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Text: Before Kevin begins, I'd like to direct all participants to our website at www.
And I hope that you and your families are all safe and healthy.
Joining me on the call today are Stewart Andrade, Teekay Tankers' CFO and Christian Waldegrave, Director of Research for Teekay Tankers.
While COVID-19 is having an unprecedented impact on the world and is clearly a major focus for us, we are truly proud of how our seafarers and onshore colleagues have responded to COVID-19, implementing new standards, which focus on the health and well-being of everyone involved in our organization, especially our colleagues at sea, while maintaining consistently safe and efficient operations for our customers.
Additionally, we are fortunate that the tanker market and our financial results have been strong so far in 2020, and we have had minimal impact on our operations related to COVID-19.
We reported adjusted net income of $110 million or $3.27 per share in the first quarter, up from an adjusted net income of $83 million or $2.47 per share in the fourth quarter of 2019 and $15 million or $0.44 per share in the first quarter of 2019.
Teekay Tankers' first quarter earnings per share was the highest in more than 10 years, resulting in an industry-leading 20% earnings per share yield for the quarter based on our closing share price yesterday at an annualized earnings per share yield of 80%, clearly demonstrating the earnings power of our business.
We have continued to strengthen our balance sheet with strong free cash flow from operations of $140 million and the completion of three vessel sales totaling $60 million during the first quarter.
This allowed Teekay Tankers to reduce its net debt by $200 million or over 20% and increased our liquidity position to $368 million during the quarter.
Our net debt-to-total capitalization declined to 40% at the end of March compared to 48% at the end of the fourth quarter of 2019 and it remains our intention to continue reducing this leverage and increasing our long-term financial flexibility and resilience.
Subsequent to the first quarter, we are continuing to generate significant free cash flow and also closed the $27 million sale of the non-US portion of our ship-to-ship transfer business.
Approximately $14 million of cash payment was received on closing with the balance due in August.
Crude tanker spot rates were the highest in more than 10 years during the first quarter and second quarter rates are also expected to be very positive based on firm quarter-to-date bookings.
Turning to Slide 4, I want to provide an update on our current operations during this unprecedented global pandemic.
The health and safety of our crew and shore staff is paramount for Teekay Tankers.
We have implemented strict measures on all of our ships to protect our seafarers while the vast majority of our shore staff are working remotely from home.
Crude changes remain a major challenge for the industry as most countries have placed restrictions on travel, visa applications and crews disembarking from ships.
We are working hard with both the industry and intergovernmental organizations to tackle this challenge.
We remain in close continuous communication with our colleagues at sea to provide support during a challenging period in which they have truly stepped up to that challenge.
I'm pleased to report that as a result of the team's dedication to health and safety and their professionalism during this time, there are no COVID cases on board any of our vessels.
Further, our vessel availability remained unaffected with no impact on our vessel days.
We were well prepared to manage any potential spares shortages as the team identified critical items and made advance purchases early in the outbreak where given our experiences from 2003 SARS epidemic, we anticipated challenges related toward manufacturing and logistics.
In addition, the team has obtained class and flag expansions for two vessels that were due to drydock in the second quarter, ensuring minimal interruption to our fleet operations.
Overall, the fleet has performed exceptionally well in the first quarter and second quarter-to-date and we expect this to continue.
Turning to Slide 5, we look at recent developments in the spot tanker market.
The crude spot tanker market started the year on a relatively firm note as strong supply and demand fundamentals seen in the fourth quarter of 2019 carried over into the first quarter of this year.
However, rates gradually softened during the course of January and February due to lower demand over the Chinese New Year period and as the COVID-19 outbreak began to impact Asian crude oil inventories.
The tanker market improved quickly during March with the collapse of the OPEC plus agreement and short-lived oil price war in March between Saudi Arabia and Russia.
By April, Saudi Arabia pushed its oil production to a record high of just under 12 million barrels per day, creating significant additional tanker demand.
At the same time, global oil demand plummeted from March onwards as a large proportion of the world's population became subject to lockdown orders in an effort to slow the spread of COVID-19.
According to the IEA, global oil demand declined by around 25 million barrels per day year-on-year in April as demand for transportation fuel collapsed.
This led to a huge mismatch between global oil supply and demand and a historic build in global oil inventories.
The rapid build in inventories drove oil prices to multi-year lows and pushed the crude oil futures curve into steep contango which encouraged oil companies and traders to put ships for floating storage.
We've also seen a large number of ships idled due to delays at port, which is further tying up available fleet supply.
As shown by the chart on the slide, around 100 crude tankers are currently being used for floating storage, which we define as being in storage for at least 30 days with over 100 additional ships sitting in ports on demurrage for periods of between seven days to 30 days.
All told, around 10% of the crude tanker fleet is currently being used for some form of floating storage, thereby reducing the number of ships available for transporting cargo.
This tightening of available fleet supply, combined with healthy cargo supply caused a significant increase in tanker utilization during the first quarter.
As a result, mid-size tanker spot rates during the first quarter were the highest in over 10 years.
In the near term, we expect the ongoing storage demand and port delays will continue to tie up tonnage and provide support to crude tanker spot rates even as cargo volumes start to decline due to oil supply cuts, albeit though at lower rate levels than the exceptional rates we saw during March and April.
Turning to Slide 6, we give a summary of our spot fixtures in the second quarter of 2020 to date.
Based on approximately 69% and 64% of spot revenue days booked, Teekay Tankers' second quarter-to-date Suezmax and Aframax bookings have averaged approximately $52,100 and $33,200 per day, respectively.
For our LR2 segment with approximately 58% spot revenue days booked, second quarter-to-date bookings have averaged approximately $34,300 per day.
As discussed in the previous slide, while the freight market is still relatively firm, rates have come off from the exceptional highs seen during April.
We expect spot rates during the balance of Q2 to be at lower levels than those booked in the quarter-to-date.
Turning to Slide 7, we outline our recent tanker time chartering activity.
Over the past eight months, Teekay Tankers has taken advantage of strong spot tanker market spikes and opportunistically secured fixed time charter coverage for 10 Suezmaxes and three Aframax size vessels at attractive rates.
One Suezmax is chartered for six months with the remaining nine Suezmaxes being chartered for one year.
The three Aframaxes were fixed out for periods of between one and two years.
As can be seen on the chart, we timed these deals with spikes in the time charter market during October, December and more recently in March and April in order to lock in rates and forward revenue well above the average spot market levels seen over the last several years.
Turning to Slide 8, we discuss some of the factors which we anticipate will impact tanker market over the medium term.
Given the unprecedented impact of COVID-19 on the world economy, it is extremely difficult to predict with any certainty how oil fundamentals will develop in the medium term and how exactly this will impact tanker demand in the coming months.
However, on the positive side, it is important to highlight that unlike past cycles, the order book this time around is very small and owners have for the most part held off from ordering despite strong earnings in recent quarters.
The current tanker order book, when measured as a proportion of the existing fleet, is the lowest we have seen it in 23 years, at just under 8%.
This is significantly lower than the almost 50% of the fleet size in 2008 and 20% seen in 2015, proportions which meaningfully weighed on the ability of the tanker market to recover the demand return.
It's also important to keep in mind, the main reasons for lower ordering during the current cycle have been a lack of available finance and uncertainty over which propulsion and fuel systems to order given new technology development and upcoming environmental legislation, neither of which is currently anticipated to be resolved in the near term.
Given this, we expect contracting for new tankers to remain low in the months ahead.
In addition to a small order book and given the world tanker fleet age profile, a large number of ships face the likelihood of scrapping in the coming years.
Looking at the mid-size tanker fleet specifically, around 370 vessels are aged between 15 years and 20 years old compared to our current order book of just 140 ships.
As such, we anticipate very low fleet growth for at least the next two years, particularly during periods of weaker tanker rates as this may provide impetus for owners to scrap these older vessels.
In summary, the tanker market faces uncertainty over the second half of the year, but a positive tanker supply outlook may lead to a faster rebalancing than in previous market cycles.
For Teekay Tankers, I'm confident that our focus on debt reduction and strengthening of our balance sheet, puts us in a strong position to weather any periods of market softness while looking for opportunities to further increase long-term shareholder value.
Turning to Slide 9, we highlight our continued focus on increasing financial strength.
Since the end of Q3 2019, utilizing very strong cash flows from operations and proceeds from asset sales, we have transformed our balance sheet, reducing net debt by approximately $270 million or 27% and increasing our liquidity position by almost four times to $368 million.
In fact, in Q1 alone, we reduced our debt by approximately $200 million or over 20% and more than doubled our liquidity position.
I'm pleased to report that the strong cash flows achieved in April, further reduced our net debt by approximately $60 million and increased our liquidity position to $420 million.
In addition, the 13 fixed rate contracts that Kevin touched on earlier, have lowered our cash breakeven by over $4,000 per day for the next 12 months, further increasing our resilience to potential medium-term market weakness.
Turning to Slide 10, we discuss how Teekay Tankers continues to create value for shareholders by generating significant free cash flow.
Starting with the graph on the left side of the page 10, TNK's free cash flow increased from a very high $102 million in Q4 2019 to $141 million in the first quarter of 2020 for total of over $240 million in just two quarters.
To put TNK's free cash flow during the first quarter into perspective, on an annualized basis, it equates to a free cash flow yield of approximately 100%, based on our closing share price yesterday of $16.05.
Referring to the graph on the right side, TNK continues to maintain significant operating leverage with approximately 80% of spot exposure over the next 12 months, while reducing its free cash flow breakeven by locking in time charters at significantly higher rates.
TNK is expected to generate strong free cash flow in the second quarter and generate positive free cash flow at average midsize tanker spot rates above approximately $10,500 per day.
Therefore, we expect to continue creating shareholder value through positive free cash flow in almost any tanker market.
Turning to Slide 11, this is a familiar slide which summarizes our strategic priorities for 2020 that we laid out at our Investor Day last November.
I'm proud of our team for continuing to execute on these priorities, despite the unprecedented global events we are currently experiencing.
We capitalized on the strong market with majority of our fleet trading spot while opportunistically fixing our 13 vessels on time charter at the peaks of the time charter market.
Financially, we have bolstered our balance sheet with significant delevering and building a robust liquidity position.
Despite majority of our employees working from home and facing logistical challenges related to crew changes, we were able to complete three vessel sales and the sale of the non-US ship-to-ship transfer business.
Lastly, we believe Teekay Tankers made the right choice in switching to low-sulfur fuels, which was a seamless low cost transition compared to others that invested in scrubbers or speculated on fuel spreads incurring additional capex, debt or losses.
Our focus on debt reduction creates shareholder value directly through increased net asset value and also increases financial flexibility and resilience which is important in all tanker markets.
With the low free cash flow breakeven, a strong liquidity position, lower balance sheet leverage, no significant debt maturities until 2024 and our mid-size fleet profile, we believe that Teekay Tankers continues to be one of the best-positioned companies in our sector to continue creating shareholder value over the long term.

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compname reports qtrly adjusted earnings per share of $3.27.
q1 adjusted earnings per share $3.27 excluding items.

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