Earnings Call Transcript - TEN Q2 2022

Operator, Operator

Thank you for standing by. Ladies and gentlemen, welcome to the Tsakos Energy Navigation Conference Call on the Second 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. I must advise you that this conference is being recorded today. I will now pass the floor over to Mr. Bornozis, President of Capital Link, Investor Relations Advisor of Tsakos Energy Navigation. Please go ahead, sir.

Nicolas Bornozis, Investor Relations Advisor

Thank you very much. I'm Nicolas Bornozis, Investor Relations Advisor to Tsakos Energy Navigation. This morning, the company publicly released its financial results for the second 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 a copy to you by email. Please note that parallel to today's conference call, there's 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. 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. TEN is celebrating this year its 20th anniversary for its listing on the New York Stock Exchange. During this 20-year period, the company has an enviable track record of uninterrupted dividend payments, regardless of market cycles. Including the current dividend, TEN has distributed $0.5 billion in dividends to its shareholders. 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. Good morning, and good afternoon to all. Thank you for joining us today for our second quarter and six months 2022 results presentation. Once again, our results and their evolution throughout the first half of the year justify our business model. In bad markets, it offers stability and downside protection and allows us to perform far better than all of our peers. We continue to pay dividends and all our obligations uninterruptedly, maintaining impeccable relationships with our banks, reducing debt, and raising capital cost cyclically, among other things. In good markets, the model allows us to immediately benefit from market recovery, as is the case now. This, in turn, allows us to continue the previously mentioned actions to a higher degree and pay substantially higher dividends, rewarding our shareholders in line with our increased profitability. This is the model; this is how it works. It has been tested many times, and congratulations once again to Nikolas Tsakos and his team for these excellent results and for a perfectly designed and executed strategy. Thank you. Nikolas Tsakos, over to you.

Nikolas Tsakos, President and CEO

Chairman, thank you very much, and first of all, we would like to deliver our deep condolences to all our UK, British investors, friends, and colleagues on the loss of Queen Elizabeth II. We hope that her memory will remain with all of us, and long live the King, England. So please accept our condolences to all our British and Commonwealth friends. Thank you, Chairman, for your kind words. Our predictions in the last couple of quarters were that the market, due to exiting the pandemic and returning to normality along with a very low and further shrinking order book of ships, would turn. The unexpected events at least for us, of March and February 2022 have actually surpassed our expectations and our forecast. The geopolitical events that dislocated the energy routes have given us many, many more ton miles—perhaps more than the current tanker fleet can actually cope with, and that's why we are seeing rates increase since the first quarter and into the second quarter. I would say, the best according to rates is yet to come in the third and fourth quarters. So the first six months of the year have been positive as we were expecting, but we believe the second half will be even stronger. With this, I would like George to give us an update on what the company has been doing, and then Paul will take us through the numbers. Thank you.

George Saroglou, Chief Operating Officer

Thanks, Nikolas. Good morning to all of you joining our earnings call today. Let's go to the slides of our presentation, starting with Slide #3. Since inception in 1993, TEN has faced five major crises, and each time the company has come out stronger thanks to its countercyclical operating model. This time is no exception. When we started the year, it appeared that we were finally near the end of the COVID pandemic, and we expected the post-COVID oil demand recovery to materialize gradually through the year. However, since the end of February, we are facing another crisis: a war in Europe with tragic loss of human life. This war has created new challenges for the world and our industry. Voluntary self-imposed as well as numerous strict western sanctions against Russia, a major commodity exporter, changed pre-war trading routes for all commodities, including oil, oil products, and natural gas. Europe started substituting its short-haul Russian crude oil imports with longer-haul barrels from the United States, Brazil, West Africa, and the Middle East, significantly increasing ton miles for European crude oil imports. Europe’s sanction plan includes stopping all Russian crude oil imports from December. Substituting these Russian barrels creates an even higher multiplying effect on ton mile growth, which should keep the good freight market going stronger for longer. At the same time, Russia is seeking alternative customers for its crude oil output, most likely in Asia, particularly China and India. India recently reported that the import mix of Russian barrels increased from 2% pre-war to 12% currently. Furthermore, European oil product imports, such as diesel, which Russia also used to export, will stop going to Europe from February of next year and will also need to be replaced with imports from the U.S. Gulf, India, the Middle East, or other locations, adding to ton mile growth and enhancing the prospects for product tankers. We are already benefiting from this trend with our product fleet. With the low order book and the redesign of the global energy map for both crude and oil product trades, we expect the tanker industry to experience a sustained strong market. In Slide 4, we present the fleet’s current employment profile. Forty out of 70 vessels in the pro forma fleet, or 55% to 57% of the fleet, has market exposure through a combination of spot, contract offer affreightment, and time charters with profit sharing. Meanwhile, 45 out of the 70 vessels, or 64%, is secured under contracts, fixed time charters, and time charters with profit sharing and contract offer affreightment. This positioning means that TEN is well-positioned to capture the prevailing positive tanker market fundamentals. Fleet modernity is key to our operating model. In August, we sold a 2003-built Panamax tanker. Asset prices are increasing, and there is renewed interest for tankers regardless of rates for some buyers. Management is actively exploring opportunities to divest some of its earlier generation vessels and replace them with more modern, eco-friendly vessels. We still have four remaining new buildings, which we expect to take delivery of in the fourth quarter of next year. These are part of our green ship dual fuel LNG Aframax orders, and we have a 2020-built scrubber-fitted South Korean-built VLCC that we expect to take delivery of in November. All four new building vessels come with long-term employment attached. In the next slide, we present the breakeven cost for various vessel types we operate. We have maintained a low cost base. During the year, revenue generated from time charter contracts was sufficient to cover the company's costs, including vessel operating expenses, finance expenses, overheads, charter imports, and commissions. We must also highlight the purchasing power of time charter management and the continuous cost control efforts by management to maintain low operating expenses for the fleet while keeping high fleet utilization year after year, quarter after quarter. Despite nine special surveys during the first half of the year, four of which were ahead of scheduling in preparation for an anticipated market upturn, we achieved an overall utilization in excess of 93% for the fleet. Thanks to the profit sharing element, a cornerstone of TEN's chartering strategy, for every $1,000 increase in spot rate, we see a positive $0.28 impact on annual earnings per share based on the number of vessels currently exposed to spot rates. Debt reduction, shown in Slide 6, is also important in the company's capital allocation strategy. The company's debt peaked in December of 2017, and since then, we have repaid $450 million of debt and repurchased $100 million in two series of stepped-up preferred shares. In addition to paying down debt, dividend continuity, as indicated in Slide 7, is also crucial for common shareholders and management. TEN has always paid dividends irrespective of market cyclicality. Today, we announce a dividend of $0.15 per common share to be paid in December, representing a 50% increase from our July 10 share dividend of $0.10. The company has paid $0.5 billion in dividends since its New York Stock Exchange listing in 2002, or about $25 million per year. Global oil demand continues to recover, despite lockdowns in China due to their strict COVID-zero policy and negative global economic sentiment stemming from the war in Ukraine along with higher unexpected inflation worldwide. Despite these headwinds, global oil demand in the second half is expected to exceed pre-pandemic levels. Large-scale switching from natural gas to oil for power generation in Europe and the Middle East due to record natural gas and electricity prices is providing additional support. For the year, oil demand is expected to grow by 2 million barrels, and next year, we expect growth to be another 2.1 million barrels. Developed economies lead the oil demand expansion this year, but most of the demand growth next year will come from non-OECD countries. On the supply side, OPEC-plus producers restored all pandemic production cuts in their August meeting. Meanwhile, global oil stocks are falling, currently around 275 million barrels below the five-year averages. Non-OPEC production is set to rise this year and next. As global oil demand continues to rebound, let's look at the forecast for the supply of tankers in Slide 9. The order book stands at just over 4%, or 234 tankers, over the next three years, which is the lowest level we've seen in at least the last 30 years. At the same time, a large portion of the fleet, almost 1,800 vessels or 73%, is over 15 years old. Additionally, 9% of the fleet or almost 500 tankers are over 20 years old. As shown in the next slide, 2018 was one of the highest scrapping years on record with 21 million deadweight tons removed. Last year, we saw an acceleration of scrapping in the second half and ended with 14.5 million deadweight tons removed. As of August, 65 vessels have been removed totaling 5.2 million deadweight tons. Scrap prices continue to hover around high levels, currently around $600 per light ton. With more environmental regulations on the horizon and 9% of the global fleet older than 20 years, we expect scrapping activity to remain elevated, which will help balance fleet supply going forward. To summarize, oil demand is reaching and exceeding pre-pandemic levels in the second half of this year. On the supply side, OPEC-plus has restored pandemic production cuts, while non-OPEC production is set to rise, bringing more cargo to the market. At a time when global oil stocks are below the five-year levels and demand is rising above pre-COVID levels, the war in Ukraine is reshaping the global energy map, significantly increasing ton mile growth for both crude and product tankers. The tanker order book to current fleet ratio is at historical low levels, and a significant part of the fleet is approaching the phase-out age, indicating a tighter supply in the next 18 to 24 months. TEN has a modern fleet and has already initiated the transition towards the next generation of green vessels. We have a well-positioned operating fleet to capture the strong freight market, continue to reduce debt, and maintain strong banking relationships that will enable the company to seize any forthcoming opportunities. With that, I will ask Paul to walk us through the financial highlights of the second quarter and the first half. Paul?

Paul Durham, Chief Financial Officer

Thank you, George. In the second quarter, TEN earned a net income of just over $46 million after generating voyage revenue exceeding $217 million, which was $80 million more than in the prior second quarter—a 60% increase in revenues. Operating income in the second quarter amounted to over $57.4 million, representing a positive turnaround of $70 million from the prior second quarter. While our time charter vessels generated over $97 million, the market environment, affected by geopolitical issues since February, allowed our spot vessels to add a further $120 million to total revenue. This, in turn, provided over $91 million of EBITDA—a threefold increase. The six-month performance was equally impressive, with EBITDA reaching over $133 million, double the previous EBITDA value, while the company achieved a net income of $51.7 million over six months. Our fleet in the second quarter enjoyed an impressive utilization of 93.6%, partly due to a reduction in the number of dry dockings during this quarter, with only three vessels dry docked in the second quarter. Daily TCE per vessel in the second quarter averaged close to $29,300, a 70% increase from the prior second quarter, while for the six-month period, the daily TCE averaged $24,500. Voyage expenses, including fuel costs, have increased due to rising oil prices caused by market conditions relating to energy supplies throughout Europe. However, total operating expenses remained fairly stable, with an increase of about 1%, nudging average daily operating expenses per vessel to about $8,300, partly due to a modest fleet increase. The six-month daily operating expenses also remained at $8,000—aided by a stronger dollar. Depreciation fell by $2 million due to the value reductions last year of certain vessels, offset by a similar amount of deferred amortization. In the second quarter, finance costs remained relatively low at just $11 million, although rising interest rates pushed finance costs up to a manageable level, with the company utilizing interest rate swaps to cover much of its exposure. In recent months, we've seen our cash resources increase substantially, placing TEN in a much better position than at the start of the year. This has allowed us to comfortably take delivery of a new shuttle tanker and to facilitate the construction of four new Aframaxes, along with signing agreements for acquiring a VLCC. All these developments should significantly alter the fleet's age profile and generate new revenue sources. Following our usual pattern for financing new acquisitions, much of the financing for these vessels, all of which come with employment contracts, will derive from our own resources, with our usual kind lenders likely participating in financing. However, new financing may impact our future total outstanding bank debt, which has recently been reduced by $17 million. We estimate that overall debt reduction will continue, if not accelerate, given our current cash resources, which we believe will please our lenders as will the recent indications of increasing tanker values, which would please us too if this trend continues. Indeed, we do expect a strong remainder of the year, hopefully within a peaceful environment. Now, I’ll pass the call back to Nicolas.

Nicolas Bornozis, Investor Relations Advisor

Thank you for the good news, and hopefully, we can report better news in the November quarter—or at least equally good. With this, I would like to open the floor for any questions. Thank you very much.

Operator, Operator

Our first question is from Ben Nolan with Stifel.

Ben Nolan, Analyst

I guess my first question relates to asset prices, which you guys have just been discussing a bit. Obviously, asset prices are a lot higher, both for secondhand and new builds. With a few exceptions, most of the growth recently has come through the new building market. Can you maybe just talk through your appetite there and how you feel about ordering ships, given how much of an increase there's been in the cost of doing so?

Nikolas Tsakos, President and CEO

Thank you. I believe our timing so far has been quite on target. We always strive to maintain a good cash position, and as the Chairman stated, we maintain very close relationships with our financiers so we can act when prices are lower. In line with that, we have initiated our green ship initiative, ordering dual fuel vessels. I would say that during the most challenging pricing times a year and a half ago, we ordered our LNG and shuttle tankers. As a result, we have a significant profit from our investments—and we will enjoy a good market with low operating costs. As Georgios Saroglou, our COO, mentioned, we are aware of the record low order book that we see now. So we believe that the earning capacity of our existing fleet will remain relatively strong for the next couple of years. There aren't enough vessels right now, and we expect that some ships with high scrap values will exit the market. Regarding pricing, we will only be considering dual fuel vessels going forward, as we have indicated in prior calls. The values of these ships are expected to increase due to inflation, and we will look to collaborate with one of our clients as we've done in previous agreements. Our profit model will continue to cover all our obligations while providing us with a modest profit and savings above that with major oil and end-users.

Ben Nolan, Analyst

Okay. I appreciate the color there. My second question relates to the ATM. I know you guys sold just over $4 million, almost $5 million worth of shares on the ATM during the second quarter, as indicated in the release. As the share price is now significantly higher than it had been, can you share your thoughts on that? Are you making so much more money that you don't need the ATM? It would seem unlikely considering how much you've issued, but conversely, the cost of capital is now much improved. How are you thinking about using that going forward?

Nikolas Tsakos, President and CEO

That was effectively completing a program the Board of Directors authorized in the second quarter. I think that is why we executed this small amount—to handle some housekeeping on our side. As you've noticed, there is significant daily cash flow building as we speak, so we will not be using the program in a significant manner going forward, based on our current perspective.

Operator, Operator

We will take a brief pause to see if there are any final questions.

Nikolas Tsakos, President and CEO

Thank you. Well, I guess when we have good news, you don't need any more news. I think that is a good sign. Again, I would like to thank all our long-term shareholders for supporting the company. We have been here quarter after quarter maintaining stability through the storms that we have faced. As George mentioned, we've been through five major crises, and every time the company has emerged stronger. I think a year and a bit ago in one of those calls, we indicated that there was a storm happening out there, but we were navigating the ship steadily and looking for opportunities on the other side. It seems that we are out of the storm, and we can see the horizon now. I believe there is more good news to come. I have a strong feeling from our clients’ appetite to obtain quality management and quality ships. Our model, as the Chairman stated, hasn’t changed. We maintain a long-term view of our trajectory. With a mix of our spot and time charter employment, we are confident in our ability to meet our obligations while also providing dividends, even in challenging market conditions. A few companies can boast such a resilient model, and when conditions are favorable, we are poised to capitalize on market opportunities immediately, as evidenced in the last couple of quarters. Additionally, we see close to $0.30 for every $1,000 increase in the market rate, contributing positively to our bottom line, as Paul mentioned. With that, we hope to report similarly positive or better news for the nine months. We also acknowledge the impact of expenses due to inflation. Our technical managers and suppliers are working diligently to keep our operating expenses reasonable and under budget. We’ve taken proactive measures by addressing the dry-docking schedules, which have allowed us to place nine vessels in the market that were previously set for dry-docking in 2023. Although this was a tough decision at the time, these ships are now adding considerable value, which is why we anticipate improved results for the remainder of the year. I want to thank all our associates, our crews, and the brave seafarers who, as they emerged from a pandemic, faced the challenging situation brought on by war. Many of our ships were caught in a unique situation involving both Russia and Ukraine, and our crews managed to coexist professionally, ensuring that the company’s interests remained above all else. Lastly, I wish to extend my birthday greetings to General Manager Mr. Hadi Michael, who keeps us in line here. Best wishes to all, and I hope the remaining year is healthy, prosperous, and peaceful for everyone. Thank you very much.