Tsakos Energy Navigation Limited (TEN) Q2 2019 Earnings Report, Transcript and Summary

Thank you for standing by, ladies and gentlemen, and welcome to Tsakos Energy Navigation Conference Call on the Second Quarter 2019 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 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 Relation Adviser of Tsakos Energy Navigation. Please go ahead, sir.

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 second quarter and six months period of 2019. 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 for you e-mailed right away.Please note that parallel to today's conference call, there is also a live audio and slide webcast, which can be accessed on the company's website on the front page at www.tenn.gr.The conference call will follow the presentation slides, so please we urge you to access the presentation slides on the company's website. Please note that the slides of the webcast presentation will be available and archived on the website of the company after the conference call. Also, please note that the slides of the webcast presentation are user controlled, and that means that by clicking on the proper button, you can move to the next or to the previous slide on your own.At this 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.And now, I will turn the floor over to Mr. Takis Arapoglou, the Chairman of the Board of Tsakos Energy Navigation. Mr. Arapoglou, please go ahead, sir.

Thank you, Nicolas. Good morning, everyone. Thank you for joining our call today. I'd say very positive performance one of -- perhaps only two positive performances in the sector, if I'm not mistaken, with over 40% increase in EBITDA year-on-year to $120 million. At the same time TEN reduced debt by $140 million, repaid the $50 million pref, continued paid dividends of all kinds and maintained a very healthy cash position, while continuously improving operational excellence.TEN continues to invest in growing the fleet in a measured way as per our stated strategy both in the conventional tanker sector, as well as in LNG, the latter being in the core of our strategy going forward, as we've said many times.On behalf of the Board of TEN once again congratulations to Nikolas Tsakos and the team, not only for the results but also for positioning the company so well for an upturn in the market as expected. So, thanks again, Nikola and over to you

Thank you, Chairman. We are glad that we are able to maintain our profitability in a challenging environment. I think we're very glad that our -- as you kindly said I think TEN is consistently one of the very few companies in our peer group that maintains profitability, regardless of the cycles.We are looking at an environment that is promising, and we are preparing the company with that in mind. However, we continue to maintain our policy of chartering our vessels and building vessels against long-term accretive employments that ensure a very strong utilization. We are at 97% utilization in a challenging market for the first six months and this has not changed even last year when the market was even poorer than is today.The future looks promising. A lot of disruptions will be happening in the next couple of quarters and seasonality will help. Already the futures market also indicates that we're going to be seeing a much healthier 2020 and the remaining of 2019. As we speak today, we are -- we have 32 of our vessels on fixed employments, 20% of our vessels in fixed and profit sharing arrangements, including contracts of a freightment [ph] and 16 vessels in the spot market.I think this mix has enabled us for the first six months to outperform the market by about 10% on the six monthly basis, but even stronger in the last quarter, where the market was weaker about 38%. And this gives us confidence that when the market will be growing and going further, the company will be able to profit and increase the bottom-line even further, which hopefully at some stage will have to be reflected on our surprise.What we're doing right now, we are in the final concluding a very large -- one of the largest newbuilding programs with first class long-term employment on every single vessel that any time to company had. We have already taken delivery of 16 vessels. We have reduced debt by more than a quarter of a billion dollars in the last 18 months, which means that the company throws a lot of cash flow to maintain repaying a dividend and also reducing our debt and allows us income for -- allows us liquidity for growth.In the last month, we have -- as we stated before, increased our exposure on the LNG sector and again talking about state-of-the-art vessels with the long-term employments. So we are positioning the company in a situation, ready to take advantage of the market that we expect to be much stronger in the second half of the year and 2020.And I think with this, I will ask, Mr. Saroglou to give us a much more detailed analysis of where we've been in the last six months.

Thank you very much, Nikolas, and good morning to you all. We are very pleased to report a profitable second quarter and first six months of 2019 operations. As a result of a better freight market environment that started during the fourth quarter of 2018. As we said, we are one of the very few companies in the peer group, if not the only one that reported profitable operations in the first six months of the year.The recovery in both the tanker and LNG market helped the company to recharter the two LNG vessels in the fleet at much higher accretive rates above the average all-in breakeven for both vessels. We continue to charter and recharter 13 vessels so far, since the start of the year, taking advantage of the appetite by oil majors and the company's clients to fix vessels forward.The last three years the company built 20 vessels, including the one-option-one LNG order we announced today, against long-term industrial business. TEN is in the final stages of this 19 vessel growth program undertaken at competitive levels during the low levels of previous cycle.Of these 15 ships have been successfully delivered finance and employed on long-term accretive charter to first-class end users. Within this year and 2020, the remaining four vessels are fully financed and chartered to an oil major concern for a minimum of five years will complete the company's current expansion and secure revenues going forward.On the LNG newbuilding front, we have ordered one-option-one 174,000 cubic meter vessels for delivery in 2021. With this order the company's LNG performance fleet rises to four vessels. We expect for this -- including the option, we expect for this vessel to follow the same employment path as the other two vessels and be employed on time charter with major international natural gas and trading companies. Already discussions have started to be in place and we hope and expect to announce as time progresses similar charters like the ones that we have on our other two LNG vessels.During the first half of the year, we had -- we concluded a deal with a major end user for four vessels and we have expanded a strategic relationship with a national oil concern by selling them two vessels.Moving to the online presentation and slide three, we see the company's versatile and modern fleet expanding across all vessel types and sizes in crude product tankers and specialized categories like LNG and shuttle tankers. Thanks to the company's employment strategy that has a bias towards medium to long-term time charters with a combination of fixed rates profit sharing and min max rate that is able to outperform the average spot market indices.Slide four, the left side presents the all-in breakeven costs for the various vessel type that we operate in the company. As you can see the costs base is low. In addition to the low shipbuilding costs we must highlight the purchasing power of TCM and the continuous cost control efforts by management to maintain a low OpEx for the fleet. In the first half of the year OpEx is down 3%, low general and administrative expenses, while keeping a very high fleet utilization quarter-after-quarter, again, almost 97% for both the second quarter and the first half of the year, which we believe qualifies us full employment.TEN’s flexible chartering strategy ensures that most of the times the company outperforms the spot market and this helps the company maintain an impeccable debt service records and meet all our obligation irrespective of where we are in the market cycle. Thanks to the profit sharing element, that is a big portion of the fleet, TEN benefit further on market conditions improve further, as we expect the market to do going forward.Based on the current conditions and the number of vessels operating in the spot market and in time charter with profit sharing for every $1,000 increase in spot market rates, we have a positive $0.06 impact on annual EPS.Debt reduction is an integral part of the company's strategy. Debt fixed at around $1.7 billion at the end of 2017. And in the last 18 months, we have reduced the company's debt by $221 million, taking down the net debt to capital ratio at the end of the second quarter of 2019 at below 50%. At the end of July, the company fully redeemed the highly successful $50 million Series B preferred shares.Despite the headwind from the U.S.-China trade war and its potential spillover effect the rest of the world, global oil demand continues to grow. The latest forecast from the International Energy Agency calls for 1.1 million barrels per day oil demand growth this year and 1.3 million next year.The USA is now the biggest crude oil producers and U.S. crude oil exports continue to grow. This, combined with geopolitical tensions, supply disruptions, the U.S. led sanctions against Venezuela and Iran, and OpEx production cuts are positive for ton miles and global fleet utilization substitute barrels travel longer distances to reach importers, refiners and consumers.We had a longer than usual refinery maintenance season in the first half of 2019, as global refineries were preparing for IMO2020 low sulfur fuel oil. However global refinery throughputs are picking up and expected to require another on average 1 million barrels per day of more crude oil than they did in the first half of the year.On the supply of tonnage the order book is at 7.7% and this is a low number compared to historical level. A big part of the fleet is over 15 years, and environmental regulations starting with retrofitting water ballast treatment systems and scrubbers to comply with IMO2020 create delays. As scrubber retrofitting takes longer than initially forecasted, while shipyard works at full capacity to meet retrofitting requirements, which could keep longer a big part of the global fleet in shipyards rather than trading and this could push more tankers approaching for above 20 years to go for scrapping.Last year was one of the highest scrapping years of record this year scrapping as expected is lower, but with more than 1,000 tankers older than 15 years and post environmental regulations we could see a pickup in scrapping especially for those vessels approaching above for 20 years.The graph on the right side of the slide is a forecast from Fearnleys the well-known ship broker from Norway. As you can see the LCC rates are expected to trend higher and reach multi-year highs going forward. We're also very positive about the market prospects and expect the strong market for all vessel categories. This environment, we believe that the company’s fleet is well positioned to capture any market opportunity that would be presented.That concludes the operational part of our presentation. Paul will walk you through the financial highlights for the second quarter and first half. Paul?

Thank you, George. Well after a comfortable quarter one TEN continued on a profitable task in quarter two. Despite difficulties arising from refinery disruption, fleet over capacity, OpEx cuts and of course seasonal factors, nevertheless TEN was able to generate a net income of $300,000 a considerably better results from that loss of over $9 million in the prior quarter two.For the half year there was net income of $11.5 million compared to $21.5 million loss in the first six months of 2018, a $33 million positive reversal. The profit was mainly due to an increase revenue by 16% in the quarter two and half year over the prior period.Partly due to new accretive time charters, including those of the LNG carriers, increased long haul voyages helped our spot vessels to earn freight at an average 30% more than in the prior quarter two. Daily TTE for vessel in quarter two and six months averaged over $20,000 well above average market rates due to our time charters that again generated enough to pay operating overhead and finance cash costs.Operating income increased fivefold from the prior quarter two to reach $19 million, despite some increase in OpEx due to the timing and higher maintenance in sales [ph], offset by a stronger dollar. Otherwise average daily OpEx for vessels stayed well under $8,000, while other expenses remain stable or fell from those of the prior quarter two.Finance costs were up by $6.5 million in quarter two, mainly due to bunker hedge losses and negative non-cash movements in valuation. However, loan interest remains stable with interest rate increases, being offset by a substantial $142 million reduction in outstanding debt in the past year. In quarter two itself net debt was reduced by $52 million, leaving cash balances of $193 million at the end of the half year with our net debt to capital at 48%.EBITDA in quarter two amounted to $56 million, 33% higher than in the prior quarter two and $120 million for the six months, a 43% increase. On top of a significant reduction in outstanding loads, we also redeemed the Series B preferred stock in July, with $50 million returned to stockholders.So all-in-all we are pleased with the results for the first six months, given the difficult market and we remain optimistic for the rest of 2019 and beyond, based on low inventories, completed refinery maintenance, high U.S. oil exports and reduced tanker deliveries, recognizing that we are approaching a period of probable disruption that may reduce the availability of tankers that in turn will have a positive effect on returns.And now I’ll hand the call back to Nikolas.

Thank you, Paul for another quarter of positive news. And we are, as I said, glad being one of the very few in our peer group if not the only one that is positive this quarter, and for the first six months. We are able to achieve this by tight control on the actual assets, maintaining operating expenses and utilization at very high rates. And our chartering strategy gives us the ability to outperform the spot market significantly.This -- the first six months, we had a 36% outperformance of the spot market that has enabled the company to be profitable. Our VLCCs performed significantly better than the spot market in the first six months. The same with our Suezmaxes, Aframaxes, Panamaxes in every single sector that we participate, we have outperformed the market significantly, with a total average of 36% in that growth.Also, a very important part of our business has to do with reducing debt. And I think as Mr. Saroglou George said, reducing debt, and repaying our initial Series B preferred was one of the highlights of the first six months and here still realizing very strong liquidity. But also interest rate reduction is very positive for our business. Just to put it in perspective, every 1% reduction in interest rate is almost $15 million straight down to our bottom line. So that's a very significant number going forward.On the growth side, our long term strategic relationships are maintained, our operational excellence is appreciated by the end users that they would rather do business with companies with a long-term solid profile like ourselves. Four vessels with a strategic relationship to a U.S. major oil company with very long employment starting this quarter and going -- or I guess starting next fourth quarter and one versus every quarter following.And of course, then the expansion on the LNG sector continues. And a lot of accretive business in the backlog as we speak, which gives us the very positive feeling that the market is expected to go from strength-to-strength, at least in the medium to near future.And with this, I would like to open the floor for any questions that you may have.

Thank you very much. [Operator Instructions]. Okay, our first question for today is from J Mintzmyer from Value Investor’s.

Hi. Good morning, gentlemen. Congratulations on the LNG order.

Thank you.

Yes. I'm looking at the timing of your installment payments for -- you have two Aframaxes, 2 Suezmaxes and one-option-one LNG. Is that correct? And then also what is the timing of those installments both for the rest of 2019, 2020 and then 2021?

Well, to-date we paid for the four vessels, $25 million we've paid already out of our pocket. We expect to pay another $55 million from our pocket in the remainder of the year -- pardon, $5 million in the remainder of the year. And drawdowns we still have from our banks, they're providing fee financing, fee delivery financing. Drawdowns will amount to $45 million by the end of the year. And future drawdowns within the year, we have $26 million. And going into 2020, we have a further $122 million and that's been provided by the delivery debt.

So, I think, actually from equity, it's another $5 million for the vessels.

In addition to the 25, already paid.

In addition to the 25 already paid.

Okay. So here is $5 million additional equity a year and what's the amount you anticipate I know all the financing is probably not wrapped up yet, especially for the LNG carriers. But what's the amount of equity that you anticipate spending in 2020 and then 2021, for those vessels?

I think the only the finance is wrap up for all the other vessels there is a Q of finance years for the LNGs. So we expect perhaps another $40 million of equity between 2020 and 2021 for the LNG carrier.

So what's the -- kind of wrapping up on that, what's the target leverage for those vessels? It sounds to me like it's in the 70%, 80% range, is that about right?

We try to be conservative, as you know we have conservative balance sheet and we try to keep it closer to 70%, rather than the 80%.

Excellent, thank you. And then the other question I have similar is on your debt facilities, I know you've targeted refinancing the balloons, but you plan to pay down your regular amortization payments. Can you remind me what the remaining amortization payments are for the rest of 2019 and also for 2020 and scheduled for 2021?

Our scheduled repayments for the remainder of 2019 $84 million, going into 2020 we're going to -- do you want to know future years as well?

No.

Okay, so for the remainder of this year, we have scheduled $84 million to pay.

And then do you amount available for 2020 or 2021 yet?

2020 we have $166 million, and these are scheduled payments, not balloons. Going into 2021 we have $141 million. And if we’re going into 2022, we got another $128 million.

Excellent. Thanks for the color on that. And then final question for me, we talked a little bit about scrubbers in the call and how those are adding some delays. I know previous calls you mentioned that there might be some customers that would pay for the scrubbers as part of their charters. Has there been any deals made on that, like how many of your fleets are tied up on scrubbers?

Well, as I said we have -- we will have about eight vessels, including the newbuilds with the scrubbers, all of them paid by the charterers in -- for the time that we will retrofit and the costs.

Fantastic. So no CapEx expected for the scrubbers.

No, CapEx at all. The opposite, we will be earning money, sitting at the yard, while this is happening. So actually it will be more profitable, because we will not have OpEx also.

Excellent. Thank you very much, gentlemen.

[Operator Instructions] The next one is for Randy Giveans from Jefferies. Please go ahead.

Good morning, gentlemen. This is Chris Robertson on for Randy. Thanks for taking our questions.

Hi, Chris.

So, Nikolas mentioned operating expense control and the utilization rate that was strong in the quarter. So it looks like you're able to achieve close to a 97% utilization rate, do you expect similar results for the remainder of the year and will any IMO2020 preparations cut into that, any disruptions there regarding the changeover in fuels?

Well, if you go back to I would say even to the last 5 or 10 years history, you see we average well above the 95%, 85% is the industry average. So 97% we expect to be a very constant number. If you -- and as I said in the previous answer, the reason we will maintain this is because our -- the time we will be taking for the scrubber installations are going to be paid. So there will be no downtime, it will be paid by the charterers.So yes, we expect to maintain because of the chartering profile, we have to maintain the same high utilization going forward.

Got you. And can you talk a little bit about the operational plans to make the changeover in fuels?

Yes, I have a big team that can say much more things than I do, but they are away from the speaker right now. Yes, I think we are preparing and at least internally, we are preparing the ships during the passage they are cleaning the tanks. So we do not have any off fire, if we have any scheduled delays, if we have any scheduled repairs, these repairs are going to be used at the same time to clean the tanks for the low sulfur.So we do not really expect any major delays in what we will be doing in the preparation and having 70% of the fleet with long-term employment, it helps very much, because we have the cooperation of the charters because they are actually the owners of the products that we burn.

Got you. And then with regards to the reduction in the vessel OpEx, was that fairly low hanging fruit and what additional steps could the technical managers take in coming quarters to maybe drive that down further?

Well, I think for us, we are -- first of all we are running a fleet at utilization of 97%. And at the same time we are -- we have on average the lowest at least from the tanker owners OpEx and G&A expenses in the industry, we have a vertical operation. So actually whatever happens on a ship, it does not happen in India, or somewhere else it happens within the premises that we all operate where the company is headquartered. So we are able to have very quick reaction and enhance control.And that's why we would like to also appreciate the efforts of our seafarers and our ship managers that are cooperating so close with the commercial department to try and keep operating expenses even lower. And I think what will help a little bit more will be a stronger dollar, which we should not exclude.

Got you. And last question for me. Regarding the Aframax tankers, are any of the crude tankers operating in the product tanker trade? What trade do you think will benefit more in the lead up to IMO implementation? And any update on the lightering activity in the U.S. or Latin American markets with your Aframax tankers?

Well, that's a very good question. And I think if we can go to page of our fleet, you’ll see that we have right now the three of our vessels, which are [indiscernible] on this. But our Aframaxes trading clean right now. And -- which is, I would say it's a market which is getting a lot of positive news because of the different dislocations of high and low sulfur growth. So we have three of those ships trading on the Aframaxes in the clean trade.And it's a very good question, which we believe that initially, perhaps, the product market might get an early start in a positive environment, because of the dislocation from the various refineries However, in order for refineries to produce the right product, they would have to find the right crude. So I think the crude market then will follow us and I will give you very quick example, because I'm sure you're all -- the U.S. refineries because you are used to actually crack heavier crudes are better prepared for producing low sulfur, than let's call the Western European refinery. So we might see products coming to -- coming from the United States to Europe, low sulfur product.Then, of course, in order to -- and also we might see lighter crude. We also like lighter crude that will have to be used to mix with a heavier crude, we have the [indiscernible] crudes, which are heavier. So the crude market will also take, I think will have an advantage of longer ton-mile. So I think the whole segment will have dislocation and disruption that will be positive for supply.

Got you. Appreciate the time.

Thank you very much. Gentlemen there are no further questions waiting. I'll hand to call back to you for closing remarks. Thank you.

Thank you. Chairman?

Well, as Nikolas said earlier we remain optimistic going forward. Totally focused on our strategy, which has been paying off the way it has been executed. In October, we have a new strategy meeting, we will review as appropriate and of course, let you know of any changes in the next results call. So thank you very much from me over to Nikolas.

Well, thank you, gentlemen. And I think looking forward to meet face-to-face with our shareholders. We have a big week in London next week with a London Maritime Week. I think the Capital Link event with a lot of chance to see our European investors, or whoever from the United States is in London, and then in October we have the LNG conference in Houston, which coincides with -- again, the various events, Capital Link events in New York all the team will be there.And in the meantime, we'll hope to be able to maintain and be able to give you good news in November, when we report our nine months results and hopefully, come up with even better results going forward. And again, thank you for your support and looking forward to a healthy second half of the year. Thank you.

Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may not disconnect your line.