Tsakos Energy Navigation - Q4 2023

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to Tsakos Energy Navigation Conference Call on the Fourth Quarter 2023 Financial Results. We have with us Mr. Takis Arapoglou, Chairman of the Board, Dr. Nikolas Tsakos, Founder and CEO, Mr. Paul Durham, Chief Financial Officer, and Mr. George Saroglou, Chief Operating Officer of the company. 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 is being recorded. And now, I will pass the floor to Mr. Nicolas Bornozis, President of Capital Link. Please go ahead, sir.

Nicolas Bornozis (Founder and President)

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 fourth quarter and year ended December 31st, two thousand and twenty-three. 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 slides on the company's website.

Please note that the slides of the webcast presentation will be available in archives on the 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. With that, at this moment, I would like to pass the floor to Mr. Arapoglou, the Chairman of Tsakos Energy Navigation. Mr. Arapoglou, please go ahead, sir.

Efstratios Arapoglou (Chairman)

Thank you, Nicolas. Good morning, everyone. Thank you for joining our call today. TEN continues to deliver very strong financial performance based on very positive market fundamentals and also best in class operational performance. At the same time, the company keeps renewing its fleet, selling all the tonnage at today's high prices and acquiring eco-friendly vessels, increasing its green footprint. It also reinforces its leading position as a very successful operator of specialized modern dynamically positioned tankers. All these are highly accretive acquisitions, the results of which are not included in today's results, but will definitely contribute very positively going forward, which will allow us to continue our strong growth. A strong growth as we have demonstrated quarter after quarter.

We're also using this current positive market to increase the number of vessels under time charter, but at the same time, we keep enough vessels to benefit from the very attractive current returns of the spot market and profit-sharing arrangements, driven by the otherwise quite unfortunate geopolitical developments. In doing so, we continue to maintain a very healthy cash balance, which allows us to be flexible and capitalize on attracting acquisition opportunities as they arise, and to continue uninterruptedly to pay sizable dividends to reward our shareholders. We're proposing as a first semi-annual installment, $0.60. So on behalf of the board, I wish to once again congratulate Nikolas Tsakos and his team for the excellent performance and wish them continued success going forward. So thank you from me, and over to Nikolas Tsakos.

Nikolas Tsakos (Founder and CEO)

Chairman, thank you very much. First of all, we would like to express our support to the victims and all affected by the tragic events in Delaware. We hope that very soon things will go back to normal with a minimum loss of life. As for TEN, we concluded our 30th year milestone with another record year, and we are looking forward to continue the trend. I think as our chairman said, the growth that has been...

That that has been embedded is not yet the is not portrayed in these results, but hopefully it will portrayed in the remaining of 2024, since we will be taking a significant amount, we will grow, grow our fleet almost by 10% by the time by the middle of the coming year. In the meantime, our fundamentals of the industry, the long-term fundamentals still look very positive.

And they look positive, not only because of the geopolitical events and the delays and closures in the canal, but I think long term, we are still seeing a very small replacement of the fleet with less than 7%, and in some categories, much lesser than that, like the larger ships, the VLCCs. And on top of that, of course, you have a very aging fleet and the shadow fleet, which is close to 20% in some of the major categories. So, you know, without trying to, you know, foresee the future, we are trying to... We believe that 2024 will be at least as good as the year we are enjoying.

So this is, like where we are, at this moment. It has been, I think for us, a springboard year, a milestone year. We were able to renew our fleet in a very drastic. I think it is the largest growth in our history, which shows that already we are 30 years old. We are not, we have not aged, yet. And as our chairman said, this year has seen us sell nine vessels with an average age of 18.5 years, and adding 18 vessels with an average age of 1.3 years, of which eight of them will be contributed immediately to our bottom line very soon.

And on top of that, we are adding 1.5 million deadweight tons in our fleet's earning capacity and carrying capacity. So this has been really our 30th year has been the springboard of a very significant growth, and we have been able to continue this growth at the same time that we have been reducing our debt, increasing our dividend, as the chairman kindly said, by doubling the dividend, at least for the first six months of the year, and growing the fleet, modernizing the fleet, and with some surprising way that Paul and his team will tell us, maintain very strong cash reserves.

So with that, as an introduction, we would like to thank everyone for their support for in our 30 years. And although this has been our second consecutive record year, we expect or we hope that next year we will maintain the same momentum with the new acquisitions, and as the chairman said, the very accretive transactions that we have secured with the company. And I will give now to our President, Mr. George Saroglou. Well done, George, and to give us a little bit more of the picture and the nitty-gritty of what's happening out there.

George Saroglou (President and COO)

Thank you, Nikos, and thanks for the whole team. Good morning to all of you joining our earnings call today. 2023 has been a banner year for TEN. We celebrated our 30th anniversary as a public company and posted another record year, the second record year in a row after 2022. Key takeaways for TEN during the fourth quarter in 2023: we took delivery of the company's first two dual-fuel LNG-powered Aframax tankers in a series of four new buildings of high-spec eco-design vessels built against long-term employment to a major oil concern. During the early part of January 2024, we took delivery of the remaining two. The delivery of these four vessels marks TEN's entrance to greener vessels. We continued the sale of older first-generation vessels. During 2023, TEN sold eight tankers built between 2005 and 2007.

In January 2024, we announced the sale of a 2005-built Supramax tanker. The nine tankers that we sold since January 1st, 2023, had an average age of 18.5 years. At the same time, we continued to grow the company and replace these first-generation vessels with newbuilding orders that fit existing transportation requirements of long-term company clients. We announced today in the press release the signing of a newbuilding contract for one more shuttle tanker, the third newbuilding under construction, against a long-time charter with a major energy concern. This brings our current newbuilding order book to seven vessels. In addition, we recently announced the acquisition of a high-spec, environmentally friendly five-vessel fleet from Viken....

The Viken acquisition includes two 2003-built Dual-Fuel LNG-powered LR2 Aframax tankers, one 2019-built super eco Suezmax, and two 1A ice-class scrubber-fitted Aframax tankers, built in 2018 and 2019 respectively. We took delivery of the first vessel, the DF Montmartre, yesterday. We expect to take delivery of the remaining four from April until June of this year. All five vessels are chartered to a major European energy concern. The freight market was strong last year and remains strong as we speak. We continue to renew time charters at higher time charter rates. Oil majors continue to fix vessels 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 biofuel and LNG currently. We continue to experience the largest change in trade flows, ongoing route, and oil product movements as a result of Western sanctions on Russian seaborne oil, and more recently, on changes in the form of the Red Sea as a result of the Houthis attacks on merchant vessels. A lot of charterers send vessels to the Cape of Good Hope instead of the shorter distance through the Red Sea and the Suez Canal to avoid being attacked. As we said in previous calls, most of these changes appear to be permanent.

Before the war in Ukraine, Europe was the biggest client of Russian oil, but as the war continues, Russian oil has been replaced with oil from the United States, West Africa, Guyana, Brazil, and the Middle East, creating a positive tone multiplier effect for tanker demand and freight rates. At the same time, global oil demand continues to grow post-COVID. 2024 is expected to be another record year for global oil demand, reaching on average 1.32 million bbl per day, versus approximately 1.18 billion bbl per day in 2023.

Of course, there are global headwinds that we have been, that we have acknowledged and are in our radar screens for quite some time now, like inflation, which might be coming down, but we could end up with higher interest rates for longer, the war in Ukraine and in Gaza, the OPEC+ production cuts and voluntary cuts by Saudi Arabia and Russia, which have been extended at least until the end of the second quarter of 2024, if not more, probably until the end of the year. However, we have a global economy that continues to grow, and the International Monetary Fund, in its most recent report, anticipates 2024, the global economy to grow 3.1% and 3.2% in 2025.

As mentioned above, oil demand is expected to grow another 1.3 million bbl per day higher in 2024 than in 2023. Strong non-OPEC growth coming out of the United States, Canada, Guyana, Brazil, will counter for now any OPEC+ production cuts and tanker fundamentals continue to favor a strong market for the next two, three years. Let's now move to the slides of our presentation. Starting with slide three, we see that since inception in 1993, we have faced five 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 fleet deadweight ton. In the next slides, 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 shares offerings since the company's 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 placement preferred instrument of $35 million initial par value, have been fully redeemed, saving the company in excess of $18 million per year in coupon payments for all retired preferred shares. In slide five, we see the fleet and its current fleet employment, including the Viken fleet that we acquired with the first of the 5 tankers in operations already for TEN since yesterday.

We have a pro forma operational fleet of 66 tankers. Thirty-four out of these 66 vessels, or 52% of the fleet in the water, has market exposure, a combination of spot, contract of affreightment, and time charter with profit sharing. Fifty-one out of the 66 vessels or 77% are in secure contract, fixed time charters and time charters with profit sharing. This means that TEN is well positioned to continue capturing the positive tanker market fundamentals. Slide six presents 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. We think we are currently topping the list as our largest charterer. The left slide of slide seven presents the all-in break-even cost for the various vessel types we operate in TEN.... Our operating model is simple.

We try to have our time charter vessels generate revenue to cover the company's cash expenses, paying for the vessel operating expenses, finance expenses, overheads, chartering costs and commissions, and let revenue from the spot trading vessels contribute to the profitability of the company. This year, fleet utilization climbed to 96.3% from 94.7% the prior year. Both numbers are very strong utilization numbers. Thanks to the profit-sharing elements, for every $1,000 per day increase in spot rates, we have a positive $0.18 impact in annual EPS, based on the number of 10 vessels that currently have exposure to spot rates. Spot rates, debt reduction is an integral part of the company's capital allocation strategy. The company's debt peaked in December of 2016.

Since then, we have repaid $349 million of debt and redeemed $211 million in three series of preferred shares, plus a privately placed preferred instrument. Slide nine, sale and purchase activity is a cornerstone of TEN's strategy, and this, the resulting fleet modernity is a key element for our operating model. The left side of the slide shows the divestments in tankers since the start of 2023. We sold six vessels, five 2005-built MRs, two 2006-built handy-sized product tankers, and one 2005-built Suezmax tanker, totaling 560,000 deadweight tons, having an average age of the vessels that we sold of 18.5 years.

Looking at the right side of the slide, under growth, we have the number of vessels we are currently building and acquired since the same period, the first of January 2023. 16 vessels in total, eco-friendly, greener vessels. We have a currently newbuilding program of seven firm tankers, which consists of three shuttle tankers for delivery in 2025 and in 2026, two eco-friendly scrubber-fitted Suezmaxes for delivery also in 2025, and two scrubber-fitted MRs for delivery in early 2026. Except for the two Suezmaxes that will be delivered after two years and the two MR tankers, the rest of the company's new buildings have been fixed forward against medium to long-term time charters.

In addition to the firm orders, the company has options for three vessels, a second shuttle tanker for delivery during the second half of 2026, and options for two LR tankers for delivery also during the second half of 2026. As you see, the vessels that we have acquired have an average age of 1.2 years and, as visible, in deadweight capacity, are 4x the vessels that we sold, plus you have to consider the quality characteristics, the eco-friendly and the more environmentally friendly traits they have. And of course, they will become the springboard of the company's growth going forward. In addition to paying down debt, dividend continuity is important for common shareholders and management. TEN has also paid a dividend irrespective of markets, of the market cycle.

Our dividend policy is semi-annual. Last year, we paid a dividend of $0.30 in June 2023, a special dividend of $0.40 in October, and the second semi-annual dividend of $0.30 in December 2023. This year, we announced $0.60 per share for the June 2024 distribution, which is double the amount distributed in June 2023. Management intends to distribute a second semi-annual dividend to holders of its common shares in December 2024. Overall, and since our listing in the New York Stock Exchange, the company has distributed $546 million to its common shareholders since the New York listing in 2002, or an average of about $25 million per year.

If we add the dividends paid to the holders of the company's preferred shares since 2003, the year the first Series B was issued, then TEN has returned in excess of $823 million to both common and preferred shareholders. Global oil demand continues to grow. Despite financial and geopolitical headwinds, the International Energy Agency expects global oil demand to grow by approximately 1.3 million bbl to a total of 103.2 in 2024. It's going to be another record year after last year. Most of the growth is coming again from Asia Pacific, mainly China and India. On the supply side, most of the growth this year is coming again from non-OPEC countries like Brazil, the United States, Guyana, Canada, Mexico, and Norway.

As global oil demand continues to grow, let's look at the forecast for the supply of tankers. The order book, as of February 2024, stands at less than 8% or 453 tankers for over the next three years. This figure represents a low number, going back to newbuilding statistics for the last 30 years. At the same time, a big part of the fleet, 2,293 vessels, or 40%, is over 15 years. And almost 830 vessels, or 14.6% of the current tanker fleet, is over 20 years.

...Next slide shows the scrapping activity since 2018. Looking at the statistics, it seems that 2023, we reach the bottom for scrapping. We believe scrapping activity will pick up as the global fleet is getting 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 fourth quarter and the year. Paul?

Paul Durham (CFO)

Excuse me. Thank you, George. Just a few remarks. TEN achieved net income in the year amounted, amounted to $300 million. And on top of this, there was a further $500 million coming from EBITDA, and altogether adding to the company's considerable cash reserves. Revenue in the fourth quarter totaled $220 million, while total revenues in the year amounted to almost $900 million, the 3.4% increase over the prior year. TCEs generated about $540 million, of which $72 million related to profit share. Total operating income in the year amounted to almost $390 million, a significant increase by 53% over the previous year.

Our average daily TCE for the year amounted to $37,000 on average, in a market that effectively operated with almost full employment for our vessels. In the year, eight vessels undertook dry dock. In the fourth quarter, vessel operating expenses by 2%, while voyage expenses decreased by 21%. Our new vessel buildings are expected to achieve their delivery dates soon, and vessel financing has now been mostly covered. We believe the new buildings are expected to generate strong rewards over the years. In the meantime, the company will continue, as always, to ensure perfect debt service. Given our cash availability, use of funds will remain for us as a priority, and in this respect, we are acquiring 11 new excellent vessels and preparing plans accordingly regarding the company's future.

Finally, we believe that the production cuts that hit demand in the latter part of the last year were temporary, and that cargo growth has already begun to swell again in the early part of this year. That's really all I have.

Nikolas Tsakos (Founder and CEO)

Thank you, Paul. I mean, good news do not have to come in many words. So thank you very much for this. Well, I think as we have seen, it has been a very, very productive year setting the base of the company's future. And we are looking. I know that many people, since we announce every year a record year, believe that at some stage we have reached the peak of our profitability. We hope that this is not the case, and this by setting the new ships, and I think, George, if you can put the slide on, I think, of the future growth, not the one with the ship. That's the one. And we might be including a couple of new acquisitions and opportunities.

Our newbuilding department here, Mr. Papageorgiou, is nodding his head. In this list, we're very close in securing the additional very accretive transactions to the 16 vessels that are out there. But hopefully we can announce something within April on that. And with this, we would like to open the floor for any comments or questions. Thank you.

Operator (participant)

Thank you so much. 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. The 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 key. One moment, please, while we poll for your questions. Our first questions come from the line of Climent Molins with Value Investor's Edge. Please proceed with your question.

Climent Molins (Head of Shipping Research)

Good morning. Thank you for taking my questions. I wanted to start by asking about your fleet positioning. You already provided some commentary on it, but over the past couple of years, you've pursued quite an aggressive plan to renew your fleet, and the recent Viken acquisition further improved the age profile. You mentioned you're working on several additional opportunities with new builds.... And I was wondering, should we expect, should we expect the size of the fleet to grow further, or will the other side of the fleet be sold in conjunction with additional acquisitions?

Nikolas Tsakos (Founder and CEO)

Well, we are looking, this is an ongoing, growing concern, as a company. However, in the strong market environment, we are looking, we have a lot of, of vessels approaching graduation, graduation years from the TEN Academy, and, you know, we will wish them, they will be very profitably graduating for the rest of the fleet. I think we were able, by selling the 9 vessels last year, last year, and part of this year, we added, $160 million, net, to our cash, which we have used to further grow the fleet. And I think the growth is significant, selling nine vessels and actually replacing them with double that. So, the answer is, there will be, growth, but there will be also re-disinvestment of the first generation vessels.

Climent Molins (Head of Shipping Research)

Thanks for the call. I also wanted to ask about the Neo Energy, which supposedly came off contract in February. Could you talk a bit about the prospects for the vessel?

Nikolas Tsakos (Founder and CEO)

The Neo Energy has been one of our luckiest vessels since she was built on February 7, 2007. She has always been, and I think she earned up to last month one of our highest time charters for a year and a half, in excess of $115,000 a day. And we believe that she will maintain to be one of our luckiest vessels, and we will-- you will hear an announcement soon.

Climent Molins (Head of Shipping Research)

Makes sense. Thanks for the call. Final question from me. On the dividend side, you mentioned you expect to distribute another dividend later this year. Could you provide some commentary on the amount you expect to distribute?

Nikolas Tsakos (Founder and CEO)

Well, I think, you know, our Chairman, who is responsible for the dividend, Takis?

Efstratios Arapoglou (Chairman)

Well, we are approaching the middle of the year. We felt that 60 cents, you know, represents what our performance last year and how things are looking right now. The second installment of the dividend depends on, you know, the rest of the year, and we cannot really make any predictions, so 'cause we're not allowed. But we are confident that our performance will continue to be strong.

Nikolas Tsakos (Founder and CEO)

Very good.

Climent Molins (Head of Shipping Research)

Thanks for the call. That's all from me. Thank you for taking my questions.

Nikolas Tsakos (Founder and CEO)

Thank you.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. I am showing no further questions in the queue. I would like to pass the call back over to management for any closing remarks.

Nikolas Tsakos (Founder and CEO)

Well, from our side, we would like to, you know, take the opportunity and thank our shareholders for their support. The management, being the main shareholder, is working pari passu to achieve the results for all of us. Regardless of the geopolitical situation that we are facing, just by the fundamentals, we are seeing that the market, which is underbuilt, and it's maintaining this less than 7% of the fleet is on order, and on top of that, an aging fleet and a shadow fleet, which we do not expect to see within the normal trading route.

So, we can conservatively say that we are looking for another couple of years of significant growth, and we are placing the company to take advantage of that. From our side, we would like, again, to pass our support to all the victims of the Delaware tragic incident, and wish everybody happy and peaceful Easter going forward. And, thank you very much.

Operator (participant)

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.