Earnings Call Transcript - TEN Q3 2020

Operator, Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Tsakos Energy Navigation Conference Call on the third quarter and nine months 2020 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’ll be a presentation followed by a question-and-answer session. I must advise you that this conference is being recorded today.

Nicolas Bornozis, Investor Relations Advisor

Thank you very much, and good morning to all of our participants. I’m Nicolas Bornozis. This morning, the company publicly released its financial results for the nine months and third quarter ended September 30, 2020. In case we do not have a copy of today’s earnings release, please call us at 212-661-7566, or e-mail us at ten@capitallink.com, and we will have a copy emailed to you right away. Please note that parallel to today’s conference call, there’s also a live audio and slides 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 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 concerned 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 on to Mr. Arapoglou, the Chairman of Tsakos Energy Navigation.

Efstratios Arapoglou, Chairman

Thank you, Nicolas. Good morning and good afternoon to all. Thank you for joining us on our call today, reporting third quarter and nine-month results. As you’ve seen, we experienced more than double increase year-on-year in operating income and positive quarterly results in such a weak market, while paying off all our obligations, replacing older tonnage with new accretive business, maintaining a comfortable cash position, redeeming our preferred issue, and maintaining a healthy dividend. All this demonstrates alertness and flexibility by our management and fully validates our strategy and positioning in the market that you’ve been hearing about all along. These attributes will certainly allow us to benefit from the anticipated gradual recovery in the market, so that we can continue offering our shareholders value going forward.

Nikolas Tsakos, President and CEO

Thank you, Chairman, and good morning to all of our participants. It has been, as described in the press release, a very strange and painful year on a personal basis for many of us. However, we have been able to maintain steady growth in taking TEN one step further to its goal, which is the full appreciation of its shareholders’ value and the company’s growing business. As the Chairman was kind enough to mention, with the help of our Board, our seafarers, our technical management team, and the whole Tsakos’ organization, we have been able to maintain an unprecedented high utilization in very difficult times. Operationally, the third quarter, which seasonally is a slow quarter, was actually influenced by operational barriers to conduct business as usual, caused by the pandemic. In the meantime, TEN was able to achieve its goals regardless of the circumstances. The most important part has been the modernization of the fleet. In the first nine months, we sold six of our older vessels and replaced them with four economically and environmentally designed vessels, all of them with accretive businesses. This has positively impacted our bottom line. We have been able to maintain our very high utilization, reduce debt, and prepare the company for a much more normalized environment. We are seeing significant signs in the other segments of the shipping business, with the dry cargo market having turned the corner, and a strong recovery from a very low starting point in the container sector. Since November, we are seeing similar signs of recovery in our business. Going forward, the supply, which is usually normalized, is at its lowest in the past 30 years, also resulting from substantial scrapping. We have already seen 380 tankers scrapped, which is about 7% of the total tonnage out there this year and it is growing.

George Saroglou, Chief Operating Officer

Thank you, Nikolas. Good morning to all of you joining our earnings call. We reported today a profitable third quarter and nine-month operation for 2020. It has been a roller coaster year for the tanker industry and the world because of the COVID-19 pandemic and its economic and social repercussions. We continue to successfully navigate the logistical and regulatory challenges of COVID-19 with no impact to our operations so far. Thank God. The shipping industry, because of the pandemic, lockdowns, border closures, and reduced airline capacity, has experienced significant challenges with crew changes. We have safely performed crew changes, but the problems with restrictions and logistics remain as different parts of the world navigate through the second wave of the pandemic. We anticipated the second wave and blunt all crew changes before it arrived, with no stoppages or disruption in our operations, and no cases of contamination for their sign-on crew and border vessels, fully supporting our charterers' trade requirements 24/7. It has been a Herculean task. I want to take the opportunity to thank our seafarers and onshore personnel for their hard work and professionalism during this unprecedented time. We will continue to work hard to normalize crew changes and bring seafarers safely back home to their families without disruption to the operational readiness and efficiency of the fleet. This has been and will continue to be our number one priority while the pandemic lasts and until we return to normal industry practices for crew changes. Let us now go to the slides of our presentation. On Slide 3, we see that since TEN’s inception in 1993, we have faced four major crises: the Far East crisis in 1999; the 9/11 crisis; the credit crisis of the Great Recession in 2008/2009; and now, the COVID-19 pandemic. But each time, thanks to our operating model, which is built to be crisis-resistant, we have come out stronger, growing from four modern vessels in 1993 to a pro forma fleet of 50 vessels with an average of 15% annual growth in deadweight tonnage over the four decades we have operated.

Paul Durham, Chief Financial Officer

Thank you, George. As expected, in addition to seasonal factors, the third quarter results were impacted by pandemic lockdowns, low oil demand, and the continuous draw on oil inventories globally. Nevertheless, third quarter operating income was $15 million and net income $1.4 million. For the nine months, operating income reached $117 million, which is double that of the prior third quarter, with net income of $54 million. In a weak market, revenue in the third quarter was still up 9% to $143 million, including a $4 million profit share, and 21% higher in the nine months. TEN had two vessels dry-docked in the third quarter and three in the nine months, yet we still achieved 93% utilization in the third quarter and 95% employment in the nine months. Daily TCE per vessel in the third quarter averaged nearly $21,000 and over $25,000 for the nine months, exceeding the average market price. Time charter has generated $86 million in the third quarter, enough to cover most expenses, while vessels operating mainly in the spot market generated a further $57 million before voyage expenses. Turning to OPEC state at $45 million, an average daily OPEC per vessel increased to just $7,900 due to extra dry dock costs and a weaker dollar, though it remained about $7,700 for the nine months. EBITDA in the third quarter amounted to $48 million, just 2% up from the prior third quarter due to the more difficult market, while nine-month EBITDA increased by 40% to $230 million. The third quarter finance costs totaled $13.5 million, down from $22 million in the prior third quarter due to reduced loan interest, with our cost of debt decreasing from over 4% to about 2% due to lower margins. Additionally, the average outstanding debt fell by about $79 million since the prior third quarter.

Nikolas Tsakos, President and CEO

Thank you, Paul. As you mentioned, we have been able to navigate through the turbulent waters of 2020 and place the company on the right track for future opportunities. With 40% of our fleet right now in the spot market and a significant part of our profit-sharing arrangements able to benefit from a higher market, we expect that as the beginning of the year finds the world in a more normalized state—both politically and health-wise—strong movement will continue. Recently, we have observed a significant uptick in the transatlantic trade, with the highest U.S. imports recorded since 2016. That is a solid indication, and we can see that MRs and LRs are actively trading. We are also noticing a gradual increase in demand, of course, with crude being supported by robust export appetites coming from Libya, which has been slow in the past but is now increasing its output by about a million barrels a day. This is intensifying competition with Russian exports, thus contributing to normalization of market dynamics. The supply is dwindling significantly, and I have not seen a situation like this for a long time. The confusion surrounding propulsion technology has created the lowest tankers and vessels supply for a generation. To put this in perspective, we currently see about 830 VLs in the water, some in storage, of which 220 are over 15 years old and only 75 vessels currently being built. That's less than 9% of VLs being constructed, which is a similar scenario across the board. I feel confident that better days are ahead for us, and as we strive to navigate these challenging times, we look forward to upcoming opportunities.

Randy Giveans, Analyst at Jefferies & Company

Giveans – it’s Randy Giveans at Jefferies. How are you?

Nikolas Tsakos, President and CEO

Hello, Randy, very well. Thank you.

Randy Giveans, Analyst at Jefferies & Company

Great, great. Doing well. So I guess a couple of questions. Can you provide maybe a little more color on that decision to repurchase the Series C preferreds? Do you plan on continuing to look at repurchasing other preferreds? Also, your cash balance is robust. You don’t really have any newbuildings. Your share price is at a steep discount to NAV. Any appetite for common share repurchases?

Nikolas Tsakos, President and CEO

Yes, as I mentioned, our first obligation has been to repurchase within the last 18 months. We have spent $100 million of our hard-earned cash to repurchase the two step-up perpetuals. That was our obligation.

Randy Giveans, Analyst at Jefferies & Company

Yes.

Nikolas Tsakos, President and CEO

As George mentioned, we have bought back 5% of the company since May, which is significant. We have established targets for buybacks while also maintaining our dividend at a significant yield of 5.25%. I think today, that number is closer to 7% with our last payment. In a world where negative returns are common, having a stable dividend is a positive achievement. We’re balancing the priority to reduce expensive paper, sustain our dividend, and support our common shares.

Randy Giveans, Analyst at Jefferies & Company

Great. All right. Yes, it sounds like a prudent strategy. Now looking at your fleet, can you provide an update on that LNG newbuilding option? It looks like you did not exercise that for later next year. And on the shuttle tanker orders, it looks like you placed one firm order. When do you have to decide on the additional two shuttle tankers?

Nikolas Tsakos, President and CEO

Well, at this point, due to the various issues I mentioned, including commercial, economic, and technical factors, there is very low demand for newbuildings. The shipyards are offering attractive propositions for potential clients. We believe that not taking our options was a strategic choice, allowing us to pursue technologically advanced ships and perhaps at a lesser price later.

Randy Giveans, Analyst at Jefferies & Company

Got it. That’s fair. Last question, on multiple calls in prior weeks, some crude players have weighed in, as have some product carrier players. Which market are you more bullish on? Obviously, you have both crude tankers and refined product tankers. Are you favoring one segment over another here in the next few months?

Nikolas Tsakos, President and CEO

First, I want to highlight that we are pleased to be diversified within the Energy segment. This has been our strategy for decades. We do not lean toward any specific market segment. I believe we are light on the VLCCs in the crude sector, which looks positive going forward. Both segments tend to move in intervals of a quarter or six months apart. We have noted positive movement in our product carriers, and we hope the crude sector will follow suit. There is less storage than there has been previously, which means more demand for oil as inventory decreases.

Randy Giveans, Analyst at Jefferies & Company

Yes, yes, that makes sense. All right. Well, that’s it for me. It looks like the markets are pleased with your responses today. Keep up the good work. Happy Thanksgiving.

Nikolas Tsakos, President and CEO

Thank you. Same to you.

Operator, Operator

Thank you. There are currently no further questions, sir. I’ll hand back to you for closing remarks.

Efstratios Arapoglou, Chairman

Once again, thank you all. Great call. Unfortunately, not many questions, but then the stock price shows that you’re all happy. We hope that our next call early next year will be even more successful than this one today. So happy Thanksgiving to everyone. Nikolas, would you like to say a few words?

Nikolas Tsakos, President and CEO

I hope the next presentation does not have to be conducted through a mask, which makes everything a bit blurry. We wish everybody a very happy Thanksgiving and a safe conclusion to this peculiar year. As the Chairman said, early next year, we hope to discuss much more exciting topics and a better, healthier outlook going forward. Thank you for your support. I believe we are out of the worst part and moving toward better times. Thank you very much. Stay safe. Happy Thanksgiving.

Paul Durham, Chief Financial Officer

Bye.

Operator, Operator

Thank you. That concludes our conference for today. Thank you for participating. You may all disconnect.