Tsakos Energy Navigation Limited (TEN) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. And welcome to Tsakos Energy Navigation Conference Call on the Third Quarter 2017 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 and there will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today. And now, I pass the floor to Mr. Nicolas Bornozis, President of Capital Link, Investor Relations Advisor of Tsakos Energy Navigation. Please go ahead, sir.

Thank you very much and good morning to all of our participants. This is Nicolas Bornozis of Capital Link Investor Relations Advisor to Tsakos Energy Navigation. This morning the Company publicly released its financial results for the third quarter and nine months of 2017. In case if 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 email a copy to you right away. Please note that parallel 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 our presentation and webcast. Please note that the slides of the webcast will be available as an archive on the Company’s website 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 cautioned that such forward-looking statements involve risks and uncertainties, which may affect TEN’s business prospects and results of operations. Such risks are more fully disclosed in TEN’s filings with the Securities and Exchange Commission. Ladies and gentlemen, at this point, I would like to over the call to Mr. Takis Arapoglou, the Chairman of the Board of Tsakos Energy Navigation. Mr. Arapoglou, please go ahead, sir.

Thank you, Nicolas. Hello and good morning to everyone. Thank you for joining us on this call today. We're presenting today our nine months third quarter 2017 results, which showed despite continued weak market TEN remains profitable and more than capable of covering its expenses, its financial obligations and maintaining steady dividend payment track record. We have now successfully completed our largest ever newbuilding program and in line with strategy, we have more than two thirds of our fleet locked into long-term equity time charters with the substantial proportion of profit sharing arrangements. This secures over $1.3 billion of revenues for the next three years, providing a cover for all our obligations and enables us to capture any upside potential. We continue to maintain well over $200 million in cash and we use the opportunity of the weak market to accelerate special surveys for three of our vessels. So as it will be explained later, our results include approximately $2.5 million of special survey cost that normally we would have incurred at the late stage and would have been spread over a longer period. Lastly, management must again be congratulated for their successful efforts of further reducing fleet operating costs to best-in-class levels. Once again, congratulations to management and the team for perfectly executing our strategy, providing stability and positioning TEN to fully reap the benefits of the next market recovery, which we expect to start shortly. So, that’s it from me for now, and I pass on the floor to Mr. Nikolas Tsakos. Thank you very much.

Thank you, Chairman, and thank you for listening in our call. As the Chairman said, it has been -- the third quarter has been a difficult quarter. I would say, after last quarter has been behind us, we would say the worse is over for now at least, and we’re looking at the fourth quarter significant recovery, as parts of the industry and as of course as a company. As Mr. Arapoglou said, we took advantage of the very weak market of the third quarter to bring forward three of our surveys. We use the period to complete the largest expansion in sales TEN's 25 or 24 year history, very soon 25 year history. And we will be starting 2018 with a 30% increase in revenues just by the minimum results of the new ships that are coming into the fleet. In the same time, we pay a lot of attention and details. We try to keep operating expenses as low as possible and I think we have been successful to do that too, and we are proud that our G&A expenses must be one of the lowest in our peer group just starting a $1,000 or a little bit above for everything that has to do with running TEN. We’re looking optimistically at the future. We’re looking in discussion with our clients and a lot of accretive transactions. We have the opportunity to continuously charter out a bigger majority of our fleet, so we expect the remaining of 2017 and 2018 to be a much better year or a much better quarter than the third quarter. We are proud that we will have another profitable year in our very long history and maintain our dividend, and hopefully, going forward we will have chances driven increase it as time goes. So with that, I will ask George to describe what has happened in the last nine months in the quarter, and we will be available for questions after Paul Durham, our CFO gives us the figures.

Thank you, Nikolas. The Company reported today the results for the third quarter and nine months of 2017. The results for the third quarter were impacted by the seasonally soft summer months, three drydocking that the Company brought forward in order to take advantage of a stronger market we anticipate going forward, and the completion of the Company’s newbuilding program. For the nine months results, we reported profitability which we also expected for the full year 2017. Since the start of last year, TEN embarked in the biggest fleet expansion program of its history with 15 newbuilding vessels. The last of these newbuildings were delivered to the Company at the end of October. All 15 ordered vessels had medium to long-term employment attached to the first-class charters, ranging from minimum 2 to maximum 12 years, which will result to a 30% increase in revenues assuming only the minimum rates for 2018. The opening slide of this presentation shows the various growth phases in the Company’s history since inception. If we turn to Slide number 4, we see the key corporate highlight. We have currently an operating fleet of 65 vessels where 25 vessels have ice-class capabilities. After completing of our newbuilding program, TEN is well positioned to take advantage of a stronger freight market, which is ahead of us. The average age of the fleet is 7.6 years versus the average of 10.2 for the world tanker fleet. We have a balanced employment strategy that takes advantage of market peaks with profit sharing arrangements. In our press release today, we announced two more time charters for two vessels that we’re previously operating in the spot market. One charter is a fixed rate charter. The other has profit sharing arrangements. Currently, 51 vessels out of the 65 vessel operating fleet have secured employment with an average tenure of 2.5 years. The emphasis is on charter with profit sharing arrangements that enable the Company to take advantage spikes stronger freight market. Minimum contracted secured revenue of 1.3 billion with potential additional revenues from profit sharing arrangements. We have built a modern diversified fleet covering client transportation requirements in crude products, shuttle and LNG, and we have become the carrier of choice for many of the top oil majors, commodity traders and refiners. We have high utilization with the nine months figure being at 96.4%, which is almost like having full utilization. The next slide has a main financial highlight of our press release, which Paul will present in more detail. I just want to highlight the profitability for the nine months, the Company’s strong financial position and continued cost control that has reduced daily operating expenses with the help of the Company’s technical management. Slide 6 has basically the breakdown of the current 65 vessels fleet, 47 vessels are engaged in crude trading, 13 in products. We have three shuttle tankers and 2 LNG vessels. Next slide has the clients of the Company with all blue-chip names with from the Company is doing repeat business over the years. Thanks to the modern fleet, the quality of service and safety record of the enterprise fleet. From the next one, we list the strong secured coverage. We have 51 vessels out of the 65 vessels fleets, six under secured revenue contracts which is a combination of time charters, time charter with profit sharing and contractor of freighters. 34 vessels are on market related charters including spot, which secures this way that Company’s ability to immediately capture the market upside. The revenues expected from the vessels in the fleet with secured employment covers the Company’s annual financial obligations. Slide 9 shows the 15 newbuilding vessels that we delivered since 2016. All vessels are currently tied on medium-to long-term time charters. These vessels have now been fully integrated in the fleet and we expect them to contribute at least 30% increase in revenue from 2018 considering just a minimum base rate that some of these vessels have. On the left side of this slide, we see the breakeven across for the various vessel types that we operate in the Company. As you can see the cost base is low, and in addition to the low ship building cost, we must highlight the purchasing power of our technical managers Tsakos Columbia Shipmanagement and the stringent cost control by management in order to maintain a low OpEx average for the fleet while keeping a very high fleet utilization rate quarter-after-quarter. 78% of the fleet operating days are tied to secured revenue contracts that cover the Company’s annual obligation. In addition, the combination of time charter with profit sharing COAs and post charters guarantee the Company’s share of the market upside every time we had a spike or a sustained strong freight margin. This is what we see in the market. Global oil demand continues to grow above historical growth levels. In the last 25 years, the oil demand growth has averaged around 1.1 million barrels per day. The latest forecast for oil demand growth in 2017 is 1.5 million barrels per day. International energy agencies continue to revise upwards the oil demand figures, not just for this year, but also for the years to come. Also improved economic conditions in OECD countries and the low oil price environment continue to support strong demand in the United States and Europe and China where we see both consumer demand and stockpiling for strategic reserves and obviously India. On the supply side, the tanker order book is coming down, the bulk of the orders placed in past years have been delivered, and despite the short term headwinds which we have experienced in the second half of this year, longer term supply is managed. We should note that the big part of the existing tanker fleet is over 16 years. Implementation of new environmental regulations with high compliance cost and charter discrimination against older tonnage could lead to an increase in scrapping. We have already witnessed increased scrapping in the larger vessel categories. The dividend on Slide 13, we have announced today another dividend of $0.05 per share to be paid on December 29 to the shareholders of record on December 21, 2017. In total, since 2002, TEN has paid $10.61 in cash dividends for 457 million and this compares with a listing price in our IPO of $7.50. The average yield since the New York Stock Exchange listing in 2002 is 5.25% per annum. That concludes the operational part of our presentation. Paul will walk you through the financial highlights for the quarter and the nine months. Paul?

Thank you, George. It was expected that quarter three market would be poor than in quarter two for seasonal reasons. But other factors include the fleet overcapacity, refinery outages, high inventories and OPEC cuts. While for the nine months, operating income was $60 million and net income nearly $18 million. For the quarter, TED incurred a loss of $3.4 million due to the post spot market and as mentioned impact of port drydockings. With nine new vessels delivered since quarter three 2016, contributing to the $15 million increase in net revenue and with 70% of our operating base on time charter, TEN remains in a good protected position. During quarter three, 15 vessels were operating on spot voyages, some in trading areas which were specially hit by poor market conditions. Nevertheless, the average daily net revenue was $17,430 similar for the prior quarter three. For the nine months, the average daily net revenue was $19,140. The 43 vessels on time charter were able to generate enough revenue to cover virtually all the voyage operating overhead and finance cost of the whole fleet including spot vessels. Total operating expenses increased due to fleet additions especially as such vessel, build up store and supplies in their initial period, which are not treated as inventory but expense, However, the daily average OpEx per vessel in quarter three fell by 2%, and for the nine month period, primarily 3% future savings on the sales and maintenance and summary expenses. Daily overhead cost per vessel which includes management fees and G&A, fell to the low level of $1,085. Although, finance costs at $15.4 million were noticeably higher than in the previous quarter three. This was mainly due to the financing of the new vessels and partly to increases in dollar interest rates. However, this was down from quarter two, and as outstanding debt declines with scheduled repayments, we would expect finance costs to fall commensurately in future periods. In quarter three, there was $23 million of new debt on delivery of a new Aframax and scheduled repayment of $47 million. Refinancing of four vessels at competitive terms resulted in a net drawdown of $8 million. Net debt-to-capital was comfortable 51.5% at September 30. With the delivery of the last vessel in October, there was another drawdown of $23 million in quarter four and expected quarter four repayment was total $48 million. And this concludes my comments, and now I will hand the call back to Nikolas.

Thank you, Paul. And we look forward for a much better report in March and thank you very much. And with this, we would like to open the floor for any questions.

[Operator Instructions] And your first question from Stifel comes from the line of Ben Nolan. And your line is now open.

So I’ve a couple of capital questions. Obviously, you guys well are now finished with your CapEx program and that gives you a lot of option just to how to think about deploying capital going forward. You have made it pretty clear that any expansion is going to be project-oriented which I think makes sense. But away from that, first of all, I was curious if you guys -- if you might be able to update me on how much your debt repayment obligations are for 2018 and 2019? And associated with that, how do you think about paying additional debt? I mean you’re generating free cash flow. Is that -- how do you value that relative to sort of projects?

Paul will give you the nitty-gritty, but for us, as I said, we always are conservative in that. I think it’s going to be -- although conservative, it’s going to be dropping significantly down from here. We have already refinanced a lot of the obligations that we had for 2018 and '19. And I think a priority for us of course is the dividend. Dividend is important for us and if there is -- if there are funds in October then that debt repayment is another alternative. But here’s Paul on the more details.

Yes. For 2018, we’re looking at total scheduled repayments of around $180 million and in year after that about $150 million. And that pays on current existing debt, not taking into account the potential financing or whatever.

Okay. So actually could be a little lower than that I guess?

Yes.

And then secondly for me and this will do. But something that I don’t know that I never heard you address, but few of the -- a few of prefers that you done in past years become callable next year. They’re not too terribly big, but as you do begin to have free cash flow certainly depending on what the spot market allows. Is that something that you would consider doing as well perhaps calling back some of those prefers to reduce the cash flow component of those?

We have taken into consideration the refinancing or redemption of those preferred stocks over the next few years. As we see that we can comfortably redeem them. In any account, at the moment, we are on a ready to be small scale buying back where possible. We have been doing that and we can always revert back to buying back and gradually lowering the amount, total amount has been redeemed. But that's fairly comfortable given our full year’s forecast that we can manage to redeem and quite successfully.

Now your next question from Morgan Stanley comes from the line of Fotis Giannakoulis. And your line is now open sir.

Nick and Paul, you mentioned that focus on maintaining the dividend. Can you remind us, are there any potential covenants or that they can put any pressure on this dividend or shall we consider that this dividend is fixed and the current level invest is the absolute floor?

Well, as far as covenants, we do not have any restriction. I said that we expect that the third quarter looks to have been the worst being behind us with a poor third quarter for the whole industry. And our intention, as you know, we are very large shareholders manage, I mean very large shareholders close to 40% together with the Board. So dividend, we are, it’s very important for us. And as long as we can logically increase it, we will logically increase it and I will leave it to that.

And Nick, can you give us your outlook for the tanker market next year, I remember last time that we discussed you're probably the most optimistic for 2018 compared to your peers. And how has your outlook change, if it has changed at all compared to the previous quarter?

As you know, we live in a country with a lot of sum that makes us optimistic. Most of our peers are up north, so that's basically the reason. But joking apart, I don't think. I am optimistic for our company, because we took a lot of efforts for the Company in its largest growth problem. We built in 18 months 15 state-of-the-art vessels from shuttle tankers to LNGs, all of them successfully, all of them believe it or not with almost no delays, all of them chartered -- so I'm very optimistic for what we have in the book, which is I think as Paul mentioned $1.3 billion of income fixed going forward at the minimum level. So I think -- and as long as this part of the business according to our strategy is good enough to pay for all our re-obligation for the whole fleet including the spot vessels. If the market moves the way we believe it's going to move and I have a feeling that '18 and '19 for reasons that I think you are all aware, I mean you are much more analytical than I am. But we are looking at I believe today the tanker market we are where we were exactly year ago in the dry cargo market. And I know that Morgan Stanley -- all of you analyzed dry companies, and we were looking at case at $6,000 in the third quarter of 2016 was the weakest for the dry cargo and that the market gradually is what it is today at $25,000 on the case and has a gradual uptick. I believe we're going to be facing the similar situation for tankers. I mean we're do looking at small rays of hope or just listen that the Chinese are opening up their seaport refineries to import almost at 50% increase on the quarter, that's equivalent of 37% increase in Chinese crude imports from year-to-year that's huge. I mean for us, that with tankers China is a very big importer. We have a technological reason that are delaying or taking now the lot of oil tonnage. So in general, regardless of the summer month, we are optimistic and we have positioned the Company to take advantage. And I think the last quarter was a quarter which we actually used it in order to fill some of our special surveys.

Thank you, Nick. Sorry, one last question about given your outlook at your -- the cash flow that you have in the balance sheet. I was wondering which asset class looks more attractive for potential investment. I remember that you have mentioned in the past many times that the vessels, which are long-term charters is going to be your plan for expansion. Are these kind of deals available, and if you can also comment about the potential expansion in either LNG in LNG market that has seen a significant improvement in the fourth quarter or even in the shuttle tanker market that we saw some of your peers ordering additional buildings?

As I said, we’re quite diversified so we not look at our fleet. It has to make sense that with the customer, the duration of the contract and of courses the returns. And we are seeing right now in all the spectrum and it’s not very usual shipping that we are seeing long-term business; as when I say long-term or it's five years and over in all categories. So, we are looking in strategic relationships from VLCC to LNG were our two vessels are doing better and better every quarter with renewing them at higher levels. So I think there is a lot of appetite.

Thank you very much. [Operator Instructions] And now from Maxim, you have a question from James Jang. And your line is now open.

Can you just go over how the Handysizes performed during the quarter?

Paul, the Handysize.

Yes, if you look at our Handysize fleet, I think a big part of it is on time charter. But I think I would say we have still vessels that are on the spot market and most of them trade in Mediterranean area where we have outdated average going.

The average time charter equivalent during quarter -- during the nine months was about $11,000 to $12,000 per day. In the quarter, it was a little less than that.

For the vessels are on the spot.

Yes, the spot vessel, yes.

Of course, the vessels that you include the non-spot vessels, it will be a higher level. But the proposals on the spot was about this for the third quarter but they have significantly improved in the fourth quarter.

Okay. So the outlook is -- because I know the Handysize, I mean the global fleet there was really difficult in terms of the spot earnings right?

Yes.

So I was just wondering if like you said, so for the fourth quarter we should look at a nice increase or is there a steady increase?

We’re seeing 11 to 12 going up to around the 13 to 14. Today, it's 16 but on average I would say let’s say around 14. So, it will be a good increase.

Okay. And so, the next question is about I guess OpEx, it seems like extended production costs, a lot of players are okay with $60 to $65 oil. When you guys have mentioned previously that you guys are working with U.S. oil major on projects, are there any opportunities near-term to fix some of the spot beyond six Aframax is on some of these projects in the U.S.? Or I mean like what’s the plan for the short and medium term for these?

Well, we’re seeing higher and higher increase of exports from the U.S. I think we have seen a 200% increase in exports from year-to-year. Now, we are at about $1.3 million barrel a day of exports, which is unprecedented in the past. Of course then we have a decrease in inputs by 3%. So the Caribbean market, I think you are very correct to say that right now the Caribbean market because of the US exports is result of the Aframax market and we are enjoying this. We have the reconsideration of our Princess vessels in the Caribbean. And I think we’re close to the 20,000 barrels a day.

Okay. So any plans I guess fix these out on longer term charters? Or are you happy operating them on the spot market for now?

As you know, we have a reconsideration of six on long, Aframax on long-term charter. And we are enjoying the spot market with those ships because we do not want to disappear from the spot market, but otherwise you’ll lose the client. So, I think that phase we’re satisfied by keeping the mix the way it is.

And so last thing just on the macro side. How do you see the crude trade market shaping up for ‘18? If OPEC does, let’s say minimum they send the cuts for six months, alright, do you see more exports, long-haul exports developing to China and India? Or do you think that pricing is still going to win out and ton miles won’t expand as much?

Because we have seen a very big increase on long-haul cargoes based with the Aframax and the Suezmax in the last year. And we’re starting this because we have seen that a trade which was not very usual, the Black Sea, the Black Sea Russian cruise going to China and India on Suezmaxes and Aframaxes. In 2016, I think we were able to report 12 export cargoes. So far this year we have about 18. That has increased significantly the ton mile. So I think we’re expecting to see more and more of that trade.

And my last question is just on fleet renewal. DHT and Euronav, they’ve been selling off some of their older tonnage and I know that you guys have mentioned that you guys were looking at possibly selling some of the older tonnage that you have. What’s the plan right now? Are you still happy operating the older vessels, especially the Millennium or will you?

Yes, that's a very good point. I think we are at a stage I think hopefully within, within the side of the year will be announcing the sale of some of the older vessels that we have on the fleet. The Millennium has been a vessel, that carrier, we built it from scratch. We operated very successfully for us for almost 18 years now, which is on a storage business in Singapore, making $17,000 a day at very minimum -- and here actual special survey due is next autumn. So, we will be milking the ship to the business. We will be milking here up to here special survey, which will be next autumn. Of course, if there is an offer which is significantly above stock, we will consider selling it. But it’s been a very good -- but that will be the last -- that will the last [indiscernible].

Okay. So I have my special survey, we can assume that will be taken care of?

Yes, we will not pass the special survey.

And so, if that does happen, I mean, the asset price are still okay. They still look pretty good from a deal side. Would you look to acquire more tonnage? Not with the project in mind, but just in speculatively or are you guys just still expected to the strategy of project links asset acquisitions?

We are right now digesting a very big bite. We should increase the fleet bite by 30%. We will speak to project-to-project transactions right now.

Now from JP Morgan, we have a question from the line of Noah Parquette. And your line is now open sir.

I am just wondering, could you guys talks and yes, in any discussions yet with your counterparties for the longer term charters on how you’re going to need the 2020 mission regulations? And how you guys are just thinking about that?

I was worried nobody will ask the 2020 question which is the -- yes, now, thanks for bringing this up. And I think this is something that I think very few of owners, but much, much fewer of the shareholders have understood that we are growing into a head-on collision that will have very, very positive effects for rates. As soon as at the middle of 2019 and 2020, I think for those we’re not familiar, will shipping were tired because we have to deal with everyday is what we have to reduce our emissions from 3.5% on New Year day in 2020 down to 0.5%. So this is a Herculean task in Greek as we say, but there are solutions. So the oil companies are pushing owners to put scrappers on the ships. Owners have not reacted positively at all. They were hoping that by to-date 40% of the world fleet will have scrappers, less than 3% have scrappers today, and we’re talking about a couple of years that this has to happen. And we are in the tanker, with the happen to acquisition is that the 6 are not going to become refineries, because it’s not good for the environment and it’s not good for recommend factor. Refineries have to be on line. So we believe that there will be enough of fuel at the time. And if there is not, we can cover our obligation by slow steaming and I think this is the key, because as you know by slow steaming, there will be much more demand of utilizations will grow and will be much more demand and we hope this will help the rates. So we have calculated by reducing our speed by 25%, we can need our obligation of burning 0.5% of emissions. So I’m not a very technical person, but where we’re going and we expect this situation to create a lot of positive for the market.

And now from Credit Suisse your next question comes from the line of Gregory Lewis. And your line is now open, sir.

I wanted to dive a little bit into the winter season. Clearly as we look at rates, not really showing up in your in Aframax rates, which I know you guys have a lot churn in your spot. But I imagine you have a good understanding of how long your Voyage times are taking? And really what I'm wondering is between less daylight hours, between maybe some starting in climate weather. Has there started to be any delays building on any of your trades that you're involved in? Or is that at this point its business is usual?

Well, I think the large delays we had have had to do of course with the disruption we have because of the hurricanes in the Gulf three months ago, two months ago. I think right now we're almost up to refining capacity what it was at that period. And as the winter comes in, we're seeing I think the Black Sea getting heavy on vessels and which will affect positively in Mediterranean, which have been very poor. So regarding the Black Sea, we see 4 to 6 day delays, which means as a season demand usually the demands in the spot market is 12 for an Aframax, the demand is about double that. So that gives us with the earning for the fourth quarter.

Thank you very much indeed, sir. And as there are no further questions, I now pass the call back to you for closing remarks.

Well, thank you very much for your questions. As we said, we're looking forward to exciting 2018. TEN will be 25 years old at the time, the most seasoned publicly traded tanker company. And I hope we will have much better news to report in our next quarter. Our team is going to be visiting New York for Capital Link events in the couple of weeks. And we'll be very happy to see you and explain more about the Company and to wish you all the best for the holidays. Thank you very much.

Thank you very much indeed and with many thanks to our speakers today. That does conclude our conference. Thank you all for participating. You may now disconnect.