Earnings Call Transcript - TEN Q3 2022

Operator, Operator

Thank you for joining us today for the Tsakos Energy Navigation Conference Call to discuss the Third Quarter 2022 Financial Results. Present with us 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. I will now turn it over to Mr. Nicolas Bornozis, Chief President of Investor Relations Advisor to Tsakos Energy Navigation. Please proceed.

Nicolas Bornozis, Investor Relations Advisor

Thank you very much and good morning to all of our participants. I am Nicolas Bornozis of Investor Relations Advisor to Tsakos Energy Navigation. This morning, the company publicly released its financial results for the third quarter and 9 months ended September 30, 2022. In case you do not have a copy of today’s earnings release, please call us at 212-661-7566 or email us at ten@capitallink.com and we will have a copy for you e-mailed 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 the Chairman, I would like to remind everybody and congratulate them. This year the company is celebrating its 20th anniversary of listing on the New York Stock Exchange, and on December 9, we look forward to having with us in New York the management of TEN and Dr. Tsakos joining the Capital Link Invest in Greece Forum on December 9 in New York. And at this moment, I would like to pass the floor to Mr. Arapoglou, the Chairman of Tsakos Energy Navigation. Please go ahead, sir.

Takis Arapoglou, Chairman

Thank you, Nicolas. Good morning, good afternoon to all. Thank you for joining our call today. Real congratulations to management for historical second best quarterly performance, just below the highest ever in Q4 ‘07 of $52 million. So this is a great result. It proves once again that the TEN strategy model protects us in bad times, fully responds in good times and allows us to serve our obligations to pay dividends and generate cash for new business. We are very happy that this is now beginning to be reflected on the stock price. In particular, I’d like to congratulate management for the successful new business with another blue chip customer, Total, on the first deal ever, which was very successful. So without further ado, congratulations to Nikolas Tsakos and his team and I will offer the floor to him for the rest of the meeting. Thank you, Nikolas.

Nikolas Tsakos, President and CEO

Thank you, Chairman, and good morning, good afternoon to all of you. Thank you for being here and supporting and following TEN’s 20-year performance on the New York Stock Exchange, and next year will be our 30th anniversary since the company was established on the Oslo Stock Exchange. Hopefully, our share price will be above $30; we are hoping to be well above $20 in the remaining year. We worked on $10 or $20 in the next year; it’s going to be $10 or $30 at least, but thank you for bringing us where we are. As the Chairman said, this really was our best quarter in the last 15 years. We have not had such a high return since the fourth quarter of 2007. I believe that if things continue to go well — you know I am very conservative usually, but I hope that we will break the record, Paul. Paul is working on it already along with our chartering team. In the fourth quarter of this year, things look to be even stronger, and this is a time that the TEN model proves it works, because we can work at difficult times, but also much better times. We have, as George Saroglou is going to point out, this is our fifth crisis that we are coming out from for the tanker market, based on geopolitical, market-related, and economic events. Our aim is always to have sustainable growth. We are able to secure business at the right time and make sales of ships at the high times that will carry us on to the next cycle. Now, we are enjoying six-figure returns in revenue time charter revenues in a majority of our Aframax, Suezmax, and VLCC fleet, which hopefully will be portrayed in the fourth and first quarter. What gives me comfort is right now, we are in a situation where very little new building supply is coming in, so this good market should, perhaps not at these high levels as always, but it should be sustainable for at least the next three years. At TEN, we use the low markets to purchase new modern assets as we have done and then charter them out when the times are better for long-term sustainability to cover the cyclical markets that we might encounter. With this, I would like to ask George Saroglou not to take too much of his time to give us a little description of the last nine months and focus on the subsequent events, which we will also discuss during the question time.

George Saroglou, Chief Operating Officer

Thank you, Nikolas. Good morning to everyone participating in our earnings call today. Let’s proceed to the slides of our presentation. Starting with Slide 3, since TEN’s establishment in 1993, we have encountered five significant crises, and each time, the company has emerged stronger, attributed to our operating model. This instance is no different. We managed the COVID pandemic without any substantial impact on both fleet and onshore operations, and we are currently addressing the challenges presented by the war in Ukraine. The market fundamentals, along with a record low order book and an aging fleet, despite the ongoing conflict, were favorable for the tanker industry. The combination of self-imposed and mandated sanctions on Russian oil due to the war has served as an additional catalyst, driving freight rates higher as established trade routes were disrupted and voyage distances extended. A new round of European sanctions on oil imports from Russia is anticipated in December. The full impact will only be determined once details are available; however, it is expected to perpetuate the increase in voyage distances. Coupled with the usual winter factors such as weather delays and a surge in oil demand due to gas-to-oil switching resulting from elevated natural gas prices in Europe, freight rates in the tanker market are expected to remain strong throughout this winter and beyond. Russia will need to redirect its oil exports away from Europe. In Europe, we will need to compensate for the shortfall in coal imports from more distant sources, both of which will continue to generate significant ton-mile demand for tankers. With a record low order book and the reconfiguration of the global energy landscape for both crude and oil product trades, we anticipate that the tanker industry will maintain robust markets in the coming years. In Slide 4, we can see the fleet and its current employment status. Forty out of the 66 vessels, representing 61% of the fleet in operation, have market exposure, which is a mix of spot contracts for affreightment and time charters with profit sharing. Forty-four out of 66 vessels, or 67%, are under secured contracts with fixed time charters and time charters featuring profit sharing. This indicates that TEN is well-positioned to leverage the favorable tanker fundamentals. We have capitalized on the positive tanker market, as our earnings release today reflects. The fleet was ready, and this is a crucial element of our operating model. Year to date, we sold two vessels, a 2003-built Panamax tanker and a 2006-built Aframax tanker, while receiving three modern vessels. We took delivery of two new builds in January, including the LNG carrier TEN Energy, and in July, we received the shuttle tanker quarter. This month, we welcomed a new eco-friendly scrubber-fitted VLCC, renamed DS1, which translates to the Greek name for [indiscernible]. All three vessels are under long-term charter commitments. In fact, today we announced the initiation of a three-year time charter with profit sharing for DS1 with a significant oil major. Asset prices continue to rise. Management is actively assessing opportunities to sell some of the older vessels and replace them with newer, eco-friendly options. On the newbuilding front, we announced today a project with a major energy company to construct and time charter up to three shuttle tankers under minimum five-year to 15-year contracts. This is in addition to our existing plans for four newbuilding Aframax tankers, which we expect to start taking delivery of in the fourth quarter of 2023, and which are part of the company’s green ship dual fuel LNG powered initiatives. All vessels will come with long-term employment attached.

Paul Durham, Chief Financial Officer

Thank you, George. This is rather going to be sort of super numbers starting with net income of over $51 million, fully realizing our expectations for a strong quarter. In this quarter, our vessels reaped an extra $92 million revenue over the prior quarter three, resulting in a total revenue of $224 million, a 70% increase, mostly from spot earnings of $103 million as rates surged. In addition, our time charter vessels in quarter three, including $14 million profit share, generated over $120 million covering most of our operational expenses. The inflow of cash in the third quarter from our operations resulted in EBITDA of over $100 million compared to just $20 million in the previous third quarter. While in the nine-month period, EBITDA totaled $236 million. From the start of this year to the end of September, TEN’s revenue reached $590 million, while net income in the nine months amounted to over $130 million, with profit share of nearly $21 million. Average daily TCE exceeded $32,000, thanks to market conditions that allowed our fleet to achieve almost maximum utilization of 94% despite five vessels completing dry-dock in quarter three. The significant cash flow generated in the recent nine-month period and the abundant cash reserves generated as a consequence have placed us in a very favorable position. We anticipate these reserves will provide us with new opportunities, such as those created by the company over the past months, particularly the new LNG carrier, the shuttle tanker, and more recently the new VLCC. These newly acquired vessels are already operating on accretive time charters and are expected to generate considerable revenue in their lifetime. These are the kinds of opportunities that we believe will continue to generate accretive returns and secure our cash flow and, as George mentioned, help reduce our debt.

George Saroglou, Chief Operating Officer

Yes. Thank you, Paul. Reducing debt is always important, and we’ve been doing it quite drastically. We’re not only reducing debt from the highs of 2016-2017 by close to $470 million, but we’ve also bought back another $100 million of our preferred shares. What we have accomplished is a bigger fleet, a much more modern fleet with significantly fewer obligations. We’ve managed to do this through good times and bad times. Perhaps we’re one of the few companies out there that have never delayed or renegotiated any of our banking relationships. Instead, this is why we have always been offered very good and competitive terms in growing the business during difficult times. The picture that Paul and I are showing is a picture of a strong market, a sustainable market looking forward. This is what we want to do, but we always protect the company’s downside as we have done in the past, and we may need to further decrease our debt and increase our dividends to shareholders. With that in mind, it seems that the best is yet to come, at least for the foreseeable future. I expect that we’re happily positioned for the fourth quarter to be a record quarter with the numbers that we’re seeing today. Our spot from Axis — many of them are above the $100,000 a day level together with our Suezmaxes, which are significantly higher than they were in the third quarter and for sure the first nine months. I would now like to open the floor for any questions. Thank you.

Operator, Operator

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

Climent Molins, Analyst

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

Nikolas Tsakos, President and CEO

Well, as you know, we are a company in growth mode. We always want to ensure we have ample cash for growth. It’s not just growth for growth; it’s about growth for accretive transactions that will elevate our earnings above the $3, $4 level per share. Dividend is very important for us. We are strong believers in rewarding our shareholders, and the management is the largest shareholders here. Protecting a strong balance sheet is crucial, and over the years, we have always maintained strong liquidity because the only time you truly appreciate your liquidity is when you do not have it, and TEN has never been in that situation in 30 years. We will increase dividends when possible.

Climent Molins, Analyst

Alright. And regarding your financial position, are you comfortable with your current level of leverage or would you like to deleverage a bit, repurchasing preferred or repaying bank debt?

Nikolas Tsakos, President and CEO

Very good point. As I said, if you look on Slide 7, we have done dramatic deleveraging, considering that in 2016 the company did not have the quality of the fleet that we have today, or the valuation of the fleet, and we are determined to continue this. According to Paul, I think by 2024 we will be significantly below $1 billion in debt. Our aim is to be above $1 billion in market cap and significantly under $1 billion in debt. This is something we are actively working on. I think you brought up a very good point. We have one of our briefs due for repurchase at par in the next six months, and that would be something that we might use our excess liquidity for.

Climent Molins, Analyst

Thank you, Nikolas. That’s helpful. I will pass it over. Thank you for taking my questions.

Nikolas Tsakos, President and CEO

Thank you.

Operator, Operator

It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Nikolas Tsakos, President and CEO

Thank you very much. It’s good when the news is good; I believe we will receive fewer questions, which is understandable. Again, as I said, we are looking and for the first time, we feel significantly strong about a sustainable positive future for the tanker and energy industries. We are proud to grow the business with first-class clients and relationships. Thank you for your support in that. We hope that our next announcement, which would be in the first quarter coming up for the fourth quarter and first full year results, will feature even better news and prospects. Looking forward, we will be visiting New York in the next couple of weeks and look forward to meeting many of you face to face to talk about the industry and the company. From all of us here, I wish our American friends and everyone around the world, a Happy Thanksgiving filled with peace, and with you and your family. Thank you very much.

Operator, Operator

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

Nikolas Tsakos, President and CEO

Thank you.