Tsakos Energy Navigation - Q3 2022

Transcript

Operator (participant)

Thank you for standing by, ladies and gentlemen, and welcome to the Tsakos Energy Navigation conference call on the third quarter 2022 financial results. We have with us Mr. Takis Arapoglou, Chairman of the Board. Mr. 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 that this conference is being recorded today. Now I pass the floor over to Mr. Nicolas Bornozis, President of Capital Link, investor relations advisor to Tsakos Energy Navigation. Please go ahead, sir.

Nicolas Bornozis (President)

Thank you very much, and good morning to all of our participants. I'm Nicolas Bornozis of Capital Link, investor relations advisor to Tsakos Energy Navigation. This morning, the company publicly released its financial results for the third quarter and nine months ended September 30, 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 emailed right away. 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 and archived on the website of the company after the conference call. 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 stage, 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.

Before passing the floor to the Chairman, I would like to remind everybody and congratulate TEN, this year, the company is celebrating its 20th anniversary of listing on the New York Stock Exchange. On December 9, we look forward to having with us in New York the management of TEN and Dr. Tsakos joining the Capital Link Invest in Greece Forum at December 9 in New York. 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 of the Board)

Thank you, Nikos. Good morning, good afternoon to all. Thank you for joining our call today. Real congratulations to management for historical second-best quarterly performance, just below the highest ever in Q4 2007 of $52 million. You know, this is a great result. It proves once again the strategy mod, TEN strategy model, protects us in bad times, fully responds in good times, and allows us to serve our obligations, pay dividends, and generate cash for new business. We're very happy that all this is reflected, now it's beginning to be reflected on the stock price.

In particular, I'd like to congratulate management for the successful new business with another blue chip customer, TotalEnergies, on a first deal ever, on very successful business. Without further ado, congratulations to Nico Tsakos and his team and offer the floor to him for the rest of the meeting. Thank you, Nikos.

Nikolas Tsakos (President and CEO)

Thank you, Chairman. Good morning, good afternoon to all of you. Thank you for being here and supporting and following TEN's 20-year performance on the New York Stock Exchange. 30 years. Next year it's going to be our 30th year anniversary since the company was established on the Oslo Stock Exchange. Hopefully our share price will be above $30. We're hoping to be well above $20 in the remaining of the year. We worked on $10 or $20, and the next year it's going to be $10 or $30 at least. Thank you for bringing us where we are. As the Chairman said, this really was our best quarter in the last 15 years.

We have not had such a high return in since the fourth quarter of 2007. I believe that these things continue to go. You know, I'm very conservative usually, and, but I hope that we will break the record. Paul is working on it already and our chartering team at the same time. In the fourth quarter of this year, things do look to be even stronger or rosier. This is a time that the TEN model proves it works because we can work at difficult times, but also at much better times.

Saroglou was going to point out, this is our fifth crisis that we are coming out from for the tanker market based on geopolitical events and market-related events and economic events. Our aim is always to have a sustainable growth. We are able to fix business and to make sales of ships at the times, at the high times that will carry us on to the next cycle. I think this is the time we are doing now. We are enjoying six-figure returns or revenue, time charter revenues in a majority of our Aframax, Suezmax and VLCC fleet, which hopefully will be portrayed on the fourth and the first quarter.

What gives me comfort is right now we are in a situation where very little new building supply is coming in. So this good market, perhaps not at this high levels as always, but will be sustainable for at least the next three years. In TEN we use the low markets to be able to purchase new modern assets as we have done, and then charter them out when the times are better for long term to be able to cover the cyclical markets that we might, the cycling that the markets might bring.

With this, I would like to ask, George Saroglou, not to take too much of his time to give us a little description of the last nine months and focus on subsequent events which we will talk also during the question time.

George Saroglou (COO)

Thank you, Nikos. Good morning to all of you joining our earnings call today. Let's go to the slides of our presentation. Starting with slide three, we see that since TEN's inception in 1993, we have faced five major crises, and each time the company has come out stronger thanks to its operating model. This time is no exception. We managed the COVID pandemic without any serious effects for both fleet and onshore operations, and we are currently navigating the challenges created by the war in Ukraine. The market fundamentals, record low order book and an aging fleet, even without the tragic war, were positive for the tanker industry. The combination of self-imposed and mandated sanctions on Russian oil as a result of the war served as an additional catalyst to propel freight rates higher as long-established trade routes were disrupted and voyage distances lengthened.

A new round of European sanctions on oil imports from Russia is expected in December. The full impact cannot be assessed until details are known. However, it is expected to sustain the lengthening of voyage distances, which, coupled with normal winter factors like weather delays and an increase in oil demand due to gas-to-oil switching as a result of higher natural gas prices in Europe, is expected to keep the freight rates and the tanker market firm through this winter and the months ahead. Russia will need to reroute its oil exports away from Europe, and Europe will need to backfill those short-hauled imports from other more distant locations, both of which will continue to create significant ton-mile demand for tankers.

With a record low order book and the redesign of the global energy map for both crude and oil product trades, we expect the tanker industry to go through a sustained strong market in the years to come. In slide four, we see the fleet and its current fleet employment. 40 out of the 66 vessels or 61% of the fleet in the water, 61% of the fleet in the water has market exposure, a combination of spot, contract of affreightment and time charters with profit sharing. 44 out of 66 vessels or 67% is in secured contracts, fixed time charters and time charters with profit sharing. This means that TEN is well-positioned to capture the prevailing positive tanker fundamentals. We have taken advantage of the good tanker market as our earnings release of today shows. Fleet modernity is a key element of our operating model.

Year to date, we sold two vessels, a 2003-built Panamax tanker and a 2006-built LR2 Aframax tanker and took delivery of three modern vessels. Two new buildings. In January, we took delivery of LNG carrier, the Energy, and in July of the shuttle tanker, Porto. This month, we took delivery of a 2020-built eco-friendly scrubber-fitted VLCC, which we have renamed as Dias I, the Greek name for Zeus. All three vessels are chartered against long accretive time charters. In fact, today we announced the start of the three-year time charter with profit sharing for Dias I to a significant oil major. Asset prices continue to trend higher. Management is actively exploring opportunities to divest some of its earlier generation vessels and replace them with more modern, eco-friendly, greener vessels.

On the new building front, we announced today a project with a major energy concern to build and time charter up to three shuttle tankers against minimum five up to 15-year contracts. This is in addition to an order we have in place for four new building Aframax tankers, which we expect to start taking delivery from the fourth quarter of 2023, and which are part of the company's Greenship dual fuel LNG powered initiative. All vessels are coming with long-term employment attached. In slide five, we present 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 charter, with nine vessels and four new buildings, all on long-term time charters.

On slide six, the left side presents the all-in break-even cost for the various vessel types we operate. We maintain, as you see, a low cost base. We have a simple operating model. We try to have our time charter vessels generate revenues that cover the company's cash expenses, which mean paying for the vessel operating expenses, finance expenses, overheads, chartering costs, and commissions. We let the revenue from the spot trading fleet contribute to the profitability of the company. Despite the prevailing inflationary pressures, we want to highlight the purchasing power of our technical managers and the continuous cost control efforts by management to maintain a low OpEx average for the fleet, while at the same time keeping a high fleet utilization through quarter after quarter, year after year.

Despite 14 special surveys, some ahead of schedule in preparation of the anticipation and the anticipated market after, we achieved an overall utilization of 93.7% for the fleet. Thanks to the profit-sharing element, for every $1,000 increase in spot rates, we have a positive $0.29 impact in annual EPS based on the number of vessels we currently operate in the spot market. Slide number seven, debt reduction is also integral to the company's capital allocation strategy. The company's debt peaked in December 2016. Since then, we have repaid $428 million of debt and repurchased $100 million in two series of step-up preferred shares we had outstanding. In addition to paying down debts in slide eight, we see that dividend continuity is important for common shareholders and management.

TEN has always paid a dividend irrespective of the market cyclicality. $0.15 per common shares will be paid in December 20 to shareholders of record on December 14th. The December dividend payment represents a 50% increase from the July $0.10 a share dividend. The company has paid half a billion in dividends since we listed the company in the New York Stock Exchange in 2002. Global oil demand continues to recover despite lockdowns in China as a result of their zero-COVID policy and mounting global economic headwinds. For the year, oil demand is expected to grow by 2.1 million barrels per day. Next year, we expect growth to be 1.6 million barrels per day. Developed economies lead oil demand growth in 2022. In 2023, oil demand expansion is forecasted to come from the non-OECD economies.

On the supply side, we have the recent OPEC+ cuts, the sanctions and self-sanctions on Russian crudes. That will play out in 2023. Further releases currently from the OECD strategic petroleum reserves. Global oil stocks continue to fall and are currently below the five-year average in the period 2017, 2021. Non-OPEC 2023 production is set to rise, coming mainly from Brazil, U.S.A., Guyana, Canada, Mexico and Norway. As global oil demand recovers, continues to grow, let's look at the forecast for the supply of tankers. The order book stats stand at a little over 4% over the next three years, which is the lowest that it has been in more than 30 years.

At the same time, a big part of the fleet is 32% is over 15 years, and we have 8.3% that is currently over 20 years. These are very strong fundamentals. As the next slide shows, the scrapping activity since 2018, we have upcoming regulations and industry with the decarbonization initiatives and almost 9% of the fleet over 20 years. We think that all these factors

Nikolas Tsakos (President and CEO)

Point to a very balanced tanker supply market for a couple of years ahead. With that, I will ask Paul to walk you through the financial highlights for the third quarter and the nine months of the year. Paul?

Paul Durham (CFO)

Well, thank you, George. This is rather going to be a report of super numbers. Starting with a net income of over $51 million, fully realizing our expectations for a strong quarter. In this quarter, our vessels reaped an extra $92 million revenue over the prior quarter three, resulting in a total revenue of $224 million, a 70% increase, mostly from spot earnings of $103 million as rates surged. Our time charter vessels in quarter three, including $14 million profit share, generated over $120 million, covering most of our operational expenses. The inflow of cash in the third quarter from our operations resulted in EBITDA of over $100 million compared to just $20 million in the previous third quarter.

While in the nine-month period, EBITDA totaled $236 million. From the start of this year to the end of September, TEN's revenue reached $590 million, while net income in the nine months amounted to over $130 million, with profit share of nearly $21 million. Average daily TCE exceeded $32,000 thanks to market conditions that allowed our fleet to achieve almost maximum utilization of 94% despite five vessels completing dry dock in quarter three. The significant cash flow generated in the recent nine-month period and the abundant cash reserves generated as a consequence has placed us in a very favorable position.

We anticipate these reserves will provide us new opportunities such as those created by the company over the past months, such as, in particular, the new LNG carrier, the shuttle tanker, and more recently, the new VLCC. These newly acquired vessels are already operating on accretive time charters and are expected to generate considerable revenue in their lifetime. These are the kind of opportunities that we believe will continue to generate accretive returns and secure our cash flow. Of course, as George has mentioned, to reduce our debt.

Nikolas Tsakos (President and CEO)

Good. Yes. Thank you.

Paul Durham (CFO)

Yes.

Nikolas Tsakos (President and CEO)

Thank you, Paul.

Thanks a lot.

Reducing debt is always good, and we've been doing it quite drastically, not only reducing debt from the highs of 2016, 2017 by close to $430 million and then another $100 million for buying back our pref. I think what we have accomplished is a bigger fleet, a much more modern fleet, with much less obligations. We've been doing this through thick and thin, through the good times, the bad times, perhaps one of the few companies out there that we have never delayed or renegotiating or renegotiated any of our, of our banking relationships, instead. This is why we have always been offered the very good terms, a very competitive terms in growing the business at difficult times.

I mean, the picture that Paul and George are showing to us is a picture of a strong market, a sustainable market going forward. This is what we want, you know, to do, but we always protect the company's downside as we have done in the past. Our main is to further decrease our debt and increase our dividends to the shareholders. With that in mind, it seems that the best is yet to come, at least for the foreseeable future. I expect that we're halfway there, so I expect the fourth quarter to be a record quarter with the numbers that we are seeing today.

I mean, our spot Aframaxes, many of them are above the $100,000 a day level together with our Suezmaxes, which is significantly higher where the third quarter was, and for sure the first nine months. With that positive note, I would like to open the floor for any questions. Thank you.

Operator (participant)

Thank you. We will now be conducting a question and answer session. 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. Once again, if you would like to ask a question, press star one on your telephone keypad. One moment please while we poll for questions. Thank you. Our first question comes from a line of Climent Molins with Value Investor's Edge. Please proceed with your question.

Climent Molins (Associate Research Analyst)

Good morning, gentlemen. Thank you for taking my questions. Given the much improved outlook on the tanker sector, I want to delve a bit deeper into your capital allocation priorities. How do you plan on balancing shareholder returns, be it dividends or share purchases, growth spending, and delivering?

Nikolas Tsakos (President and CEO)

Yes. Well, as you know, we are a company in growth mode. We always want to have ample cash for growth. Again, it's not growth for growth, it's growth for accretive transactions that will get our earnings, you know, above the $3-$4 level per share, I mean. Of course, dividend is very important for us. We are big believers in rewarding our shareholders and the management is the largest shareholder here to reward the management through dividends going forward. Protection of a strong balance sheet, which, if you go back over the years, we always maintain.

A strong liquidity because the only time you actually appreciate your strong liquidity is when you do not have it, and TEN has never been in this situation in 30 years, and increasing dividends.

Climent Molins (Associate Research Analyst)

All right. Regarding your overall financial position, are you comfortable with your current level of leverage or would you like to deleverage a bit? Be it repurchasing preferreds or repaying bank debt?

Nikolas Tsakos (President and CEO)

Very good point. As I said, I mean, if you look on slide seven that was put up there in the presentation, we have done a dramatic deleveraging considering that in 2016 the company was did not have the quality of the fleet we have today, or the valuation of the fleet. We are determined to do this. According to Paul, I think by 2024 we will be significantly under the $1 billion.

George Saroglou (COO)

Yes.

Nikolas Tsakos (President and CEO)

Our aim is to be above $1 billion in market cap and significantly under $1 billion in debt. I think this is something we are working on that. I think you brought a very good point out there. We have one of our prefers which is due for repurchasing at par in the next six months, and that would be something that we might be using our excess liquidity to do.

Climent Molins (Associate Research Analyst)

Thanks for the color. That's helpful.

Nikolas Tsakos (President and CEO)

Thank you.

Climent Molins (Associate Research Analyst)

I'll pass it over. Thank Thank you for taking my questions.

Nikolas Tsakos (President and CEO)

Thank you.

Operator (participant)

A final reminder, if you would like to ask a question, press star one on your telephone keypad. One moment please while we repoll for any additional questions. Thank you. It appears we have no further questions at this time. I would now turn the floor back over to management for closing comments.

Nikolas Tsakos (President and CEO)

Well, thank you very much and it's good when the news are good, I think, we get less questions, and I think that's understandable. Again, as I said, we are looking, and I think this is the first time we feel significantly strong about that. We're looking at a sustainable, positive future for the tanker and energy industries. We are proud to grow the business with first-class clients and relationships. We want to thank you for your support in that. We hope that our next announcement which would be in the first quarter coming up for the fourth quarter and first full year results will have even better news and better prospects.

Looking forward, we will be visiting New York in the next couple of weeks. Looking forward to meet any of you interested face-to-face and talk about the industry and the company. I would like from all of us here to wish our American friends and everybody around the world a Happy Thanksgiving. Happy, peaceful and with you and your family. Thank you very much.

Operator (participant)

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.