Earnings Call Transcript - TEN Q1 2022

Operator, Operator

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; 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 in a listen-only mode. There will be a presentation followed by a question-and-answer session. I must advise you that this conference call is being recorded today. And now I will pass the floor over to Nicolas Bornozis, President of Capital Link, Investor Relations Advisor of Tsakos Energy Navigation. Please go ahead, sir.

Nicolas Bornozis, President of Capital Link, Investor Relations Advisor

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 ten@capitallink.com and we will have a copy for you right away. We will send you a copy by email. 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, 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 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. And 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.

Takis Arapoglou, Chairman of the Board

Thank you, Nicolas. 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 regrettable war in Ukraine and supply chain challenges. Although we have full employment, we have declining numbers of workers willing to work, declining household income, and less willingness of people to spend. We seriously believe the actions by central banks to quickly reverse long and accommodating policies originally put in place to stem growth after the economic crash and COVID, and the resulting rate hikes will put pressure on public and private sector debt servicing worldwide in an over-indebted world, especially in emerging markets, and always, with a high probability of failing to avoid the 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 also offer opportunities to spend with a wide and stable footprint, and its resilient business model fully captures these opportunities, allowing it to grow revenues, reduce debt, and do all the right things, renewing its fleet with state-of-the-art vessels. Despite the very complex environment with low visibility, there may be surprises along the way. TEN is very confident that it will continue to improve its operating performance, and let’s not forget that we are currently in a multiple event-driven positive market and are still waiting for the long-expected group time to market recovery, which will be based on very encouraging fundamentals. So thank you all for your continued support and I would like to now pass the floor to Nikolas Tsakos. Thank you.

Nikolas Tsakos, President and CEO

Chairman, thank you, and good morning to everybody. It’s very good to be able to report net positive income once again. Although our company has never stopped reporting positive operating income over a very difficult period, we are very happy that right now we have also returned to positive net income. We look forward to 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 at the beginning of the year feeling that things were getting 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, which complicated issues a lot in operational matters for us. This meant that a company like ours with 32 vessels, with mixed Russian and Ukrainian groups, spent a lot of time and effort through our mining department and our human resources teams to ensure everything runs smoothly. We are very happy to announce that our seafarers have shown exceptional professionalism and we never faced an incident between these two nations. It has been a worrisome period. However, we were able to maintain our footing. We took advantage of the favorable environments at the beginning of the year to renew 15 new charters or extend charters at an average rate 25% higher than those that expired. Meanwhile, our pool vessels on the clean side are enjoying a very strong market. The timely chartering of our two VLCCs has saved us tens of millions of dollars, not only in profit but also from what we are facing today in a much harder economic environment. So, all in all, we are happy to announce that we have been able to maintain our progress on target. We took delivery of our LNG and chartered it in January, followed by our Shuttle Tanker from Korea this month, also on a long charter. We sold one of our older vessels and are taking delivery of a new VLCC with options for others going forward. Overall, we have managed to be profitable, pay a dividend, increase our cash reserves, and reduce our bank debt. We are looking forward to a better second half of the year. The second quarter looks strong and we are dedicated to maintaining and increasing our profitability, which will further enhance our ability to reduce debt and pay dividends to our shareholders. With that, I will ask George to discuss the operating part of the first quarter. Thank you.

George Saroglou, Chief Operating Officer

Thank you, Nikolas. Good morning to all of you joining our earnings call today. Let’s go to the slides in our presentation. Starting with slide three…

Nikolas Tsakos, President and CEO

Sorry to interrupt you, but the first slide is a beautiful picture of the Porto just delivered. It looks like a drawing, but absolutely, this is the actual ship and we are very proud of that state-of-the-art vessel. Thank you, George.

George Saroglou, Chief Operating Officer

Very good. Starting with slide three, we see that since inception in 1993, we have faced five major crises, and each time the company, thanks to its tested counter-cyclical operating model that targets growth at market lows, has emerged 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 into another crisis, the war in Europe, which 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 oil, oil products, and gas, alongside tragic losses of human life, we have continued to stay the course and prepare the company for its next growth phase. Earlier this year, we entered into newbuilding contracts for four dual-fuel LNG-powered aframax tankers against long-term employment with a major oil concern. Last week, we held the naming ceremony for our latest state-of-the-art Shuttle Tanker delivered from a South Korean shipyard, which is also under long-term charter. Today, we announced the sale of the 2006-built LR2 aframax tanker and the acquisition of a 2020-built scrubber-fitted VLCC. After these transactions, the company currently operates a fleet of 71 vessels for an average annual growth of 15% in deadweight tons spanning over four decades. In slide four, we see the fleet and its current fleet employment. Almost 60% of the fleet has market exposure, comprising a combination of spot contracts, time charters with profit sharing, while 60% is in secured contracts, fixed time charters, and fixed profit-sharing agreements. This means that TEN is well-positioned to capture the positive tanker market fundamentals. With global oil demand rebounding after two years and shifting trades due to the war in Ukraine, we are witnessing spot tanker freight rates reaching higher levels that lead to profitable operating results. Fleet modernity is a key element of our operating model. We also took delivery of our latest LNG carrier named Energy, which has immediately entered a five-year time charter that is expected to contribute to our bottom line as the LNG sector continues to experience strong rates. If you look at the slides, we have four remaining newbuildings, which we expect to take delivery of in the fourth quarter of 2023. This forms part of our green ship initiative with dual-fuel LNG aframax orders. All four vessels come with long-term employment attached, and included in the above charters, TEN’s minimum fixed revenue backlog exceeds $1 billion. Slide five presents the all-in breakeven costs for the various vessel types in operation. We maintain a low cost base. During the year, the revenues generated from time charter contracts were again sufficient to cover the company’s cash expenses, and we must also highlight the purchasing power of this year along with continuous cost control efforts by management to maintain a low operating expense 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 chartering strategy, for every $1,000 per day increase in spot rates, we have a positive $0.39 impact on our annual earnings per share based on the number of our vessels that currently have exposure to spot rates. Debt reduction has also been an integral part of the company’s capital allocation strategy. The company’s debt peaked in December of 2016. Since then, we have repaid $424 million of debt and repurchased $100 million in two series of step-up preferred shares that were outstanding. In addition to paying down debt, dividend continuity is important for common shareholders and management. TEN has always paid a dividend despite market cyclicality. About $0.5 billion in dividend payments have been distributed since our listing on the New York Stock Exchange in 2002. The next dividend will be paid on July 20th. 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 pre-pandemic demand levels of about 100 million starting from the second half of this year. Developed economies led the oil demand expansion in 2022; however, 80% of expected 2023 demand growth is forecasted to come from non-OECD countries. On the global oil supply front, OPEC-plus producers continue to manage supply with monthly increases. However, countries outside the Middle East have struggled to meet their quotas. Global oil stocks continue to fall and are now almost 300 million barrels below the 2017-2021 average. Non-OECD production is set to rise in 2022. As a result of the war in Ukraine and higher oil prices, we have seen another coordinated effort to release a total of 240 million barrels from the strategic petroleum reserves of the United States and major OECD member countries over the next six months to lower energy prices and counterbalance global issues. 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 significant part of the fleet is over 15 years old—1,600 vessels, or 31% of the fleet. We also have almost 400 vessels, or 7.5% of the current tanker fleet, that are over 20 years old. As shown on the next slide, 2018 was one of the highest scrapping years on record, with 21.2 million deadweight tons removed from the market. Last year, we saw an acceleration in scrapping from the second half of the year, ending with 14.5 million deadweight tons removed. So far until May, we’ve seen 105 vessels with 8.5 million deadweight tons being scrapped. Scrap prices remain high, currently hovering around $600 per dead ton, and with more environmental regulations coming and discussions for alternative fuels, with at least 1.5% of the global fleet being over 20 years old, 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. Regarding oil supply, we see continuous monthly production increases by OPEC. Non-OECD production is set to increase in 2022, bringing more cargoes to the market. Global oil stocks are below five-year levels, and demand is surpassing pre-COVID levels. Regarding external events like the recent geopolitical situation in Ukraine and the resulting sanctions, we have seen a large number of Russian state-owned and privately held tankers excluded from trade as majors and oil traders have boycotted these vessels, creating a supply squeeze, mainly in the aframax and suezmax sectors. We’ve observed a redraw in oil trade routes with heavily discounted Russian crude oil going to Asia, mainly India and China, and returning to OECD countries with short refining capacity in the form of oil products, middle distillates, gasoline, and kerosene. In the order book, the order book-to-current fleet ratio is at historical low levels, with a significant part of the fleet reaching phase-out age, indicating tighter supply of tankers for the next 18 to 24 months. And if we look at the company, we have a modern fleet. We have already started our orders that transition towards the next generation of greener vessels. We have in the water and operating fleet that is well-positioned to capture the improving trade market. Additionally, we continue to reduce debt. We have a very strong balance sheet and strong banking relationships that allow the company to take advantage of the opportunities this market will present. With that, I will ask Paul to walk you through the financial highlights of the first quarter. Paul?

Paul Durham, Chief Financial Officer

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, 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, with several vessels achieving spectacular rates. We had six vessels undergoing dry dock for survey purposes in quarter one, but we still achieved 93% utilization for the fleet. The average daily TCE rate per vessel was $19,730, reflecting a 9% increase. Judging from the results of other tanker companies, this was clearly a strong average rate compared to market averages. Total operational expenses increased by a manageable 2% over the prior quarter, primarily due to increased voyage costs, mainly rising fuel costs, while vessel operating costs did rise due to the addition of a new LNG carrier and the dry docking schedule. Daily operating expenses per vessel remained relatively stable at about $7,700, while daily overheads per vessel remained the same at only $1,200. Depreciation fell by $2 million in quarter one mainly due to reduced vessel valuations accounted for in quarter four, while amortization of deferred dry dock costs increased due to the state of dry docks over the past 12 months. We had one vessel in quarter one that is classified as held for sale and was sold in quarter two for $21 million, with certain similar vessels under consideration for possible sale, depending on market conditions for product carriers that continue to perform well for us. Finance costs were half of the prior quarter, mainly due to cash gains of $10 million from our bunker hedges. EBITDA increased 13% to over $42 million, boosting our cash reserves significantly. 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 mentioned, there were some extra expenses in quarter one, but none unusual and indeed are already attended to by our technical managers. Overall, 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 while simultaneously rewarding our shareholders as we have shown. I will now give the call back to Nikolas.

Nikolas Tsakos, President and CEO

Thank you, Paul. Hopefully, the next quarter will be even better. With that, we would like to have the opportunity to answer any questions you may have.

Operator, Operator

Our first question comes from Ben Nolan with Stifel.

Ben Nolan, Analyst

Hi, guys. I have a handful. Hopefully that’s okay. The first one was I know that you talked in the release 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?

Nikolas Tsakos, President and CEO

The majority of the shares, I think, have been sold in the first quarter.

Ben Nolan, Analyst

Okay. And I guess the reason I ask is that 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 an expensive form of capital growth.

Nikolas Tsakos, President and CEO

Well, we try to avoid whenever our cash flow is quite positive like it is today. The only reason we have used the ATM is for growth purposes. Our calculations indicate that when the market is challenging, that’s when opportunities arise, and that’s when you need to act decisively to acquire ships. Just to put this into perspective, our LNG, which we purchased for $175 million or $176 million, today we have offers for $240 million. So we would not have been able to buy those ships for $240 million otherwise. That's one of the ships we acquired during the crisis.

Ben Nolan, Analyst

Yeah. That’s a good answer and a good point. And also, Nikolas, you may wish to add that the discount through the ATM program is much less than any other way?

Nikolas Tsakos, President and CEO

Yeah. There is no discount in the ATM program. But again, we only use it when opportunities are right, and right now, our cash flow, thanks to the market and mainly due to the product market, is unprecedented. We are seeing our product carriers earning six-figure numbers, which is significant for our bottom line.

Ben Nolan, Analyst

Sure. You mentioned the asset value, specifically the LNG assets, but I think everything in general and newbuilding prices have gone up a little bit. You sold the one LR2. At the moment, does it feel like that buying opportunity that you are trying to capitalize on with respect to asset prices is sort of behind us, and things are no longer counter-cyclical with respect to value?

Nikolas Tsakos, President and CEO

We want to remain opportunistic. Currently, we are evaluating several offers for our first-generation vessels, which could potentially bring us an extra $50 million to $60 million in profit. Therefore, our focus is primarily on selling these first-generation ships. As George mentioned, we are also aiming to acquire vessels that comply with environmental standards and incorporate new technologies. For the time being, we are content with our VLCC and option purchases. The VLCC market is still facing difficulties, but we have secured charter agreements at profitable rates, allowing us to avoid losses. Referring to George’s slide on breakeven, it shows that our VLCCs are earning more than $30,000 in the spot market. Furthermore, we are seeing significant profits across all categories, with our handysize and DMRs generating profits that are five times above our breakeven point.

Ben Nolan, Analyst

Okay. And 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 the exposure you have to the market, you envision the second quarter to shape up with respect to cash flows or day rates, or maybe just knowing you might not have the exact figures, how it might vary as a percentage relative to the first quarter?

Nikolas Tsakos, President and CEO

To give you some perspective, in the first quarter, we enjoyed one month, less than a month of a good market. In the third quarter, we are enjoying three months of a strong market across all segments.

Paul Durham, Chief Financial Officer

Just one second. Is anybody there?

Nikolas Tsakos, President and CEO

Well, yes, right here.

Ben Nolan, Analyst

Yeah. And then lastly, I am glad you, hopefully, can hear me, Paul, because my last question is for you. Interest rates are rising. I am curious what your…

Nikolas Tsakos, President and CEO

I think he does not.

Ben Nolan, Analyst

Oh! Well, maybe he can’t hear me. Maybe someone else knows what the interest rate hedge position is?

Nikolas Tsakos, President and CEO

We are close to 50%...

Ben Nolan, Analyst

Okay. Perfect. While I am asking about hedging, the way that you report your interest rates, you back out the bunker hedging. I am curious why you connect the bunker hedging to interest rate expense.

Nikolas Tsakos, President and CEO

I think it falls in the same risk category, but I will get Paul to call you if we cannot hear you and give you an answer on that. But your question regarding all our hedges falls under the same category.

Ben Nolan, Analyst

Okay. All right. Good enough. I appreciate it. Thank you.

Nikolas Tsakos, President and CEO

Thank you.

Operator, Operator

The next question comes from Liam Burke with B. Riley.

Liam Burke, Analyst

Yes. Thank you. Appreciate the time. On your clean product tankers, some of your older vessels, we are looking at a very, very healthy spot rate environment versus very high asset values for the MRs. How do you balance whether to divest these older vessels as they exceed 15 years old versus riding the economic life?

Nikolas Tsakos, President and CEO

We need your advice too, but we are actually struggling with this question. The best time to divest from something is when the buyer of your assets is also going to profit. So the opportunity to make money on the resale of our first-generation ships is being considered, and hopefully, it can generate profits for us.

Paul Durham, Chief Financial Officer

This is London. Are we in contact?

Nikolas Tsakos, President and CEO

Yes. Paul, we can hear you. We are looking to invest right now and make a significant gain from our older vessels.

Liam Burke, Analyst

Okay. Great. And as I look at 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 preferred shares, and your dividend policy?

Nikolas Tsakos, President and CEO

It’s becoming more predictable. However, as we are structured now, I think every $1,000 increase in the spot market adds $0.40 to our annual EPS. Currently, 42 out of our 65 vessels in the water are benefiting from the upside of the market through profit-sharing arrangements, pools, and contracts of affreightment. We strive to maintain a balance, as shown in slide five. We want our time charter fleet to cover all our expenses, and what remains on the spot vessels contributes to profitability, allowing us to reduce debt and, ideally, address the preferred shares next.

Climent Molins, Analyst

Good morning. Thank you for taking my question. I would like to start by asking about the VLCC acquisition. Can you provide some additional commentary on the specifics of the deal? What was the reasoning behind this acquisition?

Nikolas Tsakos, President and CEO

Thank you. If you look at our fleet in George's presentation on page four, we have a diversified company with almost 50% between products and crude carriers. We were light on VLCCs; we used to have more. The reasoning, of course, is that it’s the only market that hasn’t moved yet, and people are understandably nervous. These are significant investments, totaling close to $100 million, ideally less. Additionally, the logic is to invest when things aren’t overpriced. Newbuilding prices for identical vessels approach or exceed $125 million, so buying something built in the 1990s seems like a solid investment for the future.

Climent Molins, Analyst

That’s helpful. You have consistently employed your assets in a mix of time charters and spot vessels, which has been beneficial over the past couple of years. Has your strategy changed on the product side of the business after recent strengths? What kind of rates do you see available for longer-term contracts?

Nikolas Tsakos, President and CEO

We depend on the market. We prefer predictability but recognize that for an extended period, either we or our charterers may face losses. Therefore, during each negotiation, we've rechartered 15 vessels since the start of the year, primarily under profit-sharing agreements. Depending on market conditions, we accept rates that cover all expenses and are willing to share potential gains with major oil companies. This approach to utilizing our ships has been effective for us so far.

Climent Molins, Analyst

Thanks for the insights. Lastly, do any of your aframaxes have the coating required to trade clean cargoes?

Nikolas Tsakos, President and CEO

Yes. Currently, we have two and are building another four. Thank you for taking my questions.

Operator, Operator

I am not showing any further questions at this time. I would like to turn the floor back over to the CEO for any closing remarks.

Nikolas Tsakos, President and CEO

Well, again, as I said, we would like to thank all of you for your interest in our company. We believe that we have emerged from the difficulties. We are witnessing demand growing longer routes due to the situation in Ukraine. There is a prediction that we will see a 7% increase in ton miles, which is substantial for 2023. Additionally, we anticipate slow steaming will further increase demand. We are looking at an order book for tankers that will grow by 1% in 2023 and by a total of 8.5% over the next four years. The fundamentals look promising. We observed the news from China yesterday; they are increasing crude imports and refining capacities to non-governmental institutions by 50%. Initially, we were concerned that early-month demand growth in China would be at 3% to 4%, but even a modest growth in such a massive country is significant. We are optimistic that the fundamentals are strong, and the sooner the world normalizes, the sooner we can trade globally. As the pandemic eases, we expect to see a very robust tanker market, and we are positioning the company to take advantage of the low market to build our fleet with quality vessels, LNG vessels, Shuttle Tanker vessels, VLCCs, and dual-fuel ships. We are confident we will enjoy favorable rates, bringing our share price to where it should be. Thank you and wish you a peaceful and restful summer for those planning to take a holiday. On a personal note, I would like to wish our colleague, Ms. Maria G, all the best as she embarks on her journey into parenthood. Thank you, Maria, for being a vital part of our accounting department for 15 years.

Operator, Operator

Ladies and gentlemen, this concludes today’s presentation. You may now disconnect and have a wonderful day.