Earnings Call Transcript - TEN Q4 2022

Operator, Operator

Thank you for joining us today for the Tsakos Energy Navigation Conference Call regarding the Fourth Quarter 2022 Financial Results. Present are 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. This conference is being recorded. I will now hand it over to Mr. Nicolas Bornozis, Chief President of Capital Link Investor Relations Advisor of Tsakos Energy Navigation. Please proceed.

Nicolas Bornozis, Chief President of Capital Link 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 for Tsakos Energy Navigation. This morning, the company publicly released its financial results for the fourth quarter and year ended December 31, 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 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, 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. 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 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. And before passing the floor to Mr. Arapoglou, I would like to say we are looking forward to having Dr. Tsakos with us at the Capital Link Forum in New York next Monday. And we would like to congratulate him for being recognized as the person of the year by the Hellenic American Chamber of Commerce next Friday in New York, recognizing and honoring his contribution to Global Shipping to Greece, and also recognizing the fact that TEN is the longest listed Greek company on the New York Stock Exchange, and this recognition coincides with record profitability—a record year for TEN. So, with that, I will pass the floor to Mr. Arapoglou, the Chairman of Tsakos Energy Navigation. Please go ahead, Mr. Chairman.

Takis Arapoglou, Chairman

Thank you, Nicolas. Good morning and good afternoon to everyone, and thank you for attending our call today. Please receive my voice, which is often managed. We are pleased to announce full-year record results in our books since inception, celebrating with a very positive dividend increase. I need to remind everyone of the TEN model which mitigates negative results in weak markets and allows the company to perform strongly in strong markets. This model has a lifetime of uninterrupted dividends since inception, with an average over the U.S. dividend yield ratio of over 22% of revenues, as I'm sure Nikolas Tsakos would explain later. The main driver of these stellar results, despite unfortunate geopolitical events, are the market fundamentals we have been expecting for quite some time now. So, congratulations once again to Nikolas Tsakos and the management team, which, apart from operational excellence, is economically pursuing the future, reducing debt, and keeping a prudent course to benefit from what seems to be a sustained strong market despite our recessionary expectations. The potential has been firmly recognized by the market, as evidenced by the investment in our stock performance in recent months. But again, well done to all, and we look forward to the continuation of TEN’s profitable journey going forward. Thank you all, and I'll hand it over to Nikolas Tsakos. Thank you.

Nikolas Tsakos, President and CEO

Thank you, Chairman, and good morning to everybody, or good afternoon if you are on this side. We would like to welcome you to our 2022 year-end call. As the Chairman said, thank you for reminding us that we are the oldest and greatest of the Greek companies on the New York Stock Exchange. But I think that's a great privilege and honor, and we're looking forward to celebrating this event coinciding with a very good year—a record year. But I think whenever we talk about a record year, people get a bit worried thinking that we have really reached a peak. This is something that we hope we can see from the fundamentals and the actual market conditions that we're facing right now. However, 2023 has started as an even stronger year than 2022. By coincidence, we will be celebrating 30 years as a public company, having started on the Oslo Stock Exchange in 1993. We hope, as our CEO has said, that we can see the share above $30 within our 30th anniversary. Looking at where we are today, TEN has maintained this model of being able to grow, thrive, and prepare the grounds during difficult markets because the time you want to invest in assets is when nobody wants to invest. We have been able to achieve this by following our model. We thrive during the good times, but TEN has never stopped paying a dividend and has never stopped reducing debt, nor has it needed to reconstruct any of its loans. This gives a lot of confidence to our clients and makes us a client of choice in good and bad times. Currently, we are going through our fifth crisis, which started with the Far East market, following the 9/11 crisis, the credit crisis of 2008, the impact of COVID in 2020, and then the invasion of Ukraine. Yet, through all these crises, the company has managed to maintain dividends and invest at the low points of the cycle, taking advantage of the market's changes. The beginning of 2023 has been a very busy year. We've never seen so many transactions in buying and selling ships, with 18 transactions completed in less than three months, of which 8 vessels were sold and 10 vessels ordered. This level of activity prepares the company for an exciting first quarter, which appears to be as strong as the first quarter historically. There is big appetite from clients to renew vessels from reputable operators like ourselves. Paul, would you like to provide us with a bit of the numbers, and then George can follow up?

Paul Durham, CFO

Yes, certainly. The fourth quarter of 2022 resulted in net income of over $100 million, bringing our net income for the year to over $204 million—a new record for the company since 2008. EBITDA increased to almost $160 million in the quarter, adding to our cash reserves for the year-end and reaching a staggering amount of over $300 million by the end of the recent year, primarily due to the impact of events in Eastern Europe throughout 2022. Since the end of the year, our cash reserves have continued to increase, taking into account the sale of vessels. Revenue in the fourth quarter totaled over $270 million, representing a 94% increase over the prior year. Time charters generated about $460 million in the year, while total revenues for the year amounted to $860 million, of which $55 million related to profit share. Total operating income for the quarter amounted to $122 million, compared to a loss in the fourth quarter of the prior year. In 2022, operating income reached $256 million, compared with a loss of $120 million in the prior year. With 66 vessels operating, our average daily time charter equivalent in the quarter was almost $40,000 in a market that effectively operated with full employment for our vessels at 97%. Only two of our vessels were in dry dock in the quarter, while 16 vessels underwent dry dock throughout the year. Although certain expenses increased, due mainly to new vessels incurring higher operating costs and various other price increases, our revenue from time charters alone was sufficient to cover all expenses while still leaving significant amounts of free funds. All our new vessels and orders are financed, except for the latest orders, and all new builds are expected to generate strong returns over the forthcoming years. In the meantime, the company will continue to prioritize perfect debt service. Given our cash availability, the use of funds is already a high priority for management, and we are preparing plans accordingly regarding the company's future. That's my basic comment. Please note that we shall be filing our 20-F shortly, which will include substantial information.

George Saroglou, COO

Thank you, Paul. Good morning to all of you joining our earnings call today. Last year, we experienced the largest change in trade flows due to political actions related to Ukraine and the sanctions that followed on Russian seaborne barrels. These changes could be permanent, as Europe, the largest client of Russian oil, managed to replace these barrels with those coming from the U.S., West Africa, Vienna, and the Middle East, creating a positive ton-mile multiplier effect for tanker demand and rates. At the same time, tanker newbuildings are at an all-time low—30-year lows—and global oil demand is rebounding as we emerge from the COVID pandemic. Despite the ongoing energy transition to renewables, the world understands that its reliance on oil and LNG will likely last longer, possibly well into 2050. Demand is expected to grow by 2 million barrels per day in 2023, based on the latest forecast from the International Energy Agency, which will amount to an all-time record of 102 million barrels per day. All eyes are on China, which changed its zero-COVID policy in the last quarter of 2022, as most of this growth is expected to come from them. Despite global headwinds like inflation, tightening financial conditions, and geopolitical tensions, the global economy continues to grow. Oil demand is increasing, and tanker fundamentals appear to favor a sustainably strong tanker market. Let’s review the slides of our presentation. Starting with Slide 3, since TEN’s inception in 1993, we've faced five major crises and each time the company has emerged stronger, thanks to its operating model. This time is no exception. We navigated the COVID pandemic without any serious effects on both our fleet and offshore operations. Currently, we are managing the challenges created by the war in Ukraine as well as inflationary pressures on costs. The market fundamentals—record low orderbook and an aging fleet—were already positive for the tanker industry even before this tragic war. The sanctions imposed on Russian seaborne oil as a result of the conflict have also served as an additional catalyst to propel freight rates higher as well-established trade routes have been disrupted. On Slide 4, we see the company's growth and capital market access since inception. We raised capital for growth countercyclically—not at the top of the market, but when asset prices were generally low. TEN was set up in the aftermath of the double-hull tanker legislation, starting with four modern vessels in 1993 and growing to 12 within three years by raising $130 million from the founders and new energy investors at the Oslo Stock Exchange. When we listed the company on the New York Stock Exchange in 2002, we were transitioning towards a full double-hull fleet, tailored to the requirements of our clients. In the blue boxes, you can see the company's common share offerings; and in red, the offerings of preferred shares since listing on the New York Stock Exchange. The first two series of $50 million each, Series B and Series C preferreds, have already been redeemed at par. In the following slide, we present our fleet and current employment. We have an operational fleet of 58 vessels, with 43 out of the 58 or 74% of the fleet exposed to the market through a combination of spot, contracts of affreightment, and time charters with profit sharing. This positioning enables TEN to capitalize on the prevailing positive fundamentals in the tanker market. Our fourth quarter and calendar 2022 revenue and net income announced today is a testament to TEN’s ability to take advantage of the strong tanker market. We should also note that Maria Energy’s 2016-built LNG vessel is fixed to a minimum 12-year time charter to a leading Asian natural gas operator at rates reflecting current market conditions in the LNG sector. The vessel is expected to be delivered with a new charter upon completion of the existing time charter in 2026. Greek modality is a key element of our operating model. During 2022, we sold a 2003-built Panamax tanker and a 2006-built LR2 Aframax tanker while taking delivery of three modern vessels. In January 2022, we acquired two new buildings: the LNG carrier TEN Energy. In July, we took delivery of the shuttle tanker Quarter, and in November, we welcomed DS1, a 2020-built eco-friendly scrubber-fitted VLCC. All three vessels are chartered under long-term agreements. Additionally, we announced today the sale of eight tankers, six 2005-built MRs and two 2006-built handysize tankers, along with a buyback using company cash of 2005-built Suezmaxes for prices that today are well below fair market value. While these two Suezmaxes currently operate in the spot market, management is exploring investment opportunities as asset prices continue to climb. Any divestment of older generation vessels will be replaced with modern, eco-friendly ships. On the new building front, we announced today the signing of contracts for two scrubber-fitted Suezmaxes for delivery at the end of 2025 from a South Korean yard. TEN currently has a new building program comprising two plus one optional shuttle tankers for delivery in 2025, four dual-fuel Aframax tankers for delivery in the second half of this year and the first quarter of next, plus the two eco-friendly scrubber-fitted Suezmaxes we've just announced. Except for these two Suezmaxes, which currently have no charters attached but have attracted interest, the rest of our new builds are contracted on medium to long-term time charters. In slide 6, we present the company's current and long-term clients. As you see, we have a blue-chip customer base consisting of four major global energy companies, refineries, commodity traders, with Equinor being our largest charterer with nine vessels and four new buildings, all on long-term charters. In slide 7, the left side presents the all-in breakeven cost for the various vessel types we operate in TEN. We maintain a low-cost base and a simple operating model. We aim for our tanker vessels to generate revenue sufficient to cover company expenses, including vessel operating costs, finance expenses, overheads, and commissions, while maximizing net revenue from spot trading. Despite prevailing inflationary pressures, we want to highlight the purchasing power of our technical manager and our management’s continuous cost control efforts to maintain a low operating expenditure average for the fleet, achieving almost 95% fleet utilization rate year after year. Thanks to the profit-sharing element, for every $1,000 increase in spot rates, we experience a positive $0.19 impact on annual EPS based on the number of TEN vessels currently exposed to spot rates. Debt reduction is an integral part of our capital allocation strategy. The company’s debt peaked in December 2016. Since then, we have repaid $360 million in debt and repurchased $100 million in step-up preferred shares that were outstanding. In addition to paying down debt, dividend continuity is important for both our common shareholders and management. TEN has always paid dividends regardless of market cyclicality. Today, we announced an annual dividend of $0.60 for 2023. $0.30 will be paid in June, and another $0.30 will be paid in December. This compares with $0.25 per common share paid last year, representing a 140% increase. Following the dividend announcement today, the company will have paid in excess of $516 million in dividends since its initial listing in 2002. Global oil demand continues to recover as the world emerges from the COVID pandemic. China recently changed its strict zero-COVID policy, and this policy change positively impacts Chinese and global oil demand in 2023. Despite financial and geopolitical headwinds, the International Energy Agency expects global oil demand to grow by approximately 2 million barrels in 2023, with most growth coming from the Asia Pacific region driven by a surge in Chinese demand. On the supply side, most projections posit growth from non-OPEC countries such as Brazil, the U.S., Vienna, Canada, Mexico, and Norway. As global oil demand continues to grow, let's examine tanker supply in slide 11. The order book stands at just over 4% for the next three years, the lowest it has been in more than 30 years, while a significant portion of the fleet is over 15 years old, with almost 10% currently over 20 years of age. Although scrapping activities have decreased, which is expected, upcoming regulations related to carbon emissions and the aging fleet point to the likelihood of a balanced tanker supply market in the years ahead. With that, I will hand the call back to Nicolas for the Q&A. Thank you.

Nikolas Tsakos, President and CEO

Thank you, George, for providing us with a thorough overview of what has been an exciting year. A lot of excitement has begun with 2023, where market fundamentals remain strong. There is some weakness in the price of oil, which I think bodes well for the tanker industry. I've been mentioning for a while that there is always a reverse correlation between tanker rates and the oil price. What we are witnessing recently is a normalization of the oil price in a low inventory environment, which is welcomed. The world has dealt with elevated oil prices for at least four quarters, so some correction to more affordable levels should drive more business for us, which we are observing from every metric for long-term contracts that we haven't seen in a while. As you know, we closely monitor our business through profit-sharing arrangements, and today the VLCC could command a rate close to $70,000, while Suezmax might go for about $50,000 to $60,000, with Aframax rates falling similarly. These rates are sustainable for the next couple of years. So the situation is favorable as we progress. That is why we seized the opportunity to order next-generation vessels to meet the requirements of major oil companies. Currently, we have a balanced profit-sharing and spot environment. Our LNG vessel is set to be online in the next couple of months, expected to contribute at least an additional dollar in net income from a new charter. So, that's a very positive situation going forward. We anticipate welcoming our first dual-fuel vessels this coming October of 2023. We have successfully sold our older product tankers at prices we did not previously expect to see again, showing a renewed strategy for that segment of our business. Looking back, this year, we have achieved net income of over $2.3 billion in the stock market over the last 20 years in a very cyclical market and have paid dividends exceeding $0.5 billion as our CEO stated. We aim to continue this trend for the foreseeable future. I appreciate your support throughout this journey and would like to open the floor for any questions.

Operator, Operator

Thank you. Our first question is from Climent Molins with Value Investors. Please go ahead with your question.

Climent Molins, Analyst

Good morning. Thank you for taking my questions. I wanted to start by asking about the dividend you announced today. How should we understand it? Because during the capital event in January, you mentioned that dividends would be attributable between 25% and 50% of net income, is that still the board's intention?

Nikolas Tsakos, President and CEO

Yes, indeed. Thanks for your question; good morning to you. If you look at the historical data, I announced that out of $2.3 billion in net income, we have already returned around $570 million. So, that translates to about 25% to 30%. Yes, we will maintain the same policy while continuing to build up cash reserves. I believe that if circumstances remain favorable, we may approach $0.5 billion in liquidity within this year, which would provide us with the security needed to invest in new and more environmentally friendly vessels.

Climent Molins, Analyst

Thanks for the clarity. During the quarter, you issued 570,000 shares for 10.4 million. Could you provide some insight into the reasoning behind that decision? And looking ahead, should we expect further ATM usage?

Nikolas Tsakos, President and CEO

That was a program we initiated early in 2022 and was completed within the year. Given the liquidity the company consistently builds, I don't foresee any similar transactions now that this program has concluded.

Climent Molins, Analyst

That's helpful. Thank you. And my final question is regarding the new contract for the new energy ship, which you mentioned will add at least another dollar in net income by itself. Could you provide additional commentary on the terms of that new contract? For example, the TCE or its duration?

Nikolas Tsakos, President and CEO

We are looking at yearly contracts exceeding $100,000 a day. If we consider a two-year contract, it stands at around $85,000 a day. So yes, that's how we arrive at the figure I previously mentioned.

Climent Molins, Analyst

Makes sense. So, it's not peak yet, right?

Nikolas Tsakos, President and CEO

Exactly.

Climent Molins, Analyst

Thank you for taking my questions and congratulations on the quarter.

Nikolas Tsakos, President and CEO

Thank you very much.

Operator, Operator

Thank you. There are no further questions at this time. I would like to hand the floor back over to Dr. Nikolas Tsakos for any closing comments.

Nikolas Tsakos, President and CEO

Well, first of all, thank you for your support over the last year. We acknowledge that strong quarters often raise concerns about market peaks; however, I believe the solid fundamentals presented by our COO indicate that we are in a strong position due to the lack of modern vessels available. This is indeed unprecedented since the industry's order book reflects close to 4%, with some segments nearing 2.8% to 3%. Without growth in trade volumes, we’re poised for a potent market. As always, we are prepared to absorb any possible market shocks and are proud of our track record in doing so. We look forward to reaping the benefits of our past endeavors, alongside the impending arrival of eight new ships and two recent additions, which will drive earnings growth in the first quarter and beyond. We, as major shareholders in the company, feel justified presenting a significant increase to our dividends, and should the market remain favorable, we hope to announce another increase later this year. With that, I will pass it to Mr. Arapoglou to wrap up.

Takis Arapoglou, Chairman

Thank you, Nikolas. The message is that this is not a flash in the pan. The market continues to remain as strong as it was at the end of last year, and TEN is ideally positioned to capture all the benefits moving forward. Thank you all for attending today's meeting, and best wishes.

Nikolas Tsakos, President and CEO

Thank you, and see you next week in New York. Thank you very much.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.