Tsakos Energy Navigation Limited (NYSE:TNP) Q4 2021 Earnings Conference Call April 14, 2022 10:00 AM ET
Company Participants
Nicolas Bornozis – President of Capital Link, IR Advisor of Tsakos Energy Navigation
Takis Arapoglou – Chairman of the Board
Nikolas Tsakos – President and CEO
George Saroglou – COO
Paul Durham – CFO
Conference Call Participants
Christopher Robertson – Jefferies
Magnus Fyhr – H.C. Wainwright
Operator
Thank you for standing by, ladies and gentlemen, and welcome to the Tsakos Energy Navigation Conference Call on the Fourth Quarter 2021 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 George Saroglou, Chief Operating Officer of the Company. [Operator Instructions] I must advise 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.
Nicolas Bornozis
Thank you very much, and good morning to all of our participants. I’m Nicolas Bornozis of Capital Link, Investor Relations Advisor to Tsakos Energy Navigation. This morning, the company publicly released its financial results for the fourth quarter [technical difficulty]. In case you do not have a copy of today’s earnings release, please call us at 212-661-7566 or email us at ten@capitallink.com, and we will have a copy for you right away. We will send you a copy by email.
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 contains 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 on to Mr. Takis Arapoglou, the Chairman of the Board of Tsakos Energy Navigation.
Takis Arapoglou
Thank you, Nicolas. Good morning and good afternoon to all. Thank you for joining our call today.
The results we published today demonstrate the continued operating resilience of TEN in historically very weak markets that prevailed throughout 2021 and operating performance clearly far superior to our competition. This allows us to continue our confident path with great conviction and propose a dividend as we have done since inception in an uninterrupted fashion.
We are currently experiencing very firm market conditions, which are not based on fundamentals. This is clearly an event-driven situation generated by both a surging post-pandemic economy and its inflationary and supply chain repercussions as well as by the admittedly quite sad war and humanitarian disaster in the Ukraine, affecting the world in more ways than one. It is still too early to say whether the current recovery is transitory and for how long or to any extent more permanent in nature. But in any case, we consider it as a welcome bridge towards the long-awaited recovery in the tanker market based on strong industry fundamentals.
For this, TEN, through its well-structured operating model, is perfectly positioned to benefit from as it is indeed benefiting from already, reflected and acknowledged, as you are all aware, by the recent rise in the stock price. So congratulations once again for Nikolas Tsakos and his team and best wishes for continued success in 2022, and thanks again.
And over to you, Nikolas Tsakos. Thank you.
Nikolas Tsakos
Chairman, thank you very much. And good morning to all of you from New York City where actually we had the opportunity to be on the New York Stock Exchange and celebrate our 20th anniversary as a quoted company here 20 years of continuous growth, as the Chairman said, and continuous dividend payments.
However, looking back in the 2021, which was the worst tanker rate year in recent memory, more than 30 years ago, we had similar rates. We started the new year with enthusiasm looking forward for a post-COVID opening up environment that makes transportation like other services flourish.
And whilst we were starting feeling the positive changes, we had the unprecedented events of February, end of February with the Russian invasion. So we started the last two years, every morning we were starting by making sure how to protect our seafarers and our crew and our vessels from the pandemic.
I think we have a small break over couple of weeks, and now we’re there trying to protect again our seafarers, our crew, our vessels from the difficult situations faced within the – after the Russian invasion. But as the Chairman said, TEN is a company built on difficult situations. So we have a model that is able to pass through the hurdles and come out stronger. Counting, this is – since inception, this is our fifth crisis starting with the Paris crisis in ’96. The events followed the 9/11. Then of course the Lehman crisis, COVID, and without interruption, the Russian invasion. But we keep a steady hand to the wheel.
We navigate the waves. I think good seafarers are only become good when they have to go through storms, and this is what we do. Right now, we are enjoying what we have prepared the company with, with 40 vessels out of our 71 on spot or profit-selling arrangements, every single $1,000 of spot market exposure have increased, $0.07 down to our bottom line. And we are experiencing the best rates since 2008 as we speak.
So although none of us is happy with what is happening, actually, as our CEO, we’ll play and hope that the atrocities will stop as fast as possible and the world will go to an open state, because shipping actually flourishes when we have open season, open borders.
And we expect with the fundamentals that are out there, less than 8% across the part of the world, a newbuilding replacement program with many vessels exceeding their 15th of the 20th year anniversary and outnumbering by the first-time partly the additions to enjoy, hopefully, prosperous and peaceful couple of years going forward. But in the meantime, we have to navigate with difficulty, and that’s what we do. We feel confident to maintain our dividend. And hopefully, if things continue, to have an increased dividend in the second half of the year.
And with that, I will ask George Saroglou to give us a quick wrap of 2021, a very quick job 2021, is not the year we want to remember and talk about the future. Thank you.
George Saroglou
Thank you, Nikolas, and good morning to all of you joining our earnings call today. Let’s go to the slides of our presentation.
Starting with Slide 3, we see that intent since inception. In 1993, we have faced four major crises, fifth now with the war. And each time the company, thanks to its tested counter-cyclical operating model, that targets growth of market lows has come out stronger. And of course, it’s not exception this time.
While we navigated the company through the challenges the COVID pandemic has created, we have managed to grow and prepare the company for its next phase. We announced newbuilding contracts for four dual-fuel LNG powered aframax tankers against long-term employment to a major oil concern. Factoring the latest orders and considering the company’s start in 1993, with four modern tankers, we currently have a pro forma fleet of 71 vessels for an annual growth of 15% in terms of deadweight tons.
In next slide, we see the pro forma fleet as its current – in a current employment profile. We have a combination of vessels in fixed time charters and flexible employment contracts, which means time charter with profit-sharing, contracts of affreightments and spot trading vessels that capture the market’s upside.
All dark blue color vessels, 26 in the slide, are on fixed rate time charters, while the light blue and red color vessels or about 61% of the fleet currently in the water have exposure in the market’s upside. This means that TEN is well positioned to capture the positive tanker market fundamentals.
In fact, we already witnessed better spot rates as the invasion of Russia in Ukraine, a tragic event, and the trade dislocations that it created has fuel spot rates to high levels. We took advantage of the low freight market environment in the last quarter and last year to bring forward a number of scheduled special surveys repairs to have these vessels ready once the freight market for tanker rebounds. Out of 21 special surveys last year, 12 were for vessels that were brought forward.
Fleet modernity is a key element of our operating model. During last year, we sold three of our older tankers. And as we mentioned, we replaced them with a newbuilding order for four dual-fuel aframax tankers that will enhance the company’s environmental footprints as these LNG dual-fuel-powered vessels are the first such investments in the company’s history. We are also building one more DP2 Shuttle Tanker for delivery at the end of the second quarter of this year. All remaining newbuildings are coming with long-term employment attached.
We also took delivery in January of our newest LNG vessel, TENERGY. The vessel entered immediately a five year time charter that is expected to make contribution to our bottom line as the LNG sector is currently very strong. Inclusive of the above charters, TEN’s minimum fixed revenue has a backlog that exceeds $1 billion.
Moving into Slide 5, we see that the left side presents the all-in breakeven cost for the various vessel types that we operate in TEN. As you can see, we continue to have a low cost base. And during the year, the revenue generated from the time charter contracts was again sufficient to cover the company’s cash expenses paid for the vessels’ OpEx, overheads, chartering costs and loan interest.
We must also highlight the purchasing power of Tsakos Columbia Shipmanagement and the continuous cost control efforts by management to maintain a low OpEx average for the fleet, while keeping the high fleet utilization rate quarter-after-quarter. Despite 21 special surveys during last year, we achieved an overall 92.6% utilization for the fleet.
And thanks to the profit-sharing element, a cornerstone of TEN’s chartering strategy, for every $1,000 per day increase in spot rates, we have a positive $0.33 impact in annual EPS based on the number of TEN vessels that currently have exposure to spot rates.
Debt reduction is an integral part of the company’s capital allocation, as we see in Slide 6. The company’s debt peaked in December of 2016. Since then, we have repaid $380 million of debt and repurchased 100 million in two series of step-up preferred shares we had outstanding.
In Slide 7, we see that in addition to paying down debt, dividend continuity is important for common shareholders and management. TEN has always paid the dividend irrespective of the market cyclicality. About $0.5 billion in dividend payments have been distributed since the New York Stock Exchange listing in 2002. The next dividend of $0.10 per share will be paid in June. Exact details of the payment will be announced during the company’s first quarter ’22 earnings call.
Slide 8, global oil demand continues to recover. We had 6.8 million barrels per day increase last year as a result of the vaccination rollouts and gradual return of mobility and economic activity to levels flow to the pre-pandemic demand – oil demand levels. Despite current headwinds, oil demand is expected to rise by another 2 million barrels in 2022, which means that based on the current forecast, we will be at the pre-pandemic oil demand levels during – sometime during the second half of the year or latest by year end.
On the global supply front, OPEC+ producers continue to manage supply with discipline. Some countries have not been able to meet their monthly quotas and underproducing. Global oil stocks continue to fall and are now 300 million barrels below the five year average. Non-OPEC production is set to rise in 2022.
As a result of the war in Ukraine, we had a second coordinated effort to release in total approximately 214 million barrels from the strategic petroleum reserves of the United States and OECD member countries for the next six months in an effort to lower energy prices and counter-balance the effect the war has created in the energy markets.
With oil demand recovering, let us look at the forecast for supply of tankers on Slide 9. The order book stands at around 5.6% or 285 tankers over the next three years, the lowest it has been in over 20 years. At the same time, a big part of the fleet is over 15 years. 30% of the fleet are in excess of 1,500 tankers. Almost 400 tankers or 7% of the fleet are currently over 20 years.
Slide 10. As the next slide shows, 2018 was one of the highest scrapping years of records since – with 22 million deadweight ton removed from the market. Last year, we’ve seen an acceleration of scrapping from the second half and ended with almost 15 million deadweight tons removed. Scrap prices continue to be at very high levels.
With more environmental regulations coming, discussions for alternative fuels and 7.2% of the global fleet above 20 years, we expect scrapping activity to remain high and act as a balancing factor for fleet supply going forward.
So to summarize, oil demand, the recovery continues. Oil supply, we’ve seen monthly production increases by OPEC. Non-OPEC production is set to increase in 2022, bringing more cargoes to the market at the time when global oil stocks are below the five year levels and demand is increasing towards the pre-COVID levels.
Recent geopolitical events in Ukraine and the sanctions that followed for the large numbers of Russian state oil and privately held tankers to be excluded from the market as oil majors and oil traders boycotted these vessels, creating a supply squeeze in the aframax and suezmax sectors. As rates firm, we are seeing increased activity across the tanker board.
Order book supply of tankers, the order book to current fleet ratio is at historical low levels. A big part of the fleet is reaching phase-outs age pointing to a tighter supply of tankers for the next 18 to 24 months. And if you look generally at TEN, we have a modern fleet, which is well positioned to capture the expected recovery of the market. We continue to reduce debt. We have a strong balance sheet, strong banking relationships that allow the company to take advantage of the opportunities that will be presented.
And with that, I will ask Paul to walk you through the financial highlights of the fourth quarter and the year. Paul?
Paul Durham
Hi, this is Paul. Can you hear me?
Nikolas Tsakos
Yes, Paul, we can hear you. Go ahead.
Paul Durham
Okay. Well, I’ll continue from where we lost George. There are several aspects to quarter four that contributed to a positive change in fortune in the tanker market, including higher TCE and a 6% increase in revenue. But also in quarter four, management of TEN concluded, based on cash flow projections, that seven of its oldest vessels had incurred non-cash impairment charges despite their excellent condition. This is also to our benefit. These charges totaled $86.4 million, a significant amount. But by incurring these charges, the vessel values will more accurately reflect current fair market values. In addition, quarterly depreciation charges, henceforth, will be reduced by $2.3 million in each of the following quarters.
The quarter four financials were actually much in line with the three recent quarters, and excluding the impairments, resulted in a modest loss of just $14.9 million. In a difficult market, there was a 6% increase, as I’ve said, in revenue compared to the previous quarter four with total revenue reaching $139 million. And although annual revenue dipped from the prior year, can still achieved over $0.5 billion revenue in the year with almost full vessel employment, strongly indicating an improving market that we now see gathering pace.
While tankers operating in the spot market struggled to cover daily OpEx, our average TCE was nearly $17,000 per day despite six vessels dry docking in quarter four. Even with dry dockings and soaring bunker prices, total expenses increased by a manageable 9% after excluding current and prior year impairments. Vessel operating expenses fell by 3%, keeping daily operating expenses per ship at $7,900 helped by a stronger dollar, while G&A remained at $7.2 million. Our daily overheads remaining at a low $1,200 per vessel.
Other expenses remained relatively stable compared to the prior quarter four, including interest and finance costs, remaining at about $9 million in both fourth quarters as interest rates declined and positive bunker hedges helped provide some balance against the higher bunker costs. Generating adequate EBITDA and preserving cash reserves over the past year and especially in recent quarters has been a challenge given market conditions, although we managed to reduce debt in the year by $130 million and insured financing for the LNG carrier and for the forthcoming shuttle tanker and recent aframax orders.
All of these activities have put extra pressure on our liquidity. However, thanks to our time charter strategy and to refinancing by our banks, we successfully managed to – managed our operational cash flow and fully met our debt service obligations. And to date, this year, we have bolstered our cash reserves to more healthy levels, helped by a promising market take-off, soon to be reinforced by a tanker sale with the prospect of further sales.
And at this point, I’ll finish my comments. Go back to Nikolas.
Nikolas Tsakos
Thank you, Paul. Thank you for giving us a very, I would say, rosy for the future, financial position that we always maintain. As you know, TEN has always kept a strong balance sheet through thick and thin. And if you go to the last 20 years, we’re very proud with – very proud of our banking relationships, very proud of the very low spread that we have charged for our debt when we grow the company with accretive transactions. And this has been done by consistency by – as we have on dividend payment.
Perhaps, we are one of the very few companies in our peer group that has never ever approached our banks for any sort of renegotiation, and I think this is appreciated in a huge way. But when we hear that spreads are going higher and when we hear the people, other colleagues of ours, are facing difficulties in finding finance, our treasury environment department out of London has a view of very supportive associate banks to help personal growth and in our projects, and thank you for accomplishing this.
And hopefully, as we go forward, the – since we have navigated the worst part of the storm, I think we will be able now to pay more time and dividend for our common shareholders also, together of course, without refers that have outperformed the market in a very big way.
And with this, I would like to open the floor for any questions that we could be careful to answer.
Question-and-Answer Session
Operator
[Operator Instructions] And the first question comes from Christopher Robertson from Jefferies. Please go ahead. Sir, your line is now open.
Christopher Robertson
Gentlemen, thanks for taking our questions. So I wanted to ask about the ATM activity during 4Q. I guess, can you comment on how much was raised from the common share issuance and versus the preferreds? And then any issuances done year-to-date, what remains under the ATM and what would trigger any further issuances there?
Nikolas Tsakos
Well, yes, as you see from the report, I think we had about $20 million of – in amount in the fourth quarter. And I think the majority of that is from common shares, a very a small part of it has gone with the preferred.
Christopher Robertson
And then any issuances done year-to-date during 2022?
Nikolas Tsakos
I think it’s similar issuance which we will be reporting in a couple of weeks with our results.
Christopher Robertson
And then in terms of the four dual-fuel aframax newbuilds on order, can you talk about the contract duration against those, expected EBITDA contribution? And does they’re still scheduled for delivery in 2023 through 2024? And can you talk about kind of the cadence of delivery there?
Nikolas Tsakos
Yes. I mean, this is – thank you for hosting this question because it’s a very important part of our strategy going forward. Back in 1993 when we were at almost 30 years ago when we started then, our aim was to end up the then century by the beginning of 2000 to be able to have a full double fleet. And that was, if you remember, that was helped at the time the new legislation following the open line. We were able to accomplish this on a timely mode. And when we entered the New York Stock Exchange in March of 2002, we came with 24 double vessels.
Well, now we’re undergoing a very similar exercise, although we’re a bit older, but I think wiser I hope. So what we would like to do is by the end of this decade, by 2030, to have the vast majority, if not all, of our vessels of the future technology of energy carriers, which right now seems to be the U.S., which could be either the alternative fuel, it could be gas or ethanol going forward. And of course, hydrogen is in the way part of our mind and our technical and environmental committees are working on designs like that together with our long-term shipyards.
So we look at this initial five to 10 year contracts as a start with a very predominant and very experienced end user, Equinor, to build those ships and start our process that we would like by 2030 to have it completely. We are looking at the returns. We look at it as a return on equity of this, so we look at on the high cubic feet. I mean, our main always target is in excess of 15%. But when we’re doing new high quality projects, we will do anything between 10% and 15%.
Christopher Robertson
You mentioned controlling OpEx cost inflation. So last year, the OpEx story was negatively impacted throughout the industry from COVID-related cost pressures. Do you see that aspect improving this year? And if so, where are the current cost pressures coming from in terms of expenses?
Nikolas Tsakos
Well, as I think as George, our COO, mentioned, we would like to help, starting for all our seafarers onboard because they went to have very difficult 2021 and 2020, having to spent their numerous months extending the sea service to help the company onboard the ships.
And in such a difficult environment, we were able to reduce operating expenses. I think this is really something that the Tsakos operating team, we will have to thank them because they really were able to achieve a task of reducing expenses in an environment of increased, as you see, inflation by almost in excess of 3% over the year.
And that by bringing – we also included there half dozen at least of special surveys of good work forward to have those ships ready to date where these very high rates that we are having and also many of dislocation expenses in which we have actually to navigate vessels even [indiscernible] to places like the Philippines to change the crew. So we don’t have – in mind, we were able to reduce expenses and we want to thank the seafarers and the management of Tsakos technical team for achieving this for us.
Going forward, of course, we are looking at an inflationary environment. However, having looking at the weak euro, I think this balances out at least for us. As you know, the majority of our expenses are [indiscernible] European who are paid in euro. And having a weak euro and the stronger dollar will help balance the inflationary trends. So I will not foresee other than the charter expenses which we are hedging a significant part of it an immediate negative effect at least for the first six months.
Operator
And the next question comes from the line of Magnus Fyhr from H.C. Wainwright. Please ask your question. Your line is now open. [Operator Instructions] And the next question comes from the line of Magnus Fyhr.
Magnus Fyhr
Good morning, Nick and team Tsakos, can you hear me?
Nikolas Tsakos
Morning.
Magnus Fyhr
Just a curious question on the Green fleet initiative. It sounds like you’re defining the Green fleet as dual-fueled. I mean, you do have some eco-ships in your fleet, but it’s about 42 vessels that are built before 2013, which some significant fleet replacement over the next couple of years here to have a fully dual-fuel fleet. How do you – from a capital allocation standpoint, how do you go about financing this? Should we assume long-term contracts or just selling old assets and replacing it with new given that your stock is trading at below NAV?
Nikolas Tsakos
Well, we hope by the time it is the road show to the U.S. to build NAV. I’m only joking, but thank you for your question. I think we are doing these transactions because it sounds for us sitting around the table and just talking about Green ships and it sounds more simply. It’s a huge technical task. You very rightly say that we have at least half of our fleet is already of the eco design.
And our technical team and environmental committee is doing a lot to actually implement from January 23, the new legislation that will reduce the footprint of even of our older ships and bring them to a much more environmentally friendly circumstances to be able to navigate way under the legislative tasks that we are facing.
And by placing our fleet, we would only do it together with the end users at least for the first part. After we have a dozen fleets hold the dual-fuel technology, a dozen vessels, and that will make us comfortable operating. Then we will be able to start getting ships even without growing it. So it’s not so much the risk, the financial risk is what we want also to take care of is the technical risk, but we are together with big major oil companies are getting the right ship for the right period and for the years to come.
Magnus Fyhr
Equinor seemed to be on the forefront of this. Are you having other conversations with other oil companies? And have you seen some change here over the last year as far as the appetite for financing these through long-term contracts?
Nikolas Tsakos
Yes. I think we’re seeing also European and American companies, at least we have offers to bring another 10 vessels for two similar companies with seven to 15-year employment profiles.
Magnus Fyhr
Just one last question. Rates have been very volatile here over the last month. Can you talk a little bit about the first quarter, what you’ve seen so far versus end of March vis-à-vis the fourth quarter? Maybe just talk about maybe suezmaxes and aframaxes on the crude and perhaps, the ones.
Nikolas Tsakos
Well, I think for a change and I think without taking care of all the, I would say, all the issues, impairments and non-cash items in 2021, I think we will be returning to a significant profit in the first quarter. And if things continue the way are today in an even better profit for the first six months.
And of course, we’re still in the middle or the beginning of the second quarter, but these rates, as you know, the rate is not the secrets are quite significant from the aframaxes to the product carriers and the suezmaxes all of them, regardless of the Russian crisis, regardless of Russian location, the whole market is very positive. So we believe that this could be the game changer. But you and I and the rest of the analysts we’ve been talking and the rest of our peer group for the last 18 months.
Magnus Fyhr
And I mean the spot rates have moved up here, would this be a time where your clients, the oil companies would try to lock in some vessels may be at higher rates, but maybe just secure tonnage? I mean, we still have some tonnage out there, but we see an appetite for time charters improving?
Nikolas Tsakos
There is a part to shape a very large appetite of first-class [indiscernible] almost try and not to lose the boat literally in this case. So they were offering deeper rates in January, at 15% higher, in February it’s higher, in March even higher now. And I think it is getting to a level that we can see a significant retention we might log a couple of ships. We have a very large portfolio to be able to take some on the spot and some on longer term protection.
Operator
[Operator Instructions]
Nikolas Tsakos
Well, I don’t see we have any more questions. And I would ask our Chairman will give us his closing remarks. And we want to wish everybody Happy Easter from here from New York. And looking forward to for all of us to enjoy a peaceful holiday period this week and the next week [technical difficulty]. And hopefully, we will be able to be reporting higher dividends and higher returns in our [indiscernible], and hopefully, all is going to be settled hopefully in a peaceful way.
And with that, I will ask our Chairman, Takis Arapoglou for his closing remarks.
Takis Arapoglou
Thank you, Nikolas. I have nothing else to say. I just wish you good luck and safe travels and hope you have a very productive road show in New York. Good bye from me.
Nikolas Tsakos
Thank you very much. Thank you, sir. Thank you.
Operator
Thank you. That does conclude our conference today. Thank you for participating. You may all disconnect.
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