Prepared remarks
Please standby. We are about to begin. Welcome to the Teekay Group Fourth Quarter 2024 Earnings Results Conference. 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 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.teekay.com, you will find a copy of the Teekay Group's Fourth Quarter and Annual 2024 Earnings Presentation. Kenneth will review this presentation during today's conference call. Please allow me to remind you that our discussions today can include 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 Teekay Corporation and Teekay Tankers Fourth Quarter and Annual 2024 Earnings Releases, and the Teekay Group Earnings Presentation available on our website. I will now turn the call over to Kenneth Hvid, Teekay Corporation's and Teekay Tankers' President and CEO, to begin.
Hello, everyone, and thank you very much for joining us today for the Teekay Group's Fourth Quarter and Annual 2024 Earnings Conference Call. Joining me on the call today for the Q&A session is Brody Speers, Teekay Corporation's and Teekay Tankers' CFO, Ryan Hamilton, our VP of Finance and Corporate Development, and Christian Waldegrave, our Director of Research. Starting on slide three of the press presentation, we will cover Teekay Tankers' recent highlights. Teekay Tankers reported adjusted net income of $52 million or $1.50 per share for the fourth quarter, and for the full year 2024, adjusted net income of $355 million or $10.31 per share. Despite softer-than-expected spot rates towards the end of the year, the company still generated $69 million in free cash flow in the fourth quarter and $415 million for the year. In the last few weeks, as part of our opportunistic approach to ongoing fleet management, we sold two 2009-built Suezmaxes and one 2006-built LR2 for a combined $96 million.
Two of these vessels have already been delivered to their buyers while the third is expected to be delivered by mid-March upon completion of its current voyage. Including the previously announced two vessels we sold during Q4, we've sold a total of five 2005-to-2009-built vessels for combined proceeds of $160 million resulting in expected book gains on sale of nearly $60 million. Further, I'm pleased to report that just today, we lifted SPAC and signed a memorandum of agreement to acquire a Martin LR2 tanker which we expect to close in the second quarter. These sales and purchases are part of our ongoing fleet management and fleet renewal plan, where we naturally sell older vessels and acquire more modern tonnage over time when the opportunity is right. In addition, we have now completed C&K's acquisition of the Teekay Australia business and the transfer of all the remaining management services companies not previously owned by C&K. These transactions transform Teekay Tankers into a fully integrated shipping company and the sole operating platform within the Teekay Group.
We also made a passive investment in Ardmore Shipping Corporation where we now own 5.1% of the company. Historically, Teekay has had investments in adjacent sectors to our medium-sized crude tanker business, including some exposure to the MR sector in the past. We believe that this investment represents good value in the product sector. Looking at our first quarter-to-date spot rates, our rates booked to date are slightly below our fourth quarter levels but remain volatile and have been trending upwards based on the latest Clarkson data. Spot rates, although down from historical highs in 2023 and 2024, are well above our fleet's free cash flow breakeven levels, meaning Teekay Tankers can generate substantial free cash flow and earnings in the current market environment. We will discuss the drivers of the market in subsequent slides. Lastly, Teekay Tankers declared this quarterly fixed dividend of $0.25 per share payable in March.
For the full year, we have paid $3 per share in dividends. Moving to slide four, looking at recent developments in the spot market, we've seen Chinese demand ease in the latter part of the year, which weighed on the VLCC market and, in turn, had a dampening effect on Suezmax and Aframax spot rates. Seasonal weather delays did not provide any uplift to the tanker market during the winter months. Rates were still above long-term average levels and well above TNK's pre-cash flow breakeven of approximately $14,300 per day. Average Q1-to-date spot tanker rates are slightly below fourth quarter levels but have been trending upwards in recent weeks. The imposition of additional US sanctions on 153 tankers servicing the Russian oil trade has increased rate volatility, particularly in the larger crude tanker asset classes. Replacement shipping capacity was booked for transporting oil to China and India.
In addition, Atlantic basin crude oil has been attractively priced compared to Middle Eastern crude in recent weeks, which has opened the arbitrage for long-haul movements of oil from the Atlantic basin to Asia. This has been positive for ton-mile demand in the near term, particularly for VLCC and Suezmax tankers. Turning to slide five, looking at some of the geopolitical events that are currently unfolding, these factors change day by day and there are likely more questions and answers on how things will progress over the course of this year. As highlighted by the slide, there are an unusually large number of factors this year that could influence the direction of the tanker market. I won't go into every single point in detail, but it's worth highlighting three of the key factors which we believe could impact the tanker market depending on how they unfold in the coming weeks and months.
Firstly, the red highlights the current conflicts in Ukraine and the Middle East. Starting with the war in Ukraine, the situation has become extremely dynamic in recent weeks. While we do not know how events will unfold or continue to unfold in the future, we do know that there could be wide-ranging consequences for both tanker demand and the future of the so-called shadow fleet that are currently servicing Russian oil exports, should a peace agreement be reached. In the meantime, we can envision scenarios whereby sanctions against Russia are either tightened or loosened depending on how discussions between the various parties develop. For example, we understand that the EU is planning a new round of sanctions next week, which will include another seventy-three ships being added to the sanctions list. These sanctions could further impact the ability to export oil, evidenced by the last round of sanctions in January where logistical constraints meant that India and China had to source replacement barrels from the Middle East and Atlantic basin on non-sanctioned vessels to make up for the shortfall in Russian supply.
In the Middle East, the recent ceasefire between Israel and Hamas has led to the Houthi group in Yemen pledging to stop attacks on shipping. This may eventually result in the resumption of tanker transit through the Red Sea region which, depending on how things unfold, could impact seaborne trade patterns and reduce tanker ton-mile demand. However, the situation is fragile. For the time being, we expect that owners like Teekay and cargo interests will continue to stay away from the region until there is more certainty around the safety of crews, vessels, and cargoes. Secondly, the yellow highlights the impact of sanctions on crude oil exports from Russia, Iran and Venezuela as well as the fleet of ships servicing them. We discussed the situation with regards to Russia earlier. Another key development this year is the return of the United States' maximum pressure campaign on Iran in a bid to reduce Iranian oil exports to zero.
In 2024, Iranian crude oil exports averaged 1.5 million barrels per day, the majority of which went to China. Tougher sanctions on Iranian crude oil exports could therefore lead China to import oil from other sources via the compliant fleet, which would be positive for tanker demand. Finally, the blue highlights the potential impact of tariffs on oil trade flows. In early February, the US announced 25% tariffs on imports from Mexico and Canada with a lower 10% tariff on Canadian energy. Though the implementation of these tariffs was suspended for 30 days, should these tariffs come into force, we could see Canada and Mexico looking to divert some of their crude exports away from the US to other regions, subsets Europe and Asia, while US refiners may have to find replacement barrels from further afield, both of which would be positive for tankers on a ton-mile basis. Regarding Canadian exports, their plans commence daytime loading from the Trans Mountain pipeline terminal in Vancouver later this year, which would allow the terminal to reach twenty-eight to thirty Aframax-equivalent shipments per month compared to twenty-two to twenty-four previously.
It is difficult to predict 2025 impacts, but due to political uncertainty and changes to seaborne oil trade, such events usually increase tanker market volatility and supply chain inefficiencies. Turning to slide six, looking at the underlying tanker demand and supply factors, which we believe continue to support a balanced market, notwithstanding the geopolitical events. Starting with demand drivers, global oil consumption is projected to grow by 1.3 million barrels per day in 2025. Virtually all of this demand growth is being driven by non-OECD countries led by Asia. Global oil supply is also set to grow with production from non-OPEC+ countries set to increase by 1.5 million barrels per day in 2025, led by the United States, Brazil, Norway, Canada, and Guyana. Given that these sources of oil are mostly in the Atlantic basin, while oil demand growth is focused on Asia, we expect an increase in long-haul crude oil movements from west to east, which should boost tanker ton-mile demand.
The OPEC+ group could also provide additional seaborne transportation volumes should they start unwinding their voluntary oil supply cuts from April 2025 onwards, consistent with the most recently announced plan. Turning to fleet supply, midsize tanker fleet growth is expected to remain relatively low in the medium term. As shown by the chart on the bottom right of the slide, the current size of the tanker order book is relatively similar to the fleet of older tankers turning twenty during the same time period. There are three hundred and seven midsized tankers currently on order for delivery through 2028, compared with three hundred and twelve existing midsized tankers that will turn twenty over the same time frame. In addition, there are three hundred and one midsized tankers already over the age of twenty, the majority of which operate as part of the shadow fleet servicing sanctioned trades and are facing increased scrutiny from US and European authorities.
In sum, assuming no scrapping, we could have over six hundred midsize tankers, or approximately thirty percent of the fleet, over the age of twenty years old in three years' time, which is unprecedented. For comparison, at the end of 2021, there were around one hundred and fifteen midsized tankers over the age of twenty. This illustrates the scale of the excess older fleet that could be phased out should trade normalize. While it is difficult to predict what will ultimately happen with the shadow fleet and it is uncertain when we may see an uptick in vessel recycling, we believe that with a manageable order book, a lag of available shipyard capacity until 2028 and a tanker fleet which is currently the oldest in well over twenty years, tanker fleet growth will remain at low levels over the next few years. In sum, while there are a wide range of potential outcomes from the various current issues impacting global trade, security, and energy, we remain encouraged by the underlying tanker supply and demand fundamentals which we believe point towards a balanced tanker market over the medium term.
Turning to slide seven, we highlight how Teekay Tankers is positioned for any market conditions. With our high operating leverage and a low free cash flow breakeven of $14,300 per day, we can generate significant cash flow in almost any market conditions. To emphasize, every $5,000 increase in spot rates above our breakeven produces $2.15 per share of annual free cash flow or over 5% on a free cash flow yield basis. Combined with our strong balance sheet, we've built optionality and capacity to maximize shareholder value in any market outcome. With that, operator, we're now available to take questions.
Questions and answers
Thank you. If you are dialed in via the telephone and would like to ask a question, please signal by pressing star one on your telephone keypad. Using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. To submit a question, simply type your question in the ask a question box and click send. We'll move to our first question from Jon Chappell with Evercore ISI.
Thank you. Good morning. Kenneth, you touched on it briefly in your introduction, but if you could just provide a little bit more insight on the Ardmore investment. It seems a little curious given it's a part of the tanker sector that Teekay hasn't really been involved in much in the past. I get that it's cheap and it's TNK, and it's also just a lot less liquid than TNK as an investment. Maybe explain the thought process behind that and also how you looked at that investment vis-a-vis buying back your own shares.
Yeah. Thanks, Jon. Good morning. I was expecting that question. I just wanted to emphasize that our number one priority is obviously our core fleet and our core business at Teekay with the fleet renewal, which I hope we get a chance to discuss as well. But the investment here is not a stray away from what we've done in the past. As you will remember, we've always had some MR exposure; we haven't had it for some time. We looked around. The market was up for some time, and when it took a big dip last year towards the end, we thought Ardmore was very good value, and we made a very small investment in that company relative to our asset base here. It was always meant to be small and opportunistic; it was a financial investment. Then, as you saw last week, Ardmore announced that they bought back 4% of their shares, which contributed to our 5.1% position. But just want to emphasize it's a small investment. We think it's good value, and it's consistent with keeping an eye on adjacent sectors in a modest way.
Okay. And then in my follow-up, you just announced this morning the new LR2 that you're purchasing that you're going to get in the second quarter. You're still selling at a quicker pace than you're replacing, which I think makes sense in this asset value environment. Kind of a similar question: how do you think about the continued pace of renewal buying versus selling? And then also in the last two years in the first quarter, you've had special dividends. Given the cash balance today and the proceeds from these sales, you're in a stronger position. On the other hand, the market's a bit more uncertain. So a lot in there, but kind of, how do you think about pace of replacement and capital allocation within that?
Great questions, and it's obviously what we're spending a lot of time discussing and making decisions around here. On fleet renewal, you're right and as I commented in the remarks and in last quarter's Q&A, we're looking at selling some older vessels and buying some newer vessels. That's all part of being an operating company and renewing our fleet. As you all know, we've been sweating our assets heavily over the past three years, and I think that's been great. We've also been running off ship years, and we think now is a pretty good time to start leaning in. You're correctly pointing out that we are selling more vessels than we're buying up to now. If you look at it in ship years, we are actually buying more ship years than we're selling. So I think it just speaks to how we're trying to manage where we are in the cycle and at the same time try and renew the fleet. So we're leaning in. On capital allocation, it's clear we're in a very strong position: no debt and healthy liquidity.
When we embarked on this cycle a couple of years ago, we always had the stated objective to rebuild financial strength and flexibility at Teekay, and I think anybody looking at our balance sheet can say we've done that. That's what you need to do in a cyclical, capital-intensive business. The next couple of years are going to be interesting. For parties with capital to make investments, I think we are in a position where we can hopefully make investments that create long-term shareholder value. Regarding special dividends, that's always part of the capital allocation discussion. We're not a company that pays out all our earnings; we've been very clear on that from the beginning. We have a fixed dividend, which we declared this quarter. Once a year, we have the discussion with the board about whether there's a special dividend, and that's on the agenda for the upcoming board meeting.
Thanks.
We'll move next to Omar Nokta with Jefferies.
Thank you. Hi, Kenneth and team. Couple from my side. Maybe first a follow-up to John's question and then a market-related question. Just on the Ardmore stake, obviously you're flush with cash, no debt, plenty of liquidity, and the cash is coming in much faster than you're able to deploy it. Maybe just a bigger-picture view on how you see TNK from here. Do you see the platform evolving to a growing portfolio approach perhaps, where you're taking stakes in other equities as an avenue of exposure to the sector without having to put capital to work physically?
No, I don't. I just want to emphasize that the Ardmore investment is really small in our total capital allocation plan. The number one priority is obviously looking after our core fleet. We are an operating company, and we are keen to deploy capital in a manner where we invest in our operating platform, which as you know is fully integrated with technical management and all the commercial management. So we're looking to add assets where we can bring value by putting them on our platform, rather than investing in other companies. That's our number one priority. As you point out, Omar, we're generating cash quickly. When we're able to deploy, it's not that we can't deploy cash; it's a matter of being patient in the market. We've been through many cycles over the past fifty years as a company, and sometimes being patient pays off. That's exactly what we're doing here.
Okay. Thank you. And then a quick follow-up: I appreciate your comment about taking a sub-5% stake that by virtue of a buyback required a 13G filing. I take it this is just, as you say, a small opportunistic holding with no plans to increase the size of that position?
That's right. I had a fellow CEO call yesterday and we discussed it. They clearly saw value there as well. It wasn't really our intent to move beyond a small position, so yes, it's opportunistic and small.
Okay. And then if I could just ask a market question, you referenced in your presentation the sanction discussion and the possibility of seventy-three ships being added to the EU sanctions list next week. Given your market presence in the Aframax space and the earlier US sanctions on roughly 150 tankers, have you seen an effect of those sanctions yet on the Aframax market? And how do you see things evolving if those sanctions get lifted?
We have seen an impact from the OFAC sanctions that were placed in early January. Of the ships sanctioned then, many served the Russian Far East trade into Cosco and other terminals. In the weeks following those sanctions, we've seen logistical difficulties in getting cargoes from Russia to China, and Indian buyers also had to look for alternative sources. As a result, there was a drop in Russian exports, and Chinese and Indian buyers looked elsewhere, increasing volumes from the Middle East and West Africa and other parts of the Atlantic to make up for the shortfall. That has created volatility in the VLCC segment in particular, which has had spillover support into Suezmax markets. So yes, the OFAC sanctions have had an impact; it's just hard to predict how those dynamics will evolve if sanctions are tightened or relaxed. The uncertainty itself contributes to market volatility.
Good. Thanks, Christian. I appreciate the color there, and thank you as well. I'll turn it over.
Moving next to Ken Hoexter with Bank of America.
Hey, great. Good morning. Speaking about rates: we saw Suezmax and Aframax rates down a bit from the fourth quarter, yet you mentioned more sanctions having a positive impact and seasonally colder weather increasing power needs. Is additional capacity creating the overhang? What's driving the near-term pressure on rates in your view?
For sure, in Suezmaxes there was a weaker finish to 2024 and a weaker start to 2025. What we've seen this week is that the picture has improved and is significantly stronger than the recent average. What's driving that is, as discussed in the prepared remarks, arbitrage moves and increased VLCC activity, which is beginning to kick in now. The sanction-related vessel movements created a bit of a delay while cargoes were being reallocated, and owners scrambled for cargoes. That has led to more cargo demand in the market. So the dynamics are a combination of arbitrage-driven long-haul volumes and the reallocation of cargoes previously carried on sanctioned vessels.
Okay. If we start getting toward peace between Russia and Ukraine, or normalization in the Middle East with the Houthis, what shifts do you see first and how quickly based on historical experience?
That's a difficult question and somewhat uncharted territory. Looking at the medium-sized tanker market, what really stands out is the rapid growth of the older-vessel fleet over the past few years. Before the invasion, there were just over a hundred ships over the age of twenty. Today, there are over three hundred. That increase is because those ships have been used to service sanctioned trades. If trade normalizes, we could see a large portion of those older vessels face low utilization, be laid up, or head to scrapyards. How quickly that happens is the million-dollar question. There is nothing in recent history that tells us precisely the pace, but age restrictions and charterer requirements typically start to bite around the twenty-year mark, which would pressure the economics of those older vessels if normal trade patterns resume.
Appreciate that. Maybe two quick ones to wrap up: the seasonality you normally see through Q1 into Q2, can you remind us of that trend? And with the potential overcapacity and scrapping you discussed, are you seeing more S&P opportunities come across your desk?
Typically, coming into Q1 and moving into Q2, rates start lower and then pick up before easing into Q2. This past period has been somewhat inverted compared to those typical patterns due to unusual market events, but right now it looks like we're strengthening into Q2. Regarding S&P activity, the market has come down on vessel prices, which is why we're beginning to lean in a bit on renewal. As I mentioned earlier, we've been selling a little faster than we're buying, but we are focused on fleet replenishment. We haven't done a lot of buying in recent years and we're seeing prices come into a range that we like again, so we'll continue to look for opportunities. We're an operating company and like to maintain a certain scale, so fleet renewal remains a priority.
Very helpful. Appreciate the thought. Thanks, guys.
And that will conclude the Q&A portion of today's call. I will now turn the call back to the company for any additional or closing remarks.
Thank you very much for listening in to our call today. We look forward to reporting back to you next quarter. Thank you. Have a good day.
Thank you, ladies and gentlemen. That will conclude today's call. You may now disconnect.