Earnings Call Transcript - TEN Q3 2023

Operator, Operator

Thank you for standing by, ladies and gentlemen, and welcome to Tsakos Energy Navigation Conference Call on the Third 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 call is being recorded today. I will now pass the floor to Mr. Nicolas 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, and good morning to all of our participants. I am Nicolas Bornozis of Capital Link, Investor Relations Advisor to Tsakos Energy Navigation. This morning, the company publicly released its financial results for the nine months and third quarter ended September 30, 2023. In case you do not have a copy of today's earnings release, please call us at (212) 661-7566 or e-mail at ten, T-E-N, @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 are user controlled, meaning 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 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 at this moment, I would like to pass the floor to Mr. Arapoglou, the Chairman of Tsakos Energy Navigation. Mr. Arapoglou, please go ahead, sir.

Takis Arapoglou, Chairman

Thank you, Nicolas. Good morning, and good afternoon to all, and thank you for joining our third quarter results call today. Congratulations once again to Nikolas Tsakos and management for yet another set of excellent results. TEN is once again perfectly positioned to benefit from a buoyant market, a very strong market, despite a short slowdown earlier on. Typically, you have seen us gearing up, raising capital in weak markets in a countercyclical way to invest and position ourselves for better markets. And when better markets arrive, we generate healthy equity deleverage, sell all the tonnage, repay obligations, and invest for sustained growth in best-in-class state-of-the-art vessels. This model, successfully tested several times now, coupled with superior operating performance and efficiencies, allows us to maintain our unbroken record of paying dividends to reward our investors and to grow in a balanced and sustainable way. So once again, congratulations to Nikos Tsakos and his team. That's it for me for now, and I pass the floor to our CEO, Nikos Tsakos. Thank you.

Nikolas Tsakos, President and CEO

Thank you, Chairman, and good morning to everyone and good afternoon to those joining us from other parts of the world. The first nine months of 2023 have been an interesting period for our business, marked by development, growth, and fleet renewal. Our results for this period are strong and impressive, exceeding $8.20 per share in net income. We may be one of the few companies trading at twice our net income, and if this trend continues, we hope to achieve an even better valuation soon. The traditionally weaker third quarter performed as expected this year. Excluding the eight vessels added to our fleet earlier this year, our results match those of the previous year, with a time charter average in the third quarter around $31,000 per day. The decrease in net income from quarter to quarter is mainly due to the absence of the eight vessels and, as Paul will discuss, rising interest rates in the market. However, post-third quarter, the market has rebounded more strongly than anticipated, with every type of ship currently earning between $60,000 and $80,000 a day in the spot market. We have effectively diversified and positioned our fleet, with nearly 50% of vessels on the spot or spot-related contracts and the other half on high fixed employment. We capitalized on the strong market at the beginning of the year, rechartering, renewing, or agreeing to new charters for 26 vessels at an average duration of 2.5 years, all at rates more than 50% higher than previous earnings. Looking ahead, we anticipate strong performance for the rest of the year, which is why we have also increased our dividend. As major shareholders, we hope to maintain a similar situation moving forward into 2024. The market prospects appear positive; the newbuilding order book is quite small, one of the lowest I've seen in my 30-year career. Additionally, we face various challenges, including environmental regulatory changes that may require adjustments in shipping routes. Geopolitical issues, such as global warming affecting the Panama Canal and causing more vessels to navigate around the Cape, are also significant factors, increasing ton miles. Overall, we are optimistic about the near future. I would now like to ask Mr. Saroglou to provide additional details.

George Saroglou, Chief Operating Officer

Thank you, Nikos. Good morning to all of you joining our earnings call today. 2023, as you know, is the year we celebrate our 30th anniversary as a public company. This morning, we report the unaudited financial results for the third quarter and nine months of 2023. We have experienced the usual seasonal summer lull, but since September, the market rebounded. As we speak, we continue to enjoy a strong freight market as a result of robust global oil demand growth, positive tanker market fundamentals, changes in trade routes, and growth in ton-mile demand. What started last year continues. We experienced the largest change in trade flows due to ongoing crude and oil product movements as a result of Western sanctions on Russian seaborne oil. These changes appear to be permanent because before the war in Ukraine, Europe was the biggest client of Russian oil. As the world continues to evolve, Russia has been replaced with oil from the United States, West Africa, Guyana, Brazil, and the Middle East, creating a positive ton-mile multiplier effect for tanker demand and freight rates. At the same time, tanker new buildings continue to enjoy low single-digit growth numbers, with new orders being less than 7% of the existing fleet. Many yards report availability from 2026 onwards. Global oil demand continues to grow, boosted by the post-COVID global recovery and recently by strong summer air travel, increased oil used in power generation, and surging petrochemical activity, mainly in China. The latest November forecast from the International Energy Agency has revised global oil demand growth for 2023 from 2.2 million to 2.4 million barrels per day. As we are 1.5 months before the end of the year, these demand growth figures suggest that we will reach an all-time high for global oil demand in 2023 of 102 million barrels per day. There are also global headwinds like high inflation and tightening financial conditions, which could lead to higher interest rates for longer. Additionally, the war in Ukraine, the war in Gaza, OPEC+ production cuts, and voluntary cuts by Saudi Arabia on top of the initial production cuts pose challenges. However, the global economy is expected to continue growing in 2023. The forecast is for 3% growth and 2.9% in 2024, with oil demand expected to continue growing next year. This perspective is supported by both OPEC and the International Energy Agency, two main oil market prognosticators. Venezuela recently received a six-month relaxation of US sanctions and could be on a slow comeback road to increase production in international oil markets, while Latin America, specifically Guyana, Brazil, and Suriname, continues to expand their oil production as they develop offshore oilfields. Growth in the Atlantic Basin is beneficial as most of this oil is not just going to Europe but also to Asia, which has a multiplying effect on ton-mile growth. Additionally, tanker fundamentals continue to favor a strong tanker market for the next two to three years. The company took delivery in September and October of the company's first two dual-fuel Aframax tankers, opening a new chapter for TEN as the first two LNG-powered conventional tankers in a newbuilding order of four that TEN operates for a significant European oil concern against long-term charters. If we move to the slides of the presentation, starting with Slide 3, we see that since inception, we have faced five major crises, and each time the company emerged stronger thanks to its operating model. Recently, we navigated out of the COVID pandemic and continue to overcome the challenges posed by the geopolitical war in Ukraine and elsewhere. The fundamentals such as very low tanker order book, an aging fleet, and post-COVID oil demand recovery are positive for the tanker industry even without the tragic wars. The Western sanctions and price cap import on Russian seaborne oil as a result of the war served as an additional catalyst to propel freight rates higher, as long-established trade routes were disrupted and voyage distances elongated. Almost all of the Russian volumes are now flowing long haul to India and China. Meanwhile, US crude oil exports have increased from averaging about 3.8 million barrels per day last year to about 4.8 million barrels per day now. In Slide 4, we see the company's fleet growth and capital market access since inception. We raised capital for growth, not at the top of the market, but at times when asset prices are usually low. In this slide, the numbers in the blue boxes present the company's common share offerings, and in red, the series of preferred sales offerings since the company's New York Stock Exchange listing. The first three preferred series have totaled $188 million in par value, with Series B, C, and D, plus a privately placed preferred instrument of $35 million in initial par value, having been fully redeemed as we speak, saving the company more than $18 million per year in coupon payments for all these retired preferred series. In the next slide, we see the fleet and its current fleet employment. We have an operational fleet of 60 vessels, with 31 out of the 60 vessels, or 52% of the fleet in the water, having market exposure — a combination of spot and time charter profit sharing. 46 out of the 60 vessels, or 77%, are under secured contracts, fixed time charters and time charter with profit sharing. This means that TEN is well-positioned to continue capturing the positive tanker market fundamentals. Any divestment of older generation vessels, as we have done in the first quarter of the year with the six 2005-built MRs and the two 2006-built Handysize product tankers, will be replaced and have already been replaced with modern eco-friendly vessels. TEN currently has a newbuilding program of eight tankers consisting of two shuttle tankers for delivery in 2025, two remaining dual LNG-powered Aframaxes for delivery in the first quarter of 2024, two eco-friendly scrubber-fitted Suezmaxes for delivery in 2025, and two scrubber-fitted MR tankers for delivery in early 2026. Except for the two Suezmaxes that will be delivered after two years and the two MR tankers, the rest of the company’s new buildings have been fixed forward against medium to long-term time charters. Slide 6 presents the company’s current and long-term clients. As you see, we have a blue-chip customer base consisting of all major global energy companies, refineries, and commodity traders with Equinor currently topping the list as our largest charterer with 11 vessels and two new buildings, all on long-term time charters. The left side of Slide 7 illustrates the all-in breakeven cost for the various vessel types we operate within TEN. Our operating model is simple. We want to have our time charter vessels generate revenue to cover the company’s cash expenses, including vessel operating expenses, financing expenses, overheads, chartering costs, and commissions. Meanwhile, revenue from the spot trading vessels contributes to the profitability of the company. Fleet utilization for the nine months was 95.6%, which is a very strong number. Thanks to the profit-sharing element, for every $1,000 per day increase in spot rates, it has a positive $0.18 impact on annual EPS based on the number of TEN vessels that currently have exposure to the spot rates. Debt reduction is an integral part of the company’s capital allocation strategy. The company debt peaked in December 2016. Since then, we have repaid $355 million of debt and redeemed $211 million in three series of preferred shares, plus a privately placed preferred instrument. In Slide number 9, we see the historical performance of the company since 2004. I would like to highlight the revenue growth as the fleet increased during this period, the changes in EBITDA as the company navigated the ups and downs of the shipping market over this 20-year period, and the bottom-line profitability and strong cash reserves that we have maintained. Last year was a record year for the financial performance of TEN. We expect an equally strong performance for 2023. In addition to paying down debt, dividend continuity is important for common shareholders and management. TEN has always paid a dividend irrespective of the market cycle. Our dividend policy is semiannual. Following the June 2023 and October 2023 payments, the latter being a special dividend as we previously announced, we will pay a dividend of $0.30 per common share on December 20 to holders of record as of December 14, 2023. This distribution reflects the second regular semiannual payment in '23, in line with TEN’s semiannual dividend policy. Overall, for '23, the total dividend distribution of $1 per common share is four times the $0.25 per common share distributed to the company's shareholders in 2022. Following this year’s last dividend payment in December, the company will have distributed in excess of $528 million to its common shareholders since the New York Stock Exchange listing in 2002. If we included the dividends paid to holders of the company's preferred shares since 2013, the year the first Series B was issued, then TEN has returned in excess of $800 million to both common and preferred shareholders of the company. Global oil demand continues to grow despite financial and geopolitical headwinds. The International Energy Agency expects global oil demand to grow by approximately 2.4 million barrels per day, reaching 102 million barrels per day, a record number in 2023. Most of the growth is coming from the Asia Pacific region, mainly China. On the supply side, most of the growth this year is coming from non-OECD+ countries: Brazil, the USA, Guyana, Canada, Mexico, and Norway. As global oil demand continues to grow, let's look at the forecast for the supply of tankers. The order book as of October 23 stands at 356 tankers over the next three years, or 6.7%, which is one of the lowest numbers in the last 20 years. At the same time, a significant portion of the fleet, almost 40%, is over 15 years old. Additionally, 661 tankers, or 12.4%, are currently over 20 years. The next slide shows the scrapping activity since 2018. For this year, scrapping is low, but with upcoming regulations and the industry's first phases of decarbonization, and with more than 12.4% of the fleet over 20 years, we believe that scrapping is going to pick up. Overall, all these factors point to a very balanced tanker supply market for the next few years. With that, I will ask Paul to walk you through the financial highlights of the nine months of the year.

Paul Durham, Chief Financial Officer

Thank you, George. I'll just add a few words relating to the nine months ending in September in a year that has enjoyed considerable success for TEN and which continues to enjoy strong rates as the new year approaches. Net income for the nine-month period amounted to $272 million, while operating income for the nine years increased by 160%. EBITDA amounted to approximately $370 million adjusted, a significant increase of 90%. The average daily TCE for the nine months was over $37,000, up from $27,000 in the prior nine-month period, a substantial increase compared to the previous year, helped by profit-sharing arrangements providing nearly $60 million in nine months with almost every vessel fully employed apart from seven in dry dock. Voyage revenues amounted to nearly $700 million, a 13% increase over the prior year. Our overhead expenses per day per vessel continue to remain stable at only $1.6 million. Total finance costs in the nine-month period amounted to $73 million, an aberration due to interest rate hikes and inflationary causes. Finally, our debt to capital was about 49%, a comfortable ratio partially helped by scheduled loan repayments of $140 million and redeemed preferred shares totaling over $100 million. Our new buildings are on target to meet delivery and related financing has now been covered. Our current optimism relates partly to the forthcoming months and is supported by our significant cash reserves and a promising global decline in inflation. Now, I'll give the phone back to Nikos.

Nicolas Tsakos, President and CEO

Paul, thank you for your good news, and it's great to hear that everything is adding up positively. As mentioned by our President and our CFO, the current spot market is, I would say, at all-time strong highs across all segments. This is a surprising situation where both the smaller clean trade investments and those between Suezmax and Aframax are earning between $60,000 and $80,000 a day on the spot market. This gives us substantial comfort with our profit arrangements and our 50% spot exposure. Currently, with 35 vessels in spot-related markets, as George said, it's almost $0.20 for every $1,000; that’s a $0.20 increase to our bottom line. The result of $8.18 so far this year is very positive, and this will soon reflect in our share price. Additionally, this gives us more confidence to continue our dividend distributions. Looking back this year, other than the $30 million of dividend that will be paid, we have already returned in excess of $100 million, totaling $108 million in payments back to our preferred shareholders. This immediately translates to a bottom line saving of $9 million for next year. Overall, we have returned more than $140 million to our preferred and common shareholders during this period. Additionally, we are maintaining a very strong balance sheet that allows us to explore possibilities of expanding our fleet with more tonnage. We sold eight vessels and have taken delivery of two out of our ten environmentally-friendly newbuildings. Our prospects going forward remain strong, as our Chairman mentioned; we have a very low order book, increasing demand, and a strong fleet of between 250 to 300 vessels that are not participating in the day-to-day market with the major oil companies. New legislation is incoming that promotes slow steaming and navigation restrictions that increase ton-miles. Natural limitations, such as Panama Canal restrictions, compel many owners to take alternative routes that further increase ton miles. Therefore, I am confident that the fourth quarter of this year, as we celebrate our 30th year, is going to be another record year, similar to last year. The prospects for the next couple of years, considering the limited newbuilding supply, are positive. With that, I would like to open the floor in case anyone has specific questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question is from Sherif Elmaghrabi with BTIG. Please proceed with your question.

Sherif Elmaghrabi, Analyst

The first question, earlier this week, we saw some VLCCs go on multiyear time charters at above historical average rates. You've been active in the charter market. So I'm wondering if you're seeing much interest from charters for three-year plus contracts? Or is the opportunity there pretty thin?

Nikolas Tsakos, President and CEO

I would say, as we are speaking, my phone is actually ringing with charters receiving messages from our chartering department in our London office and Singapore, getting offers of this sort. There is a lot of appetite right now for three to five years on modern tonnage. Our two Suezmax's, which are being built for next year, are prime contenders for very strong interest from those ships. So yes, you're correct; there is significant appetite and expectation from major oil companies that we will see stronger rates. After the seasonal third quarter, which is typically the weakest quarter, we have seen a very strong market demand in all categories of ships. Typically, the clean market started strengthening about a month ago, and I believe the dirty market, meaning the larger ships, are now also following suit. Therefore, yes, there is considerable demand for three to five-year employment for quality operators and relatively modern tonnage.

Sherif Elmaghrabi, Analyst

On the clean side, a few Middle Eastern refineries have been ramping capacity and are projected to start ramping capacity this year and next. Has that started to shift trade flows for product tankers or are you not seeing a shift in volumes there yet?

Nikolas Tsakos, President and CEO

Yes, we are observing the larger capacity Middle Eastern and Far Eastern refineries filling those gaps. This is why you may have seen LR2s, which are not typically Far Eastern traders, earning very healthy rates, transporting crude from refineries to either Europe or to refineries back in the Middle East. Thank you.

Operator, Operator

Thank you. Our next question is from Omar Nokta with Jefferies. Please proceed with your question.

Omar Nokta, Analyst

Thank you. Just a couple for me. Perhaps just as a follow-up to the initial discussion on the time charters. I wanted to ask about fleet deployment from here. In your release, you mentioned charters being more active. Looking for long-term contracts, which Nik, you just highlighted again. But clearly, with long-term contracts, there's a sign of conviction that the market is going to remain elevated for some time. In terms of how you deploy your fleet from here, you mentioned having the 35 ships on the spot market. As we approach 2024 and beyond, how do you want to deploy the fleet? Do you prefer to stay spot exposed as you are currently? Or would you like to shift more towards index-linked or secure long-term contracts at elevated fixed rates?

Nikolas Tsakos, President and CEO

It depends on the quality of the offer. If we have a new charter from someone we do not have an extensive relationship with, we might consider longer employment. But currently, we are existing long-term business on our existing fleet because, as you said, the market is quite favorable. We have an excellent buffer with the ships we have right now, the 33 ships under time charter. We are always looking at pooling and profit-sharing arrangements, which we encourage.

Omar Nokta, Analyst

Thank you. Lastly, regarding the two MRs you ordered recently, what was the delivery timeline for those vessels which are set for 2026? Do you have options that came with those orders? If so, when do you need to exercise them?

Nikolas Tsakos, President and CEO

Yes. We have options for our ships, including in the first half of next year for dual-fuel versions of those ships. Our technical department is analyzing the situation alongside our clients.

Omar Nokta, Analyst

Thank you for the clarification. That's it for me. I’ll turn it over.

Nikolas Tsakos, President and CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from Climent Molins with Value Investor's Edge. Please proceed with your question.

Climent Molins, Analyst

Good morning or afternoon. Thanks for taking my questions. I wanted to start by asking about your fleet renewal efforts. You have been clear on your intention to continue to sell older vessels and reinvest proceeds into modern tonnage. However, there haven't been many transactions on the eco side of the fleet. Do you expect liquidity to increase going forward? Secondly, how do you perceive the trade-off between high asset pricing and the need to renew the fleet?

Nikolas Tsakos, President and CEO

That's a very good question because what you usually see in shipping is that you should not be selling at the same time that you are buying. Your point is very well-timed. However, we are a client-driven organization; we are more of an industrial play owner. We have sold at least eight vessels since the beginning of the year at very healthy prices. Instead of buying vessels in the spot market, we chose to order our future with very modern ships. As long as we have strong employment covers for the vessels we buy with very good returns going forward and their amortization, we will continue this model of selling older vessels at this market and seeking good quality, perhaps dual-fuel, alternatives that will reduce our rate profile and footprint significantly.

Climent Molins, Analyst

That’s helpful. Thank you. Regarding operating expenses on a per day basis, which saw a significant quarter-over-quarter increase, should we expect them to trend closer to $9,000 or $9,500 per day? And what were the main drivers behind the increase?

Nikolas Tsakos, President and CEO

Yes. Paul can provide further details, but I'll give you the basic ideas. We are currently operating a fleet of much larger vessels. Last year, our vessels included eight vessels of the Handysize class that brought our daily operating expenses lower. This year, we had the dry docking of our larger ships in Portugal. Naturally, since we are operating larger vessels, the average will be higher, but I think it will normalize within the year.

Climent Molins, Analyst

Makes sense. That's all from me. Thank you for your answers.

Nikolas Tsakos, President and CEO

Thank you.

Operator, Operator

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

Nikolas Tsakos, President and CEO

First of all, thank you very much for joining us. I know you're all busy wrapping up for an exciting and hopefully peaceful Thanksgiving, and we appreciate your time today. We look forward to reporting even better results in early in the first quarter. I would also like to remind our shareholders about the Christmas holiday dividend we will be announcing on December 20. With that, I will ask our Chairman, Takis, for your closing remarks, and wish everyone a very happy Thanksgiving.

Takis Arapoglou, Chairman

Thank you, Nikos. As you mentioned, in view of the continued buoyant market, we expect very strong results for the year and equally strong results going forward. I hope that all the good prospects described today will soon be reflected in our stock price. Best wishes for a happy Thanksgiving to all. Thank you.

Operator, Operator

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