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Teekay Tankers Ltd. Benefits From Improved Spot Market

Teekay Tankers Ltd. reported the Company’s results for the quarter ended March 31, 2022:

First Quarter of 2022 Compared to Fourth Quarter of 2021
The reduction in GAAP net loss and non-GAAP adjusted net loss for the first quarter of 2022, compared to the fourth quarter of 2021, was primarily due to higher average spot tanker rates in the first quarter of 2022. In addition, GAAP net loss in the fourth quarter of 2021 included an $11.6 million equity loss relating to the write-down of an equity-accounted investment and a net expense of $4.3 million relating to vessel write-downs and gain on vessel sale, which was higher than the net expense of $0.4 million relating to the asset write-downs recorded as part of the GAAP net loss in the first quarter of 2022.

First Quarter of 2022 Compared to First Quarter of 2021
The reduction in GAAP net loss and non-GAAP adjusted net loss for the first quarter of 2022, compared to the first quarter of 2021, was primarily due to higher average spot tanker rates and full service lightering revenues, as well as lower vessel operating expenses in the first quarter of 2022 due to vessel sales and the timing of repair and maintenance activities, partially offset by the expiration of certain fixed-rate time charter contracts at higher rates during 2021.

CEO Commentary
“Following a weak start to the year, spot tanker rates increased significantly at the end of the first quarter, driven primarily by global oil trade disruptions resulting from Russia’s invasion of Ukraine. A reduction in European crude oil imports from Russia and the sourcing of replacement barrels from elsewhere has resulted in significantly longer voyage lengths which, coupled with the effective removal of Russian-owned tankers from many routes, has led to a much tighter tanker market. These changes have been particularly positive for mid-sized tankers that our company operates, given the flexibility of the tonnage and our ability to call at a much wider range of ports relative to VLCCs,” commented Kevin Mackay, Teekay Tankers’ President and CEO.

“While we are encouraged by the recent positive trend in spot tanker rates, we note that a number of significant variables remain in the tanker market outlook, including the duration and extent of China’s latest round of COVID-19 lockdowns, the geopolitical situation in Eastern Europe, the pace at which OPEC+ is expected to return oil to the market, higher bunker fuel prices, and the potential for lower global economic growth. At the same time, we have good, multi-year visibility into tanker supply, where a small orderbook, constrained by a lack of shipyard capacity through the middle part of this decade, represents a firm, positive fundamental in any market.”

“At Teekay Tankers, we remain proactive in strengthening our balance sheet and managing our fleet. Having refinanced 13 vessels on low-cost sale-leaseback financings and sold three older vessels in 2022, we have strong pro forma liquidity of $230.9 million and a net debt-to-capitalization ratio of 42 percent. We have also maximized our exposure to the spot market, where our strong operating leverage positions us to generate significant cash flow from an increase in tanker rates.”

Summary of Recent Events
The Company completed the previously announced sales of a 2004-built Suezmax vessel and a 2004-built Aframax vessel for approximately $29 million. The sales were completed in February and April 2022, respectively. The Company also entered into an agreement to sell a 2005-built Aframax vessel for approximately $15 million in March 2022. This sale was completed in April 2022.

The Company refinanced 13 vessels with new, low-cost sale-leaseback financings, which were completed in March and April 2022. These refinancings increased the Company’s liquidity position by approximately $75 million.

Tanker Market
Crude tanker spot rates were relatively weak during the first two months of 2022 due to the impact of the Omicron COVID-19 variant on oil demand, lower than expected oil supply growth due to temporary production outages, and high crude oil prices which led to an increase in bunker costs. However, Russia’s invasion of Ukraine in late February led to a spike in crude tanker rates, particularly in the Aframax and Suezmax sectors, due to trade disruptions and the rerouting of cargos. Since then, the tanker market has exhibited significant rate volatility and stronger crude tanker spot rates.

Although the near-term outlook for the tanker market is uncertain, changing trade patterns due to the Russia- Ukraine conflict are resulting in an increase in tanker tonne-mile demand. During the past few weeks, there has been a decrease in Russian crude oil exports to Europe and a corresponding increase in Russian crude oil exports to Asia, particularly to India. This has been positive for tanker tonne-mile demand due to longer voyage distances. Similarly, Europe is having to replace Russian crude oil with imports from further afield, including the U.S. Gulf, West Africa, and the Middle East, which is also positive for tanker tonne-mile demand. Given the European Union’s recent proposal to phase out all Russian crude oil imports over the next six months, and refined products by the end of 2022, the Company expects that these altered trade patterns may persist for an extended period of time. In addition, the fleet of Russian-owned and operated ships, which comprises approximately 5 percent of the global Aframax fleet, is finding it more difficult to trade, which is further tightening available fleet supply.

The outlook for the global economy and oil demand has worsened since the start of the year due to rising inflation, Russia’s invasion of Ukraine, and a resurgence of COVID-19 cases, particularly in China. In its April 2022 “World Economic Outlook” report, the International Monetary Fund (IMF) reduced its GDP growth outlook from 4.4 percent to 3.6 percent and warned that risks are weighted to the downside. In addition, the International Energy Agency (IEA) has downgraded its outlook for global oil demand growth from 3.2 million barrels per day (mb/d) at the start of the year to 1.9 mb/d in its April 2022 report. A weakened outlook for the global economy and oil demand is a potential headwind for tanker rates in the coming months; however, these negative impacts may be offset by the increase in average voyage distances due to the Russia-Ukraine conflict and the Company expects rate volatility to persist in the near-term.

The outlook for tanker fleet supply continues to look very positive, with some of the best supply fundamentals seen in over two decades. As of April 2022, the tanker orderbook stood at only 6.4 percent of the existing fleet size, which is the lowest since Clarksons started tracking orderbook data in 1996. Rising newbuilding prices, which are currently the highest since 2009, and a lack of shipyard capacity continue to limit new tanker orders, with just 0.2 million deadweight (mdwt) of new orders placed in the first quarter of 2022, the lowest since at least 1996. With most major shipyards being at capacity through the middle of 2025, there is limited available capacity to order new tankers for delivery in the next three years. This, coupled with a rapidly aging global tanker fleet, should lay the foundation for very low fleet growth in the medium-term.

In summary, spot tanker rates have increased following Russia’s invasion of Ukraine and look to remain volatile in the coming weeks and months as the situation continues to unfold. Although the near-term outlook is highly uncertain, the longer-term outlook appears positive due to a small tanker orderbook, very low levels of tanker ordering, and an aging global tanker fleet, which together should lead to an extended period of very low tanker fleet growth.
Source: Teekay Tankers Ltd.

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