Tsakos Energy Navigation - Q1 2022
June 30, 2022
Transcript
Speaker 7
Thank you for standing by. Ladies and gentlemen, welcome to the Tsakos Energy Navigation conference call on the first quarter 2022 financial results. We have with us Mr. Takis Arapoglou, the Chairman of the Board, and Mr. Nikolas Tsakos, President and CEO, Mr. Paul Durham, Chief Financial Officer, and Mr. George Saroglou, Chief Operating Officer. At this time, all participants are on a listen only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. I must advise you that this conference call is being recorded today. Now I will pass the floor over to Nicolas Bornozis, President of Capital Link, Investor Relations Advisors of Tsakos Energy Navigation. Please go ahead, sir.
Speaker 5
I am Nicolas Bornozis, President of Capital Link, investor relations advisor to Tsakos Energy Navigation Limited. This morning, the company publicly released its financial results for the first quarter of 2022. In case you do not have a copy of today's earnings release, please call us at 212-661-7566 or email us at [email protected] and we will have a copy for you right away. We will send you a copy by email. Please note that prior to today's conference call, there is also a live audio and slide webcast which can be accessed on the company's website on the front page at www.tenn.gr. The conference call will follow the presentation slides, so please, we urge you to access the presentation slides on the company's website.
Please note that the slides of the webcast presentation will be available in archive on the company's website after the conference call. Also, please note that the slides of the webcast presentation are user controlled, and that means that by clicking on the proper button, you can move to the next or to the previous slide on your own. At this time, I would like to read the safe harbor statement. This conference call and slide presentation of the webcast contains certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties which may affect TEN's business prospects and results of operations. At this moment, I would like to pass the floor on to Mr. Takis Arapoglou, the Chairman of the Board of Tsakos Energy Navigation.
Please go ahead, Mr. Arapoglou.
Speaker 2
Thank you, Nicholas. Hello, good morning and good afternoon to everyone. Thank you for joining our Q1 results call today. The world is going through a very complex and unprecedented period of contradictions and severe challenges. It's an event-driven runaway inflation generated by the dreadful war in the Ukraine and supply chain challenges. Although we have full employment, yet we have declining numbers of workers willing to work, declining household income, and less willingness of people to spend. The seriously belated actions by the central banks to quickly reverse long and accommodating policies originally put in place to stem growth after the economic crash and COVID. The resulting rate hikes will put pressure on public and private sector debt servicing worldwide in an over-indebted world, especially in emerging markets.
All this with a high probability of failing to avoid a recession in the process. All this results in serious unrest, public unrest, with extreme social repercussions, amplifying inequality and reducing social stability yet. These environments offer also opportunities which TEN, with its wide and stable footprint and its resilient business model, fully captures, allowing it to grow revenues, show profits, reduce debts, and do all the right things, renewing its fleet with state-of-the-art vessels and doing all this in full contrast with its peers. Although the market, given this very complex environment with low visibility, may produce surprises on the way, TEN is very confident that it will continue to improve further its operating performance.
Let's not forget that we're currently in a multiple event-driven positive market, still waiting for the long expected crude tanker market recovery, which will be based on the existing very encouraging fundamentals. Thank you all for your continued support. I would like to now pass the floor to Nikolas Tsakos. Thank you.
Speaker 6
Chairman, thank you, and good morning to everybody. It's very good to be able to report net positive net income once again. Although our company has never stopped to report positive operating income over a very difficult period. We're very happy that right now we have also returned to
Positive net income. We're looking forward for a second quarter that will be even stronger than the one we announced today. As the chairman said, it has been a rollercoaster period. We started the beginning of the year feeling that things were going back to normal with COVID supposedly under control and parts of the world opening up to travel and business as usual. Then we were hit by the invasion in Ukraine that has complicated issues a lot in operational matters for us, which meant that a company like ourselves, with 32 vessels, with mixed Russian and Ukrainian crew, had to spend a lot of time and effort through our manning department, our human resources teams, to make sure that everything goes smooth.
We're very happy to announce, and we're very happy and thankful to all our seafarers about their professionalism. We never had an incident between those two, I would say, sister or brother nations. It has been a worrisome period. However, we were able to maintain a steady fast on the wheel. We took advantage of the better environment in the beginning of the year to renew 15 new charters or extend charters on an average with 25% higher rates than the ones expired. In the meantime, our pool vessels in our pool, mainly on the clean side, are enjoying a very strong market.
The timely chartering of our 2 VLCCs has actually saved us $ tens of millions, not only in profit, but actually from what we are facing today in a much harder economic environment. All in all, we are happy to announce that we have been able to maintain our program on target, took delivery of our LNG and chartered it in the middle of January, followed by our shuttle tanker in this month from Korea, also on a very long charter. Sold 1 of our older vessels, and we're taking delivery of a new VLCC with options for others going forward. All in all, we have been able to achieve this, being profitable, pay a dividend, increase our cash and reduce our bank debt.
We're looking forward to a better second half of the year. The second quarter looks to be a strong quarter, and we will be happy to maintain, of course, and increase our profitability. That will enhance us further reducing debt and paying dividends to our shareholders. With that, I will ask George to come with the operating part of the first quarter and thereafter. Thank you.
Speaker 3
Thank you, Nikos. Good morning to all of you joining our earnings call today. Let's go to the slides in our presentation.
Speaker 6
Starting with slide three. Sorry to interrupt you, but the first slide is a beautiful picture of the Porto just delivered. It looks like a drawing, but actually this is the actual ship. We're very proud of that state-of-the-art vessel. Thank you.
Speaker 3
Very good. Starting with slide three, we see that since inception in 1993, we have faced five major crises. Each time, the company, thanks to its tested counter-cyclical operating model that targets growth at market lows, has come out stronger. This time is no exception. At the start of the year, it appeared that we were near the end of the COVID pandemic after almost two years. From the end of February, we were thrown to another crisis, a war in Europe that created new challenges for the world and our industry. In this difficult environment, with sanctions and self-imposed sanctions on Russia, a major commodity exporter, changing trade routes for all commodities including oil products and gas, war and destruction, tragic loss of human life, we continue to stay the course and prepare the company for its next growth phase.
We reported earlier this year new building contracts for 4 dual-fuel LNG-powered Aframax tankers against long-term employment to a major oil concern. Last week, we had the naming ceremony of our latest state-of-the-art shuttle tanker delivered from a South Korean shipyard, that is also employed against long-term charter. Today we announced the sale of a 2006-built ELAC Aframax tanker and the acquisition of a 2020-built scrubber-fitted VLCC. Factoring these latest transactions, the company has currently a pro forma fleet of 71 vessels for an average annual growth of 15% in terms of deadweight tons spanning over 4 decades. In slide four, we see the fleet and its current fleet employment. Almost 60% of the fleet is in the water, has market exposure, a combination of spot, COAs and time charter with profit sharing.
60% is in secured contracts, fixed time charters, time charter with profit sharing and COAs. This means that TEN is well-positioned to capture the positive tanker market fundamentals. With global oil demand rebounding after two years and with shifting trade route patterns as a result of the war in Ukraine and the sanctions and self-imposed sanctions on Russian oil exports, we are already witnessing spot tanker freight rates reaching higher levels that lead to profitable operating results. Fleet modernity is a key element of our operating model. In January, we also took delivery of our latest LNG carrier named Maria Energy, and this vessel has immediately entered a five-year time charter that is expected to contribute to our bottom line as the LNG sector continues to enjoy strong rates.
If you look at the slides, we have four remaining new buildings, which we expect to take delivery from the fourth quarter of 2023. These form part of our green ship initiative with dual fuel LNG Aframax orders. All four vessels are coming with long-term employment attached. Inclusive of the above charters, TEN's minimum fixed revenue backlog exceeds $1 billion. Slide five. The left side presents the all-in break-even cost for the various vessel types we operate. We maintain a low cost base. During the year, the revenue generated from the time charter contracts was again sufficient to cover the company's cash expenses. We must also highlight here the purchasing power of TCM and the continuous cost control efforts by management to maintain a low OpEx average for the fleet while keeping a high fleet utilization rate year after year and quarter after quarter.
Despite six special surveys during the first quarter of this year, we achieved an overall 93.3% utilization from the fleet. Thanks to the profit-sharing element, which is a cornerstone of our strategy, our chartering strategy, for every $1,000 per day increase in spot rates, we have a positive $0.39 impact in annual earnings per share based on the number of our vessels that are currently have exposure to spot rates. Debt reduction in slide six has also been an integral part of the company's capital allocation strategy. The company's debt peaked in December 2016. Since then, we have repaid $424 million of debt and repurchased $100 million in two series of step-up preferred shares that we had outstanding. In addition to paying down debt, dividend continuity is important for common shareholders and management.
TEN has always paid a dividend irrespective of the market cyclicality. About $0.5 billion in dividend payments have been distributed since the New York Stock Exchange listing in 2002. The next dividend is going to be paid in July on July twentieth. Global oil demand continues to recover. Despite current headwinds, oil demand is expected to rise by 1.8 million barrels per day this year and another 2.2 million barrels per day in 2023. The forecast is to surpass the pre-pandemic demand levels of about 100 million, starting from the second half of this year. Developed economies lead the oil demand expansion in 2022. However, 80% of the expected 2023 demand growth is forecasted to come from non-OECD countries. On the global oil supply front, OPEC+ producers continue to manage supply with monthly increases.
However, countries outside the Middle East producers have struggled to meet their quotas. Global oil stocks continue to fall and are now almost 300 million barrels below the 2017 to 2021 average. Non-OPEC's production is set to rise in 2022, and as a result of the war in Ukraine and high oil prices, we had another coordinated effort to release in total of another 240 million barrels from the Strategic Petroleum Reserve of the United States of America and major OECD member countries for the next six months in an effort to lower energy prices and counterbalance the effect of the war. Global oil demand continues to rebound, but let's look at the forecast for the supply of tankers.
The order book stands at around 5% or 255 tankers over the next three years, the lowest it has been in more than 20 years. At the same time, a big part of the fleet is over 15 years. We're talking about 1,600 vessels or 31% of the fleet. We also have almost 400 vessels or 7.5% of the current tanker fleet that is over 20 years. As the next slide shows, 2018 was one of the highest scrapping years on record with 21.2 million deadweight tons removed from the market. Last year, we've seen an acceleration in scrapping from the second half, and we ended up with 14.5 million deadweight tons removed.
So far until May, we have 105 vessels of 8.5 million deadweight ton being scrapped. Scrap prices continue to be at high levels, currently hovering around 600 light displacement ton. With more environmental regulations coming with discussions for alternative propulsion fuels and at least 7.5% of the global fleet over 20 years, we expect scrapping activity to remain elevated and act as a balancing factor for fleet supply going forward. To summarize, if we look at oil demand, the rebound continues. At oil supply, we continuously see monthly production increases by OPEC. Non-OPEC production is set to increase in 2022, bringing more cargos to the market at a time when global oil stocks are below the 5-year levels and demand is surpassing pre-COVID levels.
On outside events like the recent geopolitical events in Ukraine and the sanctions that followed. That it forced a large number of Russian state oil and privately held tankers to be excluded from trade as oil majors and oil traders boycotted these vessels, creating a supply squeeze, mainly the Aframax and Suezmax sectors. We have seen a redraw in oil trade routes with heavily discounted Russian crude oil going to Asia, mainly India and China, and returning back to the OECD countries that are short refining capacity in the form of oil products, middle distillates, gasoline, kerosene. On the order book, the order book to the current fleet ratio is at historical low levels. A big part of the fleet is reaching phase out age, pointing to a tighter supply of tankers for the next 18-24 months. If we look at the company, we have a modern fleet.
We have already started with our orders, the transition towards the next generation of greener vessels. We have in the water an operating fleet that is well positioned to capture the improving trade market. We continue to reduce debt. We have very strong balance sheet and strong banking relationships that allows the company to take advantage of the opportunities that this market will present. With that, I will ask Paul to walk you through the financial highlights of the first quarter. Paul?
Speaker 8
Well, thank you, George. In quarter one, TEN achieved a net income of $6.3 million before minority interests of $0.8 million. This is compared to a net loss of $4.8 million in the prior quarter one. We had a complete positive turnaround. In this quarter one, TEN increased revenue by $11 million, bringing our total revenue to $150 million in the first quarter. Of this, our time charters generated $83.4 million, which includes $1.3 million in profit share, while our spot vessels contributed $66 million, several of the vessels achieving spectacular rates. We had six vessels undergoing dry dock for survey purposes in quarter one, but still achieved 93% utilization for the fleet.
The average daily TCE rate per vessel was $19,730, a 9% increase. Judging from the results of other tanker companies, this was clearly a strong average rate compared to average market rates. Total operational expenses increased by a manageable 2% over the prior quarter one, primarily due to increased voyage costs, which consisted mainly of rising fuel costs, while vessel operating costs did increase due to the addition of a splendid new LNG carrier and due to the dry docking schedule. Daily OpEx per vessel remained relatively stable at about $7,700, while daily overheads per vessel remained the same at only $1,200 per day.
Depreciation fell by $2 million in quarter one, due mainly to re-reduced vessel valuations accounted for in quarter four, while amortization of deferred dry dock costs increased due to the spate of dry docks over the past 12 months. We had one vessel in quarter one that is classified as held for sale and was actually sold in quarter two for $21 million, with certain similar vessels under consideration for possible sale, depending, of course, on market conditions for product carriers that continue to do so well for us. Finance costs were half that of the prior quarter one, mainly due to cash gains of $10 million from our bunker hedges. EBITDA increased 13% to over $42 million, boosting our cash reserves substantially.
In the quarter, outstanding bank debt fell by $44 million, bringing total outstanding net debt to $1.3 billion and net debt to capital down to 51%. As I've mentioned, there were some extra expenses in quarter one, but nothing unusual, and indeed are already attended to by our technical managers. Our finances remain in good shape, and we believe we will continue to be throughout quarter two and the half year as we enter the third quarter, which we expect will continue to generate strong cash flow, allowing us to further focus on debt reductions and disposal of older vessels, at the same time enabling us to continue rewarding our shareholders as we have shown. Now I'll give the call back to Nicholas.
Speaker 3
Thank you, Paul. Hopefully the news next quarter will be even better. With that, we would like to have the opportunity to answer any questions or what you might want to ask. Please.
Speaker 7
Ladies and gentlemen, if you have a question or a comment at this time, please press star then the one key on your touchtone telephone. If your question has been answered or you wish to move yourself from the queue, please press the pound key. Our first question comes from Ben Nolan with Stifel.
Speaker 0
Hi, guys. I have a handful. Hopefully that's okay. The first one was, I know that in the release you talked about having sold shares as part of the ATM program in the first quarter. Just curious if that was still the case in the second quarter.
Speaker 3
The majority of the shares, I think, have been sold in the first quarter.
Speaker 0
Okay. I guess the reason that I ask is that, you know, I think generally speaking, the shares have been below NAV. I am trying to understand the rationale for selling shares and at the same time buying ships at NAV, but selling shares at a discount. It seems like it's, you know, an expensive form of capital for growth.
Speaker 6
Well, we try to avoid whenever our cash flow is very positive, but like it's today, the only reason we have used the ATM is for growth purposes. Our calculations with the market, when the market is, as you call it, bad, when the shipping market is bad, that's when the opportunities arise. That's all the time that you need to put deposits down to buy cheap ships that today, just to put in perspective, just to tell you how undilutive our actions were, is that our LNG, which we purchased at $175 million or $176, today we have offers for it at $240 million. We would not have been able to buy those ships $240 million.
That's one of the ships that we have bought during the crisis.
Speaker 0
Yeah, no, that's a good answer.
Speaker 6
And also-
Speaker 0
Good point.
Speaker 6
Also, Nikos, you may wish to add that the discount through the ATM program is much less than the other way. Yeah, there is no discount in the ATM program. But again, we only use it when opportunities arise. Right now our cash flow, thanks to the market, and mainly thanks to the product market, which is, I would say, it's unprecedented in as long as I've been in the business, to see our product carriers earning six-figure numbers, and add significantly to our bottom line.
Speaker 0
Sure. You'd mentioned that asset values, specifically the LNG assets, but I think everything in general and new building prices have gone up a little bit. You sold the one LR2. At the moment, does it feel like that buying opportunity that you're trying to sort of be opportunistic with respect to asset prices is sort of past or things, you know, no longer countercyclical with respect to value?
Speaker 6
We do want to, as you say, spin all the bins. I mean, right now we are looking at offers of many, many of them with not even inspection on the majority of our ships from people that would like to buy our first generation vessels that will net additional $50-$60 million profit to us. I mean, we are more sellers of first generation ships. I think as George rightly said in his statement, we are looking for vessels that are fully environmentally apt to new technologies if we were going to buy something. I think right now we are very satisfied. We're very satisfied with our VLCC and option price purchases. The VLCC is the market which is not out of the woods.
It's suffering right now. Not in our case because preemptively we have chartered the VLCCs at profitable accretive rates. So we are not bleeding. Actually, if you go back to George to the slide with the break even, just to put it in perspective, I think you can, there you go. You can see that, I mean, our VLCCs are netting in excess of $30,000 in a market, in a spot market of minus, if you were in a spot. So I think in every category, we're making a significant profit. I think in the Handysize and MRs, the profit is, I would say fivefold from the, from our break even. So we are looking at a healthy second quarter and hopefully a third quarter.
Speaker 0
Well, actually, that leads into my question. We are literally a few hours away from the third quarter at this point. Can you give any color as to how, given you know the exposure that you do have to the market, how you envision the second quarter to shape up with respect to you know cash flows or day rates? Or maybe just knowing that you might not have the exact figures, how maybe just as a percentage, how it might vary relative to the first quarter?
Speaker 6
Well, I think just to put it in perspective, in the first quarter, I'm going to leave to this, but I think you will get, because you are very analytical and smart. In the first quarter, we enjoyed one month, less than a month of a good market. In the third quarter, we're enjoying three months of a good market in all segments.
Speaker 0
Okay. Yeah, well, we'll
Speaker 6
It's London. Is anybody there? Paul Durham is right here.
Speaker 0
Last, I'm glad, hopefully you can hear me, Paul, because my last question is for you. Interest rates are rising. I'm curious what your,
Speaker 6
Just talk to me. Talk to us.
Speaker 0
Oh, well, maybe he can't hear me. Maybe somebody else knows. What's the interest rate hedge position?
Speaker 6
We're about close to 50%.
Speaker 0
Okay, perfect. Oh, and while I'm
Speaker 6
Chinese listened.
Speaker 0
While I'm asking about hedging, in the way you report your interest rates, you back out the bunker hedging. I'm curious why you connect the bunker hedging to interest rate expense.
Speaker 6
I think it falls in the same risk category, but I'll get Paul to call you if he cannot hear you and give you an answer on that.
Speaker 0
Okay.
All our hedges fall under the same accounting category.
Okay. All right. Good enough, I appreciate it. Thank you.
Speaker 6
Thank you.
Speaker 7
Our next question comes from Liam Burke with B. Riley.
Speaker 4
Yes, thank you. Appreciate the time. On your clean product tankers and some of your older vessels, we're looking at a very, very healthy spot rate environment versus very high asset values for the MRs. How do you balance whether or not to divest these older vessels as they exceed 15 years old versus riding the economic life?
Speaker 6
We need your advice, too, but we are actually struggling with this question, but I think there is the best time to divest from something is when the other, the buyer of your assets is also going to make money. I think by not saying more, I think we are looking at ways to make our first generation ships have a very profitable resale for us and hopefully make money for the guy down the line. Yes, we have
Speaker 8
This is London. Are we in contact?
Speaker 6
Yes, Paul, we can hear you. We are looking to divest right now and make a significant gain from our older vessels.
Speaker 4
Okay, great. You know, as I'm looking at, you know, your new builds coming online, the shuttle tankers, the LNG carriers, your revenues and cash flows are becoming less volatile and more predictable. How do I balance that with your capital allocation of paying down debt, paying down your preferreds and your dividend policy?
Speaker 6
Well, it's becoming, I would say yes, more predictable. However, the way we are structured right now, I think every $1,000 increase in the spot market adds another $0.40 to our annual EPS. So we still have, I would say, you know, we have 42 out of our 65 workhorse vessels right now are enjoying the upside of the market through profit sharing arrangements, pools and COAs. So we try to keep a balance, which is always again on that slide 5. We want our time charter fleet to cover all our expenses. If you look on page 5 as we speak today, the time charter vessels cover much more than all our expenses.
Whatever is left on the spot vessels is profitability and paying down debt and hopefully the preferreds, which is our next target.
Speaker 4
Great. Thank you very much.
Speaker 7
Our next question comes from Climent Molins with Value Investor's Edge.
Speaker 1
Good morning. Thank you for taking my questions. I want to start by asking about the VLCC acquisition. Could you provide some additional commentary on the specifics of the deal, and what was the reasoning behind this concrete acquisition?
Speaker 6
Thank you. Well, you know, if you look at our fleet, George, please can you fleet us? On page four, you see we are. We have 1 more scrubber-fitted VLCC, which is not shown here. Anyway, you see we are a diversified company. We are almost 50% between products on your right-hand side as you look at the and crude carriers on your left side. We have been light on VLs. We used to have more VLs going forward. The reason, of course, is that it is the only market that has not moved. People are very nervous. These are big, you know, big investments. They are, you know, it is not, it is close to $100 million, hopefully less.
The other logic behind this is you should invest when things are not overpriced. Newbuilding prices for exactly the same vessels are approaching $125 million, if not exceeding them. If we buy something in the 90s, I think it's a good investment going forward.
Speaker 1
All right. That's helpful. You have consistently employed your assets in a mixture of time charters and spot voyages, which has been very helpful over the past couple of years. I was wondering if your strategy has changed on the product side of the business after the recent strength. Following up on this question, what kind of rates do you see available if you look for longer term contracts?
Speaker 6
We have always, depending on the market, we always like predictability. We are not fans of fixed rates because there's someone at the end of the day for a long period of time, either ourselves or our charterers are going to be in a sense, on the losing side. Every time we are looking to negotiate and I said we rechartered 15 vessels since the beginning of the year, the majority of them on a profit sharing arrangement. Depending on where the market is, we sit down and we accept a rate that covers all our expenses, and then we are open to share the upside with the major oil companies. I think this method of employing our ships has served us well so far.
Speaker 1
Thanks for the color. Final question from me, do any of your Aframaxes have the coating required to trade clean cargoes?
Speaker 6
Yes. I think we have right now we have two of them and we're building another four.
Speaker 1
Yep. That's helpful. That's all for me. Thank you very much for taking my questions.
Speaker 6
Thank you.
Speaker 7
I'm not showing any further questions at this time. I'd like to turn the floor back over to the CEO for any concluding remarks.
Speaker 6
Well, again, as I said, we would like to thank all of you for your interest in our company. We believe that we are out of the woods. We are seeing demand growing longer routes because of the Ukrainian situation. There is prediction that we will have a 7% increase in ton miles, which is very substantial for 2023. On top of that, we will have a slow steaming, which will increase even further the demand from our side. We are looking at an order book that, for 2023, it's going to grow, on average on tankers by 1%, and a total order book over the next four years of 8.5%.
The fundamentals look good. I mean, we got news. I think we all saw the news yesterday from China. They're increasing by 5.5% crude imports and refining capacity to non-governmental institutions. We were nervous, I would say, in the beginning of this month when demand or growth in China was supposed to be 3%-4%. But 3%-4% in a gigantic country like that is still a significant part. We believe that the fundamentals are there. The sooner the world normalizes, the sooner we can have peace and quiet in the world, so we can trade all over the ports of the world.
As soon as the pandemic starts easing down, we expect to see a very firm tanker market. We are preparing the company for that. We are taking advantage of the low market, which we did to build up our fleet with quality vessels, LNG vessels, shuttle tanker vessels, VLCCs and dual fuel ships. Hopefully for the remaining of this year and for sure for 2023, we will be able to enjoy rates that finally will get our share price to where it should be. With that, I would want to thank you, wish you a very peaceful and restful summer for those of you that are planning to take a holiday from us here.
On an in-house note, we have our friend, a very good colleague and friend of ours, Ms. Maria G., who has been with us for 15 years, and now she's on her way to enjoy parenthood. We wish her all, Maria. She has been a very strong part of our accounting department, has been helping us report 15 years of growth. I think your most important job is starting now. Enjoy parenthood and thank you very much for all the efforts you have made for the company. Thank you, Maria.
Speaker 7
Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful-