Tsakos Energy Navigation Limited (NYSE:TNP) Q2 2022 Results Conference Call September 14, 2022 10:00 AM ET
Company Participants
Nicolas Bornozis – President, Capital Link, Investor Relations Advisor
Takis Arapoglou – Chairman
Nikolas Tsakos – President and CEO
Paul Durham – Chief Financial Officer
George Saroglou – Chief Operating Officer
Conference Call Participants
Ben Nolan – Stifel
Operator
Thank you for standing by. Ladies and gentlemen, welcome to the Tsakos Energy Navigation Conference Call on the Second Quarter 2022 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.
I will now pass the floor over to Mr. Bornozis, President of Capital Link, Investor Relations Advisor of Tsakos Energy Navigation. Please go ahead, sir.
Nicolas Bornozis
Thank you very much. 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 second quarter of 2022. 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 a copy to you by email. Please note that parallel to today’s conference call there’s 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.
TEN is celebrating this year its 20th anniversary for its listing on the New York Stock Exchange. During this 20-year period the company has the enviable track record of uninterrupted dividend payments, regardless of market cycles. Including the current dividend, TEN have distributed $0.5 billion in dividends to its shareholders.
At this moment, I would like to pass the floor on to Mr. Takis Arapoglou, the Chairman of the Board of Tsakos Energy Navigation. Please go ahead, Mr. Arapoglou.
Takis Arapoglou
Thank you, Nicolas. Good morning, and good afternoon to all. Thank you for joining us today for our second quarter and six months 2022 results presentation. Once again, our results and their evolution throughout the first half of the year, justifies our business model. In bad markets, it offers a stability and downside protection and allows us to perform far better than all of our peers, to continue to pay dividends and all our obligations uninterruptedly, maintaining impeccable relationships with our banks, reducing debt, raising capital cost cyclically and all these nice things which we always say. And in good markets, the model allows us to immediately benefit from market recovery as is the case now, which in turn allows us to continue all the previous mentioned actions to a higher degree and paying substantially higher dividends rewarding our shareholders in line with our increased profitability.
This is the model, this is how it works. It has been tested many times and congratulations once again to Nikolas Tsakos and his team for these excellent results and for perfect — a perfectly designed and executed strategy. Thank you.
Nikolas Tsakos, over to you.
Nikolas Tsakos
Chairman, thank you very much, and first of all, we will deliver our deep condolences for our all our UK and British investors and friends and colleagues to all [charters] around the world for loosing Queen Elizabeth II. And we hope that her memory, and I’m sure to all of us who never had the — ever had any other Queen that we knew of, but — and long live the King, England. So please accept all of our condolences to all our British and Commonwealth friends.
And thank you Chairman for your good words. Our predictions in the last couple of quarters have been that the market only because of exiting the pandemic and returning to normality and with a very low and further shrinking order book of ships was going to turn. The unexpected events at least for us, of March and February 2022 have actually also surpassed our expectations and our forecast. The geopolitical events that dislocated the energy routes have given us many, many more ton miles — perhaps more 10 miles than the current tanker fleet can actually cope and that’s why we are seeing rates since the first quarter, second quarter. And I would say, the third and the fourth quarter seems that — the best according to rates is yet to come. So the first six months of the year have been positive as we were expecting, but we expect the second half to be even stronger as we’re going forward.
And with this right now, I would like George to give us an update of where we have been and what the company has been doing and then Paul take us through the numbers. Thank you.
George Saroglou
Thanks, Nikolas. Good morning to all of you joining our earnings call today. Let’s go to the slides of our presentation, and let’s start with Slide #3, where we see that TEN since inception in 1993, we have faced five major crisis and each time the company has come out stronger thanks to its countercyclical operating model.
This time is no exception. When we started the year, it appeared that we were finally near the end of the COVID pandemic and we expected the post-COVID oil demand recovery to materialize gradually through the year. But since the end of February, we are facing another crisis, a war in Europe with tragic loss of human life. The war created new challenges for the world and our industry. Voluntary self-imposed but also many rounds of strict western sanctions against Russia, which is a major commodity exporter, changed pre-war trading routes for all commodities including oil, oil products and natural gas. Europe started replacing its short haul Russian crude oil imports with longer haul barrels from the United States, Brazil, West Africa and the Middle East, significantly increasing ton miles for European crude oil imports.
Europe’s sanction plan is to stop importing any Russian crude oil from December. Substituting these Russian barrels, we have an even higher multiplying effect on ton mile growth, which should keep the good freight market going stronger for longer. At the same time, Russia is trying to find alternative customers for its crude oil output, most likely in Asia, China and India in particular.
India recently reported the Russian barrels and their import mix increased from 2% before the war to 12% currently. And European oil product imports like for example diesel, where Russia was also a main exporter, which stopped going to Europe from February of next year and will also have to be replaced with imports from the U.S. Gulf, India, the Middle East or from other locations, adding more to ton mile growth and freight prospects for product tankers. We are already benefiting from this trend with our product fleet. With the low order book and the redesign of the global energy map for both crude and oil product trades, we expect the tanker industry to go through a sustained strong market.
Next slide, Slide 4, we see the fleet and its current employment profile. 40 out of 70 vessels in the pro forma fleet or 55% to 57% of the fleet has market exposure, a combination of spot, contract offer affreightment and Time Charters with profit sharing. While 45 out of the 70 vessels in the fleet or 64% is in secured contracts, fixed Time Charters, and Time Charters with profit sharing and contract offer affreightment. This means that TEN is well-positioned to capture the prevailing positive tanker market fundamentals.
Fleet modernity is a key element of our operating model. In August, we sold the 2003-built Panamax tanker. Asset prices are going higher. There is renewed interest for tankers irrespective of rates for some buyers. Management is actively exploring opportunities to divest some of its earlier generation vessels and replace them with more modern echo-friendly greener vessels. We still have four remaining new buildings, which we expect to take delivery from the fourth quarter of next year, which are part of our green ship dual fuel LNG AFRAMAX orders, plus we have a 2020-built scrubber fitted South Korean built VLCC that we expect to take delivery in November. All four newbuilding vessels are coming with long-term employment attached.
In the next slide, we present a breakeven cost for the various vessel types we operate. We maintained a low cost base. During the year, the revenue generated from Time Charter contracts was again sufficient to cover the company’s cost expenses, paying for the vessel OpEx, finance expenses, overheads, charter imports, and commissions. We must also highlight the purchasing power of TCM and the continuous cost control efforts by management to maintain the low OpEx for the fleet, while keeping a high fleet utilization year-after-year, quarter after quarter.
Despite nine special surveys during the first half of the year, four of which were ahead of scheduling preparation of an anticipated market upturn, we achieved an overall utilization in excess of 93% for the coal fleet. And thanks to the profit sharing element, a cornerstone of TEN’s chartering strategy, for every $1,000 increase in spot rate we have a positive $0.28 impact in annual earnings per share based on the number of vessels that we currently — that currently have exposure in the spot for — in spot rates.
Debt reduction in slide six is also important for the companies in the company’s capital allocation strategy. The company’s debt picked in December of 2017, and since then we have repaid 450 million of debt and repurchase a 100 million in two series of step up preferred shares. In addition to paying down debt, dividend continuity as Slide 7 indicates is also important for common shareholders and management. TEN has always paid the dividend irrespective of the market cyclicality.
Today, we announce a dividend of $0.15 per common shares to be paid in December. It represents a 50% increase from our July 10 share — $0.10 a share dividend. The company has paid $0.5 billion in dividends since the New York Stock Exchange listing in 2002 or about $25 million per year. Global oil demand continues to recover despite lockdowns in China as a result of their strict COVID-zero policy, and negative global economic sentiment due to the war in Ukraine and higher unexpected inflation worldwide.
Despite this headwinds, global oil demand in the second half is expected to break the pre pandemic level. Large scale switching from natural gas to oil for power generation in Europe and the Middle East as a result of record natural gas and electricity prices is providing support. For the year, oil demand is expected to grow by 2 million barrels. Next year, we expect growth to be another 2.1 million barrels. Developed economies lead the all demand expansion this year, but next year, most of the oil growth — most of the demand growth is going to be to come from the non-OECD countries.
On the supply, OPEC-plus producers have restored all the pandemic production cuts in their August meeting. Global oil stocks continue to fall and are now almost 275 million barrels below the five-year averages. Non-OPEC production is set to rise this year and next. As global oil demand continues to rebound and grow, let’s look at the forecast for the supply of tankers in slide nine.
The order book stands at a little over 4% or 234 tankers over the next three years, which is the lowest that we have seen in at least the last 30 years. At the same time, a big part of the fleet almost 1,800 vessels or 73% is over 15 years, 9% of the fleet or almost 500 tankers are currently over 20 years.
And as the next slide shows, 2018 was on one of the highest scrapping years of record with 21 million deadweight ton removed. Last year, we’ve seen acceleration of scrapping from the second half and we ended with 14.5 million deadweight ton removed. So far until August, we have 65 vessels removed totalling 5.2 million deadweight ton. Scrap prices continue to be at high levels, currently hovering around 600 per light ton. And with more environmental regulations coming, with discussions for alternative propulsion fuels and 9% of the global fleet above 20 years, we expect scraping activity to remain elevated and act as a balancing factor for the fleet supply growing forward.
To summarize, oil demand, we are reaching and passing the pre pandemic level for during the second half of this year. Oil supply, OPEC-plus has restored all pandemic production cuts. Non-OPEC production is set to increase bringing more cargo to the market. At a time when global oil stocks are below the five year levels and demand is growing above pre-COVID levels, the war in Ukraine is redrawing the global energy map, adding to significantly ton mile growth for both crude and product tankers, order book supply of tankers.
The order book to current fleet ratio is at historical low levels, and a big part of the fleet is reaching phase out age pointing to a tighter supply for the next 18 to 24 months. And if you look at TEN, we have a modern fleet. We already started the transition towards the next generation of green vessels. We have in the waters and operating fleet that is well positioned to capture the strong freight market. We continue to reduce debt. We have a strong balance sheet and a strong banking relationships that will allow the company to take advantage of any opportunities that will be presented to us.
And with that, I will ask Paul to walk us through the financial highlights of the second quarter and the first half. Paul?
Paul Durham
Thank you, George. In quarter two, TEN earned a net income of just over $46 million after generating voyage revenue of over $217 million, which was $80 million more than in the prior second quarter, a 60% increase in revenues.
Operating income in quarter two amounted to over $57.4 million, a positive turnaround of $70 million from the prior quarter two. While our Time Charter vessels generated over $97 million, the market environment created by geopolitical issues since February, allowed us spot vessels to add a further $120 million to total revenue.
This in turn provided over $91 million of EBITDA, a threefold increase. The six months performance was also impressive within the period with EBITDA reaching over $133 million, double the previous EBITDA, while the company achieved a net income of $51.7 million in six months. Our fleet in quarter two, enjoy that high utilization of 93.6% partly due to a reduction in the number of dry dockings in the quarter with only three vessels competing dry dock in quarter two. Daily TCE per vessel in quarter two averaged close to $29,300, a 70% increase from the prior quarter two. While in the six month period, daily TCE was on average $24,500.
Voyage expenses which include fuel costs increased due to rising oil prices caused by the market conditions relating to energy supplies throughout Europe. However, total operating income — expenses rather, remained fairly stable with an increase of about 1%, nudging average daily OpEx per vessel to about $8,300 partly due to a modest fleet increase. The six month daily OpEx also remained at $8,000, partly due to a stronger dollar.
Depreciation fell $2 million due to the value reductions last year of certain vessels offset by a similar amount of deferred amortization. Quarter two finance costs remained relatively low at just $11 million, although increases in interest rates pushed finance costs up fortunately to a manageable level, the company utilizing interest rate swaps to cover much of its exposure.
The recent months have seen our cash resources increase substantially placing TEN in a considerably better position than at the start of the year. This has provided us the ability to comfortably take delivery of a new shuttle tanker and allow the construction of the four new Aframax’s, plus the signing up for an acquisition of a VLCC as mentioned, which all together should significantly change the age profile of the fleet and generate new revenue sources.
Following our usual pattern for financing new acquisitions, much of the financing for these vessels all with employment will be from our own resources with our usual kind lenders likely to participate in providing finance. However, clearly new financing may have an impact on our future total outstanding bank debt, which had come down by $17 million recently. But we estimate that the overall pace of debt reduction will still continue, if not accelerate, given our current cash resources, which should please our lenders as it will — as will the recent indications of increasing tanker values, which will also much please us if it continues as we expect. And indeed, we do expect a strong remainder of the year, hopefully within a peaceful environment.
And now I’ll pass the call to Nicolas.
Nicolas Bornozis
Thank you for the good news. And hopefully, we can report better news in the November quarter or as good at least. And with this, I would like to open the floor for any questions. Thank you very much.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from Ben Nolan with Stifel.
Ben Nolan
I guess my first question relates to asset prices, which you guys are just discussing a bit. Obviously, asset prices are a lot higher, both for secondhand and new builds. With a few exceptions, most of the growth recently has come through the new building market. Can you maybe just talk through sort of your appetite there and how you feel about ordering ships, given how much of an increase there’s been in the cost of doing so?
Nikolas Tsakos
Thank you. Well, I believe our timing so far has been quite on target. We try to always keep a good cash position and as the Chairman says, very close relationships to our financier so we can move when prices are lower. And then in that view we have started the green ship initiative ordering for dual fuel vessels. So I would say at the direst times of pricing a year and a half ago or a year and a bit ago in the summer of 2021 in the middle of the pandemic, and also our LNG and shuttle tankers were ordered about the same time. So we have a significant profit — book profit from our investments there and there we will be enjoying a very good market with low operative and of courses as Georgios Saroglou, the COO said.
In the meantime, we’re looking at an order book, which I have never seen an order book also, such a low order book in my 30 years in business. So we believe that the earning capacity of our existing fleet is going to be maintained relatively strong to be conservative for the next couple years. You cannot have enough vessels right now as we see it, and we expect some of the ships with maintaining high scrap values physically to have to leave the market.
On the pricing, we will be only looking at dual fuel vessels going forward. I think we said this in a couple of calls in the past, and nothing has changed on that. On the new buildings, we will be looking at dual fuel ships. We know that the value of those ships with inflation will be increased, and we will be looking to do those ships together with one of our clients, which we are discussing, as we’ve done in the previous one. Our model of profit saving that will cover all our obligations and gives us a small profit and profit saving above that with the major oil and end users, we will maintain it. So we will not stop looking or rebuilding the future as long as the figures make sense.
Ben Nolan
Okay. I appreciate the color there. And then my second one, and I’ll turn it over, relates to the ATM. I know you guys did sell a little over $4 million, almost $5 million worth of shares on the ATM during the second quarter in the release. And obviously, the share price is materially higher than it had been. Just trying to get a sense of what are you thinking about that. Are you making a lot more money, so you don’t need the ATM. It wouldn’t appear as much as you did, but the flip side of that is the cost of capital is meaningfully better than it had been. So how are you thinking about the use of that going forward here?
Nikolas Tsakos
Well, that was actually completing a program that the Board of Directors have authorized within the second quarter. So I think that’s why we have this small amount just to do some housekeeping from our side. And as you rightly saw, there’s a significant daily cash flow building up as we speak today. And so we will not be using the program in any significant manner going forward as we see things today.
Operator
[Operator Instructions] We will just pause for a brief moment to see if there’s any final questions. There are no questions. I will hand the conference back over to management for closing comments.
Nikolas Tsakos
Thank you. Well, I guess when we have good news, you don’t need any more news. So I think that is a good sign. Again, I would like to thank all of our long-term shareholders for supporting the company. We have been here quarter-after-quarter maintaining and having a stable hands through the storms that we really went through. I think George mentioned that we have been through five major crisis and every time the company came out stronger. I think a year and a bit ago in one of those calls we said that, there is a storm happening out there, but we are navigating the ship steadily and we are looking forward to take measures to take advantage of the storm on the other side. And it seems that we are out of the — we can see the horizon now.
I think there is some more good news to come forward. I get the feeling from the appetite of our clients, which are out there looking to put their hands on good quality management, good quality ships. So our model, as the Chairman said, has not changed. We are not changing our views depending on each quarter. We have a long-term view of where we want to go. And with a mix of our spot and Time Charter employment, we know that we can sleep at night whatever happens by repaying all our obligations and leaving a little bit to pay dividend even in the worst market conditions. So I think a few companies can have this model, I can say that, from many really successful.
And when things are strong, we still have a lot of ammunition to be able to take off the market immediately as it has seen in the last couple of quarters mainly. And I think we have about close to $0.30 every $1,000 that the market goes up the way we are structured, but another $0.30 or $0.28 as Paul said, on our bottom-line. And with that, hopefully, we will be reporting as good or better news for the 9 months. And I would like to take also because do not forget the expenses. We are in inflation, our technical managers, our suppliers are putting a lot of effort to maintain logical, good and under budget operating expenses and I think we have been doing this.
We took the preemptive action with their advice to take 9 vessels. If you remember, if you go back to our old news you would see that we said we are taking 9 vessels that were supposed to be dry-docked in 2023 and the later part of the 2022 out in the market. It was painful at the time, but now those ships that are in the market and they are actually adding much more, and that’s why we are expecting much more or good — better results for the [indiscernible] here on the remaining of the year.
And that’s why I want to thank all our associates, our people on board the ships, our brave seafarers who have — as soon as they were coming out of a pandemic, they had to face a war situation. Then some of our ships or quite a number of our ships were mount by a combination of Russian and Ukraine, and seafarers, all of them, very professionally coexisted and made sure that the company’s interests are above anything else. And we want to thank them.
And also to General Manager, Mr. [Hadi] Michael here, happy birthday. Keeps us in line here, and all the best and looking forward to see you soon face-to-face. And I hope the remaining of the year will be healthy, prosperous and peaceful for all. Thank you very much.
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