that can be replaced readily. We think that the Aframaxes will continue to enjoy a really strong run, as will the Suezmaxes. It's just that they may be capped out a little bit, where the highs don't go, you know, as high as we saw them in the Q4 , during the summer. They'll still be, on a relative basis, extremely healthy, you know, returns for Suezmaxes relative to historical norms.
Great. Appreciate the time and thoughts. Thanks, guys.
Thanks, Ken.
With that does conclude our question and answer session. I would like to hand the call back over to the company for any additional or closing remarks.
Thank you for joining us today. We look forward to speaking to you next quarter.
With that does conclude today's call. Thank you for your participation. You may now disconnect.