Tsakos Energy Navigation - Q1 2024

Transcript

Operator (participant)

Thank you for standing by, ladies and gentlemen, and welcome to Tsakos Energy Navigation Conference Call on the Q1 2024 financial results. We have with us today Mr. Takis Arapoglou, Chairman of the Board, Nikolas Tsakos, President and CEO, Mr. Paul Durham, Chief Financial Officer, and Mr. George Saroglou, Chief Operating Officer of the company. At this time, all participants are in 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 this conference is being recorded today. I will now pass the floor over to Nicolas Bornozis, President of Capital Link, Investor Relations Advisor for Tsakos Energy Navigation. Please go ahead, sir.

Nicolas Bornozis (President and Investor Relations Advisor)

Thank you very much, and good morning to all of our participants. I am Nicolas Bornozis of Capital Link, Investor Relations Advisor to Tsakos Energy Navigation. This morning, the company publicly released its financial results for the Q1 ended March 31st, 2024. If 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 emailed right away. Please note that parallel 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 be able to access the presentation slides on the company's website.

Please note that the slides of the webcast presentation will be available and archived on the website of the company after the conference call. Also, please note that the slides of the presentation, the webcast, 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 contain 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.

Before turning the floor over to the chairman, I'd like to mention that we also have today with us, as part of the management team, Mr. Haris Kosmatos, the Co-Chief Financial Officer, and congratulations, Mr. Kosmatos, for your new role. At this moment, I would like to pass the floor to Mr. Arapoglou, the Chairman of Tsakos Energy Navigation. Please go ahead, sir.

Takis Arapoglou (Chairman)

Thank you, Nicolas. Good morning and good afternoon to all, and thank you again for joining our call today for Q1 results. Despite, as you've seen, a historically low utilization of 91%, just over, mainly due to a large number of dry dockings that we decided to do, we continue to deliver operational excellence on the back of a very positive market based on strong shipping fundamentals and geopolitical events, which are both expected to continue in the foreseeable future. Our very comfortable equity-generating ability and cash position allows us to double our semi-annual dividend from last year's.

In addition, we are mainly making use of the good market, and we're using opportunities in the S&P side of the business to sell old tonnage and buy new, modern, green vessels, reducing the age of our fleet and positioning ourselves to capture a creative business that comes our way from our demanding blue chip clients. The result of all this is the steady increase of our stock price in recent months as the market recognizes our robust business model, and this makes us very happy. So once again, well-deserved congratulations to Nikolas Tsakos and his team, and best wishes for maintaining TEN's stellar performance going forward. Thank you, and over to you, Nikolas Tsakos.

Nikolas Tsakos (President and CEO)

Thank you, thank you, Chairman. And yeah, as well, we're going to have a new ticker starting as of July 1st. We will get TEN; we'll finally be TEN after almost 22 years where our ticker belonged to another company, which right now has moved from the stock exchange. So I see this as a good sign, although the previous ticker, which took us from $3 and change in 2019 to, you know, in excess of $30 last month, were my initials. But I'd rather sacrifice my initials for much closer identification for the company. As you said, the Q1, which has been a strong, profitable quarter, is a springboard for us for what we are there to do. We took a lot of vessels out of service to prepare them for the better days.

We looked at ships, prepared them for sales, and of course, we took delivery of a very large, about 14 vessels, of a very large number of ships. At the same time, we were able to increase our cash position. Looking at it today, we're way above $450 million, approaching $500 million in liquidity as we're finishing the Q2. We're expecting a much better quarter, although I have to say that even the Q1 is a very healthy quarter, but we're looking at a much better quarter. We're already at the latter part of the Q2, so I can see a much better quarter coming. Q3 and Q4, where we'll have the whole tonnage into action, I think we will see even better times.

So looking for a record year for 2024, as we did last year, what makes us very positive is the unprecedented, in my 30-year, 30-plus year history in the business, unprecedented demand by the major oil companies for any quality asset that is out there. And I mean, we get calls, and we deal only with the major oil companies and the first-class end users or government bodies. And the calls we get, even during the festive time of Posidonia, which we're all recovering still down in Greece in the last couple of weeks, we are getting we were cornered at any time and asked to provide our tonnage for long-term employment. It's a good situation. It's not always have been that way, although TEN has fared well, even at times when people did not want to see any of our ships.

I believe we will see this portrayed on our share price. This has been the most active period in the last five years I can recall commercially for our business. Again, I want to thank men and women on board the ships because they, by keeping the propellers running, they make things happen and they give us the opportunity to serve with our long contracts and, of course, our people on land and in our offices. Looking, as I said, looking forward, it seems that the stars are aligned for this period of time as long as our industry, other than the LNG segment, which I would say is the only grossly overbuilt side of the business, with 60% of the order book out there. Every other aspect of our business, any other segment of the energy business, is well balanced.

We're ordering ships in some segments that there is no any growth. With that, yes, please, I will ask George to give us more detailed developments. Thank you.

George Saroglou (COO)

Thank you very much, Nikolas. Good morning to all of you joining our earnings call today. 2024 continues to be another good year for tankers, as the factors that elevated freight rates in the last two years since 2022 continue. Key takeaways for TEN during the Q1 of 2024, which was one of the busiest quarters in TEN's history as far as fleet renewal and volume of S&P transactions is concerned. First of all, we took delivery of the company's last two dual-fuel LNG-powered Aframax tankers in a series of four newbuildings that were built against long-term employment to a major energy concern. We started taking delivery of the first in a series of five high-spec, environmentally friendly tankers from Viken. The delivery of the remaining four took place during the Q2 of 2024. Two of the five tankers are dual-fuel LNG-powered Aframaxes.

With the 4 that TEN purposely built for another client, the company has now 6 dual-fuel LNG-powered Aframax tankers fully operational. This is one of the largest, if not the largest, concentration of LNG-powered Aframaxes. These 6 vessels mark TEN's entrance into green tankers. At the same time, we continue the sale of older third-generation vessels. Since the start of 2023, we sold 8 tankers that were built between 2005 and 2007. From January of this year, the company took advantage and sold more vessels. We started by announcing the sale of a 2005-built Suezmax tanker in January, and since then, 4 more vessels have been sold. Another 2005-built Suezmax, 2 Aframaxes, one built in 2007 and the other in 2008, plus a 2004 steam turbine LNG vessel built in 2007.

In total, since 2023, 13 vessels have been sold with an average age of 17.5 years and have been replaced with 21 vessels that have doubled the deadweight capacity of the vessels that were disposed and an average age of just 1 year. Part of the 21-vessel growth initiative is with purpose-built newbuilding vessels to fit existing transportation requirements of the company's long-term clients. Since the start of 2024, we have signed 6 newbuilding contracts for 1 shuttle tanker and 5 LR1 tankers. This brings our current newbuilding order book to 12 vessels. The freight market was strong last year and remains strong as we speak. We continue to renew time charters at higher time charter base rates. Oil majors continue to fix vessel forward, which is a testament to a market that is expected to sustain current freight levels.

The order book continues to be low due to the uncertainty of availability and affordability of alternative fuels other than biofuels and LNG currently. Many yards report availability after 2027. We continue to experience the largest change in trade flows to ongoing crude and oil product movements as a result of Western sanctions on Russian seaborne oil and, more recently, changes in the crossings in the Red Sea and Suez Canal as a result of the Houthis' attacks on merchant vessels. And as we have said in previous calls, most of these changes appear to be permanent. At the same time, global oil demand continues to grow. 2024 is expected to be another record year for global oil demand. We expect demand to reach approximately 103 million barrels per day versus approximately close to 102 million barrels per day in 2023. Let's go to the slides of our presentation.

If we start with slide 3, we see that since inception in 1993, we have faced 5 major crises, and each time the company came out stronger thanks to its operating model. The average company growth is 21% in terms of total deadweight tonnage. In slide 4, we see the company's fleet growth and capital market. In slide 4, we see the fleet and its current employment profile. The slide has all the 5 ex-Viken tankers that are now fully integrated and operational. We have a pro forma fleet of 62 tankers. 29 out of the 62, or 47% of the fleet, or 47% of the fleet in the water have market exposure, a combination of spot, COAs, and time charter with profit sharing. 52 of the 62 vessels, or 82%, are in secured contracts, fixed time charters, and time charters with profit sharing.

This means that TEN is well positioned to continue capturing the positive tanker market fundamentals. In slide number 5, we see the company's fleet growth and capital market access since inception. We raised capital for growth, not at the top of the market, but at times when asset prices were usually low. In the slide, the numbers in the blue boxes represent the company's common share offerings, and in red, the series of preferred share offerings since the company New York Stock Exchange listing. The first three preferred series, totaling $188 million of par value, the Series B, C, and D, plus a private-placed preferred instrument of $35 million initial par value, have been fully redeemed, saving the company in excess of $18 million per year of coupon payments for all retired preferred shares. In the next slides, we see the company's current and long-term clients.

As you see, we have a blue-chip customer base consisting of all major global energy companies, refineries, commodity traders, with Equinor currently topping the list as our largest charterer, with 13 vessels all on long-term charters. In slide 7, the left side presents the all-in-break-even cost for the various vessel types we operate in 2024. Our operating model is simple. We try to have our time charter vessels generate revenue to cover our company's cash expenses. That means paying for the company's vessel operating expenses, finance expenses, overheads, chartering costs, and commissions, and we let revenue from the spot trading vessels contribute to the profitability of the company. Fleet utilization, as a result of the 8 vessels undergoing scheduled maintenance and repairs during the Q1 of 2024, was 91.3% versus 96.1% the prior-year quarter.

Thanks to the profit sharing element for every $1,000 per day increase in spot rates, this has a positive $0.14 impact in annual EPS based on the number of TEN vessels that currently have exposure in spot rates. Managing debts is an integral part of the company's strategy and capital allocation. The company's debt, as this slide shows, peaked in December of 2016. Since then, we have repaid $250 million of debt and redeemed $211 million in three series of preferred shares, plus a privately placed preferred instrument. Sale and purchase activity is also important. It's a cornerstone of TEN's strategy and the resulting fleet modernity, a key element of our operating model. The left side of the slide shows the divestments in tankers since January 1st, 2023. We sold 13 vessels, totaling 1 million deadweight tons, having an average age of 17.5 years.

On the right side of the slide, under growth, we have the number of vessels we are currently building and acquired since the 1st of January 2023. 21 vessels in total, eco-friendly, greener tankers. TEN has currently a newbuilding program of 12 tankers consisting of 3 DP2 shuttle tankers for delivery in 2025 and 2026, one vessel, 2 eco-friendly scrubber-fitted Suezmaxes for delivery also in 2025, 2 scrubber-fitted MR tankers for delivery in early 2026, and 5 LR1 product tankers for delivery in 2027, one vessel, and 2024, 4 vessels. We have taken delivery of 4 DF LR2 newbuildings and 5 ex-Viken tankers with a combined average age of 1 year and 2.3 million deadweight tons. We more than doubled the cargo capacity of the fleet with new, more environmentally friendly, eco-built tankers. This slide highlights the company's financial performance since 2004.

As the fleet was growing through the years, so did the company's cash position, always maintaining strong cash reserves to manage the ups and downs of the shipping cycle. We have maintained strong profitability with the last two years, generating record profits, and we have kept manageable debt levels throughout this 20-year period. The first five months of 2024 have given TEN the opportunity to further upgrade the quality and earnings power of the fleet. We expect the new additions to contribute positively in the overall financial performance of the company, starting from the second half of this year. 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 cycle. Our dividend policy is semi-annual.

Last year, we paid $0.30 in June, a special dividend of $0.40 in October, and $0.30 in December. This year, we announced $0.60 per share to be paid July 18 to shareholders of record on July 12th. Inclusive of this upcoming dividend, which is double the first semi-annual dividend of 2023, TEN has distributed over $800 million of common and preferred share dividends, $546 million of which to common shareholders since the company 2002 New York Stock Exchange listing. Global oil demand continues to grow. Despite financial and geopolitical headwinds, the International Energy Agency expects global oil demand to grow by approximately 1 million barrels per day to approximately 103 million barrels per day. It's going to be another record year after last year. Most of the growth is coming from Asia and Asia-Pacific region, mainly India and China.

On the supply side, most of the growth in 2024 is expected to come from non-OPEC+ countries like Brazil, the United States of America, Guyana, Canada, Mexico, and Norway. The majority of the additional supply is in the Atlantic Basin, while demand growth continues to be concentrated in the Pacific, boosting long-haul tanker demand. As global oil demand continues to grow, let's look at the forecast for the supply of tankers. The order book as of May 24th stands at 10% or 577 tankers over the next three years. The figure still represents a low number of new buildings. At the same time, a big part of the fleet, almost 42%, is over 15 years, and 893 tankers, or almost 60% of the fleet, are currently over 20 years. The next slide shows the scrapping activity since 2018.

We believe scrapping activity will pick up as the global fleet gets older and older tankers are getting out of favor for long-term business by major charters. And with that, I will ask Paul to walk you through the financial highlights of the Q1. Paul?

Paul Durham (CFO)

Thank you, George. And first, I'd just like to say how happy I am to be with my colleagues for a long, long time. It's been a long time, really. It feels like a long time. Thank you, George. Since the beginning of 2024, we have been very active on the sale and purchase front, which enabled us to divest from some of our first-generation tankers and replace them with new ones in high-end green technology.

From the sale of our older vessels, we generated $200 million, which together with the strong cash flow the fleet has earned and enabled us to retain very solid cash reserves. During this time, while engaging in this green-ship initiative, we took eight vessels for our scheduled maintenance and repairs, a necessary activity which should fade away into the Q2. The result of this was a natural drop in fleet utilization. So shall I continue?

George Saroglou (COO)

Yeah, please. Okay. Great. It's like it takes two to tango, so let's continue the tango. So let me take it over from here. So as Paul started saying, the result of this maintenance created this natural drop in utilization from 96.4% in the same quarter of 2023 to 91.3% this quarter.

Despite these actions, Voyage revenues totaled $202 million, and operating income, including $16.2 million in capital gains from a vessel sale, settled at $76.2 million. The resulting net income reached $54 million, which translates to $1.06 in earnings per share. Operating expenses continued to be somewhat influenced by inflationary pressures and reached $48.6 million, similar to the 2023 Q1, which did have approximately two vessels more on average. Operating expenses per ship per day were at about 9,400, not far off the 2023 first quarter, with the average TCE time charter equivalent per ship per day at around 33,400. So a big notable difference. A still healthy number, but impacted by the reduction in vessels and the steep drydocking and repairs evident in the quarter, as mentioned earlier.

EBITDA at the end of the Q1 of 2024 was at about $101 million and expected to return to higher levels once the new vessels begin to generate their lucrative returns. From the beginning of Q1 of 2024, we have seen a distinct continuation of demand for our vessels, and we expect this to help further build our cash reserves going forward. As the tanker market fundamentals continue to remain firm and assisted by the various geopolitical events around the globe, we are confident that TEN will continue to be the main beneficiary. I think that concludes the summary from the financial point of view. So over to you, Nikos. Thank you.

Nikolas Tsakos (President and CEO)

Thank you, guys. I think it's good to let our shareholders know how busy we have been.

I think this has been one of the longest presentations by our president because we have been so busy. But, George, yeah, it's better to be accurate than do nothing. But as I said, I think we used this period of time as a springboard of our next phase, which is very clearly to be one of the first, if not the first company to run the most environmental fleet out there. And we did this before. I mean, we were about 30 years younger for those who have such a long memory. And the reason TEN is around today was a very quick reaction to the OPA 90. And that was the big change of the industry's design of ships. That was the biggest really structural change in our industry's design since the ancient years.

We were the first company to have a fully double-hulled fleet way before the due time, the obligatory due time. We're looking to do the same with our fleet with the help of our clients. I think we're—and in the meantime, make significant profits. With that, I would like to open the floor to any questions that you may have. Thank you.

Operator (participant)

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Clement Mollins with Value Investor's Edge. Please proceed.

Clement Mollins (Research Analyst)

Good morning or well afternoon.

Thank you for taking my questions. I wanted to start by asking about the recent order for 5 LR1s. Should we think about it as fleet renewal, or is there a plan to increase your exposure to that subsegment? And secondly, do you plan to fix those vessels on medium-term contracts before delivery, or would you be comfortable trading them on spot?

Nikolas Tsakos (President and CEO)

Very well. I think that's a really good point. If you look at our fleet list that our president was presenting, you see that we have vessels there. We still have the Andes, which is kind of our oldest vessel that was built before most of my children were even born.

Now, I'm an empty nester, but we have fond memories of her performance, and that ship is, of course, a big candidate for sale, but she has performed very well for us being built in Imabari, in Japan. And you see that we have a significant fleet built between 2008 and 2016, let's say. So it is a category of ships that we believe they have been profitable for us. And if you look at the order book, I don't think anybody's building any of those ships. I think the order book is, anyway, 2%-3%. So it's a combination. Yes, it is fleet renewal. It's a side of the business that very few people operate, and it's something that I think is a good opportunity. It is the least-built segment of the vessels that we operate.

Clement Mollins (Research Analyst)

Makes sense. Makes sense. Thanks for the color.

Would you be willing to trade them on spot, or do you still plan to follow your usual strategy of securing a charter?

Nikolas Tsakos (President and CEO)

Well, I mean, the way things are today, we do not have a big chance of trading ships on spot because our clients are actually grabbing those ships as soon as we ink a newbuilding order or a discussion or take delivery of the ship. What I try to do, and I think our clients are now much, much more open to it, is put market-related features like profit-sharing in the market. So most probably, those ships will be either entering some of our very successful pools or will be working on profit arrangements with our clients. So yes, we are always looking for the highest utilization and the proper way to earn us money every hour.

Clement Mollins (Research Analyst)

That's helpful. Thank you.

Actually, talking about long-term contracts, I noticed that your exposure to every $1,000 per day increase in rates has decreased to $0.14 relative to last quarter's $0.18. I was wondering, could you provide some commentary on some of the fixtures you have added over the past few months?

Nikolas Tsakos (President and CEO)

Yes. I think by the end of, actually, by the end of the Q2, it will be closer to $0.20 from our calculations because we have refixed at some vessels in the Q3 at unprecedented levels. I cannot say too much because our competition is listening, and although we're all nice friends and we can have a drink in Marine Money or Capital Link, it's better for everybody to run his own business. But in some cases, our minimums have doubled from where they are from the profit share. So you will see that increasing significantly.

The reason is that in the Q1, we took some vessels that had, with its previous owners, fixed employment.

Clement Mollins (Research Analyst)

Thanks for the color. And final question from me. This is more on the shareholder return side. Last year, you declared a special dividend alongside Q2 earnings, and I was wondering, considering you expect Q2 earnings to be significantly better than Q1's, is it fair to expect a special dividend as well when you report earnings?

Nikolas Tsakos (President and CEO)

That's a very good question. I mean, all of your questions are good, but I think that I want to clarify something. Yes. Last year, we actually announced and paid an extra dividend, which went unnoticed by the analysts and the market as a one-off experience. So we did not get any additional valuation for our shareholders.

So, we will not pay an extra dividend because it goes unnoticed, although I thought dollars should be paid after we pay them. There should be notice. We will add it on the second-half dividend, so it will go noticed. So, I guess our intention is, if the market continues to increase the second half of the year, but not with a special dividend because the market seems to think that it's a one-off occasion, and they do not give it any value. So, we will include it in our second half, in our December dividend.

Clement Mollins (Research Analyst)

Makes sense. That's all from me. Thank you for taking my questions.

Nikolas Tsakos (President and CEO)

Thank you.

Operator (participant)

As a reminder, this is star one on your telephone keypad. If you would like to ask a question, we will pause for a brief moment to see if there's any final questions.

With no further questions at this time, I would like to turn the floor back over to the CEO, Dr. Nikolas Tsakos. Please conclude.

Nikolas Tsakos (President and CEO)

Again, it's a pleasure to be able to share the company's developments with you. It's our 31st year. Hopefully, we will see last year, we were TEN at 30, and we broke 30. Now we're 31. I want to break 31 and more and much more above that. We hope that our performance and our results and our dividend payments will help the shareholders and our share price go much closer to where it should be. Although it has moved positively, we're still a long way from where we expected to be. Again, I want to thank everybody for their support.

It has been a frantic period in the last six months for commercial developments of renewing the fleet, of growing the fleet significantly, at the same time making earnings, positive earnings and profits by selling older ships and then replacing them with much younger ships, growing the company, modernizing the company. So yeah, we are in a go-go always mode right now, but we only do it when there is solid business. You know that we are trying to avoid putting ever our company into any trouble. We haven't done this for 31 years, and we're always growing it responsibly. And we want to thank you for your support and looking to see you face to face very soon. And I think we're organizing a European roadshow, and of course, we're always in the U.S. quarterly to see our shareholders.

And again, thank you very much, and have a nice, relaxing, and peaceful summer. We will not have one because we will be working. Thank you.

Operator (participant)

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.