Earnings Call Transcript - TEN Q2 2023

Operator, Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Tsakos Energy Navigation Conference Call on the Second Quarter 2023 Financial Results. We have with us Mr. Takis Arapoglou, Chairman of the Board; Dr. 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. And now, I'll pass the floor over to Mr. 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

Thank you very much, and good morning to all of our participants. As the operator mentioned, I'm Nicolas Bornozis of Capital Link, Investor Relations Advisor to Tsakos Energy Navigation. Before I continue with the conference call, I would like to take this opportunity to express, on behalf of all of us, our condolences to the Tsakos family for the loss of Dr. Irene Saroglou-Tsakos, Nickolas' beloved mother, a distinguished figure in Greek shipping, who is also known as the Doctor of Shipping. Dr. Irene Saroglou-Tsakos co-founded the Tsakos Group and pioneered naval medicine, passionately authoring medical literature and caring for seafarers and their families. She received numerous prestigious tributes from institutions like the Academy of Athens, the Hellenic Foundation of Cardiology, Euroclassica and many others. And again, our condolences to the Tsakos family. And now, I will proceed with the conference call. This morning, the company publicly released its financial results for the second quarter and six months ended June 30, 2023. 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 send it to you 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. The conference call will follow the presentation slides, so 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, which 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 slide and slide presentation of the webcast contain 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. Takis Arapoglou, the Chairman of the Board, I would like, on a happier note, to say that we hope to have Dr. Tsakos with us in New York more often now that his two daughters will be attending Columbia University. And on another happy note, to remind everyone that Tsakos Energy Navigation is celebrating this year the 30th year of being a publicly listed company. I would say a unique and enviable track record, and we all know the company's commitment to creating shareholder value for the long term. And with that, I will pass the floor to Mr. Takis Arapoglou, the Chairman of the Board of Tsakos Energy Navigation.

Takis Arapoglou, Chairman of the Board

Thank you, Nicolas. Good morning, everyone, and thank you for joining our call today. As expected, we delivered a great set of results. The results, of course, benefit from continued strength in the market. Management needs to be thoroughly congratulated. They are making the best use of all opportunities in the spot and time charter business following the model. The model, of course, allows them to reward shareholders in good and bad times. So, in this framework, we've been repaying preferences consistently in the last couple of years, and we've continued paying dividends, returning value directly or indirectly to our shareholders. We feel that it is appropriate with this excess liquidity to continue refreshing the fleet, selling old stock and buying new state-of-the-art vessels. We hope the market will continue from here, and the model will continue to reward everyone. That's it for me. Congratulations to Nikolas Tsakos and the team, and I'm looking forward to continued success. Thank you. I'll pass the floor to Nikolas Tsakos.

Nikolas Tsakos, President and CEO

Thank you, Chairman, and good morning from a very sunny, humid, and warm New York. The good thing is the air conditioning is working full gear here, which is ideal for product carriers. The first six months have been an exciting period for energy and tanker shipping. I think we have positioned the company well to take advantage of perhaps similar or even better days going ahead since the supply and demand equation allows us to envision potentially favorable conditions. We see this happening in the marketplace as many of our major clients are looking to charter our ships, and they are securing charters two or three years down the road with very positive returns plus profit sharing. Additionally, transactions that occurred in the last week show that a relatively modern VLCC was chartered for a three-year period in excess of $50,000, close to $55,000 a day. This is the highest rate for VLCC charters that we've seen since 2008. The prospects are looking very good. As Nick Bornozis kindly said, we've been operating for 30 years, and we're planning to be around for many more years. The Tsakos Group is the major shareholder in this, and we are navigating towards safer and wealthier harbors as we progress. In the first six months, we capitalized on the timely sale of our first-generation vessels. We are replacing them now with environmentally friendly vessels as part of our initiative towards greener operations. I will hopefully be flying at the end of this month to Korea to start taking delivery of our dual-fuel vessels that can burn not only fuel oil but also gas and methanol. These are the ships we are looking to design and advance with our clients. We are maintaining a very conservative balance sheet, as always. TEN has never stopped paying a dividend in our 30-year tenure. Over the last 20 years, we've been listed on the New York Stock Exchange. During this time, we have made profits of $2.5 billion and distributed $530 million in common dividends, in addition to close to $800 million including our preferred dividends. The outlook for next year appears healthy. The supply-demand dynamics and the appetite of our clients look promising, and we believe our share price is still very undervalued. As Nick said, thank you very much for your kind wishes regarding paying for two college tuitions at an Ivy League University. I will have to work harder and be in New York more often to drive our share price higher. With that, I'll ask George to provide some background, and then we can open up for questions together, followed by Paul who will go over the financial details.

George Saroglou, Chief Operating Officer

Thank you, Nikolas. Good morning to all of you joining our earnings call today. 2023 marks our 30th anniversary as a public company. We reported this morning the unaudited financial results for the second quarter and first half of 2023. Assuming no change in market conditions during the latter part of the year, 2023 is likely to be as good, if not better, than 2022, which was the best year since the company's inception. Some key points: We continued to experience significant changes in trade flows due to ongoing crude and oil product movements resulting from Western sanctions on Russian seaborne oil. These changes appear to be permanent. Prior to the war in Ukraine, Europe was the largest client of Russian oil. However, as the war progresses, Russian oil has been replaced with oil from the United States, West Africa, Guyana, South America, and the Middle East, creating a positive ton-mile multiplier effect for tanker demand and freight rates. Simultaneously, new tanker builds are at an all-time low, with new orders accounting for less than 6% of the existing fleet. Many yards are now reporting availability from 2026. Furthermore, global oil demand continues to grow, boosted by the post-COVID global recovery, strong summer air travel, increased oil use in power generation, and surging petrochemical activity in China. The latest forecast from the International Energy Agency shows global oil demand growth at 2.2 million barrels per day this year, reaching a record 102.2 million barrels per day in 2023. Some global headwinds persist, including ongoing inflation, tightening global financial conditions, the war in Ukraine, and OPEC+ production cuts set to last until year-end. However, the global economy is expected to continue growing in '23 by approximately 3% and at the same rate next year. Oil demand is on the rise, and tanker fundamentals continue to favor a strong tanker market for the next two to three years. Moving to our presentation slides, since our inception in 1993, we have navigated through five major crises, each time emerging stronger due to our operating model. Recently, we came through the COVID-19 pandemic and continue to address challenges resulting from the war in Ukraine. The fundamentals, including a record low tanker order book, an aging fleet, and the post-COVID oil demand recovery even without the tragic war, have been positive for our industry. The Western sanctions and price cap imposed on Russian seaborne oil as a consequence of the war have added impetus to push freight rates higher as established trade routes have been disrupted and voyage distances have increased. Almost all Russian volumes are now being transported long-haul to India and China. Additionally, U.S. crude oil exports have risen from an average of approximately 3.3 million barrels per day last year to about 4.1 million barrels per day currently. Moving to Slide 4, we can see the company's fleet growth and capital market access since inception. We raised capital for growth not at market peaks, but during periods when asset prices were typically low. The blue boxes in this slide represent the company's common share offerings, while the red indicates the series of preferred share offerings since the company's New York Stock Exchange listing. Our first three preferred series totaling $188 million in par value, the Series B, C, and D, alongside a privately placed preferred instrument of $35 million initial par value, have all been fully redeemed, resulting in saving the company over $18 million annually in coupon payments. Slide 5 displays our current fleet and its employment. We maintain an operational fleet of 58 vessels, with 31 out of the 58 tankers, or 53% of the fleet, exposed to the market through various mechanisms such as spot contracts, contracts of affreightment, and time charters with profit sharing. Currently, 44 out of these 58 vessels, or 76%, are secured under fixed time charters. This positions TEN well to capture the positive tanker market fundamentals. Any divestment of older generation vessels, as we accomplished in the first quarter of this year with six 2005-built MRs and two 2006-built handysize product tankers, will be followed by investments in modern eco-friendly vessels. TEN has an existing newbuilding program for 10 tankers, which includes two shuttle tankers to be delivered in 2025; four dual-fuel Aframaxes with deliveries commencing in the latter half of this year; two eco-friendly scrubber-fitted Suezmaxes for delivery in 2025; and two scrubber-fitted MR tankers for delivery in early 2026. With the exception of the two Suezmaxes and two MRs, the rest of the newbuildings have been fixed forward against medium to long-term time charters. In the subsequent slide, we see our current and long-term clients, featuring a blue-chip customer base consisting of major global energy companies, refineries, and commodity traders, with Equinor currently topping the list as our largest charterer, holding nine vessels and four newbuildings all under long-term charters.

Paul Durham, Chief Financial Officer

Thank you, George. Today, we will review the six-month period alongside a quarterly overview. For the first six months ending in June, the company earned net income of $240 million, an increase of $106 million from the previous six months. Revenues totaled $483 million, reflecting a 32% increase over the prior half-year, with voyage expenses dropping by 24%, and vessel operating expenses also showing a decrease compared to last year's six months. During the first half, EBITDA surged to $356 million, which has bolstered the company's cash reserves. In the three months ending in June, the company registered a net income of $61 million, benefiting from a stronger U.S. economy compared to earlier months. Revenues for this period reached $220 million, a 2% increase, with operating expenses remaining consistent with prior levels. Time charter revenues for this quarter amounted to $137 million, while total spot revenue accounted for approximately $84 million. Our profit share also contributed $24 million to the quarter's performance. In this quarter, vessel voyage expenses decreased by 40% from the previous three-month period due to lower bunker costs. Total vessel operating expenses remained steady, as did depreciation and amortization compared to the previous year’s second quarter. In recent months, we have made significant strides in redeeming large amounts of preferred stocks, totaling over $107 million, which has already yielded substantial benefits to our bottom line that we expect will continue going forward. Alongside building new vessels and redeeming preferred shares, the company has effectively utilized in-house resources to restructure our organization and develop it in new directions. In the remaining months of this year, this will continue to be a major focus area for management. Lastly, to provide a more detailed account of our financials relating to both the three- and six-month periods, we will have an SEC filing shortly, which will furnish considerable additional information for our shareholders.

Nikolas Tsakos, President and CEO

I'm here. I was actually on mute listening to Paul's updates. I'll take over from here. The essence of what we have discussed is that we achieved $240 million in six months, and we hope this will increase significantly by year-end. Out of that, over $135 million has been allocated, in one way or another, to common share dividends, while the remaining was utilized in redeeming some expensive preferreds that were quite useful ten years ago when our company was expanding during tough times. Now that we can afford to redeem them, we are planning for a secure future. If we had distributed everything to common shareholders, it would have amounted to an unprecedented dividend of $4.50 per share based on a very inexpensive share price of around $20. However, we are committed to long-term growth. Had we pursued such strategy while maintaining our obligations to our preferreds, we would likely face challenges similar to those our peers have encountered. Our priority is to remain financially stable and navigate profitably into the future. I am pleased with our decisions thus far, and an additional $100 million of our net income has been invested in green dual-fuel vessels. Our project describes an ambitious and exciting newbuilding agenda moving forward. We are focused on creating a straightforward and easily manageable balance sheet, which should enable us to consider increasing dividends for common shareholders in the future. Since the end of June, we capitalized on the robust market conditions and increased our operations, securing eight new charters. Notably, we have also extended some charter contracts for our LNGs at significantly elevated rates. Moving forward, we expect pleasant surprises in our performance for the next nine months and the year. I anticipate this will be, without a doubt, another record year, and if predictions prove accurate, 2024 could be even better. We are navigating through much safer waters now. With that said, I would like to open the floor for any questions. Thank you.

Omar Nokta, Analyst

Thank you. Hey, guys, good morning, good afternoon. As always, an exciting update from the TEN team. I wanted to ask about your fleet makeup as it stands and how it could evolve going forward. Recently, your crude tanker exposure has risen due to the sale of older product tankers and also the acquisition of more modern crude vessels. You just ordered the two scrubber-fitted MRs. Is this the start of an expansion cycle for TEN to potentially rebalance your fleet?

Nikolas Tsakos, President and CEO

Yes, thank you very much, Omar. We made the timely decision to block sell a large number of our first-generation vessels, which served us extraordinarily well. When we made those investments about 15 years ago, we were the largest ice-class operator. We capitalized during that period, and those ships were sold nearly at the same price as we acquired them. In the first six months of the year, we sold eight vessels. Naturally, we do not want to exit the market. Hence, we are now focused on building dual-fuel and environmentally friendly vessels as replacements. We will not expend all our financial resources solely on fleet expansion; instead, we will continue to balance our investments and oversee fleet growth thoughtfully.

Omar Nokta, Analyst

Thank you. Additionally, you mentioned the dual-fuel capability, along with the Aframax dual-fuel LNG carriers. What is your stance on methanol regarding your product tankers? Moreover, would you consider ordering ammonia-ready ships, or would you prefer to wait until ammonia becomes a more feasible option?

Nikolas Tsakos, President and CEO

Well, this is the billion-dollar question. We are reminded of the decisions we had to make regarding COVID vaccines, where uncertainty prevailed over which was the best option. Thankfully, we are not facing a health crisis now. We are closely monitoring our clients' preferences. An ammonia-ready vessel represents a substantial investment, so we may consider it, but I am not entirely convinced that ammonia is indeed the future, primarily due to the risks it poses to seafarers and the challenges it presents. Moreover, I believe seafarers' unions may also have reservations about ammonia alternatives. Conversely, methanol, which sits between gas and today’s fuel, seems promising, and we are discussing options for its adoption.

Omar Nokta, Analyst

Thank you, Nik. That's insightful. One final question from my side — on the two MR newbuildings, how do you envision deploying those ships? Are you already negotiating contracts to place them on term charters ahead of delivery, or are these ships intended for opportunistic deployment, keeping them on the spot market unless contracted?

Nikolas Tsakos, President and CEO

Currently, we have 10 vessels in the building process, and out of the 10, six are already secured with long charters involving profit-sharing arrangements and very lucrative deals in place. Then, we have the Suezmaxes, which I am particularly excited about along with the MRs. We intend to maintain flexibility with these ships; there is pressure to charter some of them with profit-sharing arrangements against our clients who are reputable companies, while also keeping some in the spot market.

Climent Molins, Analyst

Good morning. Thank you for addressing my questions. I'd like to start with general and administrative expenses, which increased substantially quarter-over-quarter. Could you elaborate on the reasons behind this increase? How should we anticipate G&A evolving in the future? Should we expect it to revert back to the $7 million to $8 million range?

Nikolas Tsakos, President and CEO

Historically, our G&A costs have been among the lowest in the industry. However, this year, expenses have risen due to various factors, including discussions involving cybersecurity upgrades and investments in establishing a modern control room. To put it plainly, I believe we will return to previous levels after making these significant protective investments.

Climent Molins, Analyst

Thank you for the clarification. Regarding the dividend, you declared a special $0.40 distribution. How should we expect dividends to progress in the future? Do you plan to maintain a standard dividend while using special distributions as complements, or what is the overall strategy?

Nikolas Tsakos, President and CEO

This has always been our strategy. We will pay something in June and December as steady dividends. In good earnings periods, we will issue additional payouts like now. If you look back, we've consistently managed this through thick and thin. During even the toughest years when earnings were minimal, we maintained our dividend policy, understanding its importance to our shareholders for stability.

Climent Molins, Analyst

That makes sense. One last question — you have chosen not to renew the ATM, which is a logical decision given the significant discount your shares are trading at. Is there any inclination to consider a share repurchase?

Nikolas Tsakos, President and CEO

We will, but it's not our top priority at the moment. As we mentioned in our press release, our primary focus is reducing our debt, then addressing our perpetual preferreds. Moreover, our main concerns remain fleet replacement and increasing dividends. Only after these priorities are met would we contemplate share repurchases. Keep in mind, we have just 30 million shares outstanding, with management and the Tsakos family holding close to 40% of that. Therefore, we do not intend to reduce liquidity. We find it more prudent to reward shareholders through dividends rather than incentivize shareholders to sell. Thank you very much. It has been a pleasure announcing another record profit period. We're looking forward to maintaining and enhancing our results. I'd like to add that we didn’t emphasize it much, but Paul mentioned that we maintain control over our expenses, as that is critically important. During prosperous market periods, some neglect expenses to their detriment when markets turn sour, which means we are positioned advantageously. We aim to elevate our share price to appropriate levels. We believe it has considerable upward potential. We are not a company focused solely on quarterly results; we take a longer-term view in our strategies. Thank you for your continuous support. As Nicolas Bornozis stated earlier, we will be celebrating our 30th anniversary since entry into the Oslo Stock Exchange back in October of 1993. We have a presentation on the company's achievements planned next week in London and another set for New York on the actual date, along with follow-ups in Europe later in the month. Thank you very much, and I look forward to meeting with some of you and affirming the value of our shares.

Operator, Operator

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