Tsakos Energy Navigation: Sailing Right, Time To Buy (NYSE:TNP)

Tsakos Energy Navigation (NYSE:TNP) is one of the largest independent tanker companies transporting crude oil and products all around the world. In this article, I will explain why I believe Tsakos Energy Navigation is a stock worth buying. If you are interested in other investment opportunities in the tanker business, you can have a look at my previous articles about Teekay Tankers (TNK) and International Seaways (INSW).

Tsakos Energy Navigation Overview

Tsakos Energy Navigation, also known as TEN, is a Greek NYSE-listed company specializing in the transportation of crude oil and other petroleum products with operations in almost all countries and strategic alliances with the largest oil companies and commodity traders. TEN’s fleet has an average age of 7.5 years (lower than the 10-year world tanker average) and is composed of 66 vessels:

• 3 VLCCs (3 time-charters)
• 18 Suezmax (2 bareboat, 10 spot and 6 time-charters)
• 19 Aframax (2 bareboat, 2 spot and 15 time-charters)
• 2 Aframax LR (both time-charters)
• 9 Panamax (1 spot and 8 time-charters)
• 6 Handymax (all pooled)
• 6 Handysize (3 spot, 2 time-charters and 1 pool)
• 3 LNG carriers (all time-charters)

In addition to these operating vessels, Tsakos has 6 vessels under construction that will be delivered in Q3-2023 (1 vessel), Q4-2023 (3 vessels) and Q2-2025 (2 vessels)

It is worth mentioning that, differently from other companies such as International Seaways and Teekay Tankers, Tsakos’ fleet is mostly operated with time charters.

Stock performance

Tsakos Energy Navigation is currently trading at $15.84/share, equivalent to a market cap of $452 MM, with the stock being up 93% year-on-year. The 52-week minimum, $7.23/share, was reached almost one year ago (January 21^st, 2022) while the 52-week maximum was recorded on November 21^st, 2022 ($20/share).

Q3-2022 Financial Results

During Q3-2022, TEN generated revenues for $224 MM, up 70% year-on-year (+$92 MM vs Q3-2021) mostly due to rising tanker rates. This large increase in revenues accounts for almost half of the increase recorded in the first nine months of the year, +$183 MM or 45% year-on-year. The average day rate for Q3-2022 was $32K (+105% year-on-year) while it was a bit lower if we consider all the nine months of 2022 ($27k, +60% year-on-year).

Q3-2022 operating expenses were quite in line with the previous year at $157 MM, only +6% year-on-year, with the largest cost items being voyage expenses ($53 MM) and vessels operating expenses ($50 MM).

Overall, the company reported a net income of $51 MM during Q3 and $103 MM during 9M. Looking at the cash flows, the Company does not disclose very detailed information, but we know that cash flow from operations was $82 MM in Q3 and $156 MM in the nine months while cash used for investing activities was $57 MM in Q3 and $201 MM in the nine months.

As of September 2022, cash amounts to $201 MM while debt is $1.5 B, equivalent to a net debt of $1.3 B. The current net debt is obviously quite high (almost 2.8x the market cap), therefore, the company will have to carry out some debt reduction initiatives in the next quarters. During the Q3-2022 call with financial analysts, Tsakos management announced its intention to target a $1 B debt by 2024 with some potential early repayments to be done n Q1-2023.

In 2022, the company paid a $0.25 dividend per share to its shareholders.

How Tsakos Energy could benefit from the market dynamics

With its large fleet, Tsakos is perfectly positioned to take advantage of some dynamics that are characterizing the commodity and tanker markets. On one side, oil demand has increased by 2.3 MMboe/d (IEA) in 2022 and it is expected to further increase between 1.7 MMboe/d (IEA) and 2.25 MMboe/d (OPEC) in 2023 with a consequent higher need for crude transportation. The increase will be driven by many countries with India and China playing a key role, particularly in the long term: indeed, the yearly per capita oil consumption of India and China, 1 and 4 boe/y per person respectively, is much lower than other countries such as Thailand (7 boe/y per person) or Europe (8 boe/d per person). In the long term, if China were to reach the same level of per capita consumption as Thailand, the increase in overall oil demand would be almost 5 MMboe/d from the current demand levels.

Moreover, the EU ban on Russian crude and oil products means that Russian crude will have to be redirected to other countries, likely in Asia (India, China), with longer average voyages.

However, increasing oil demand and longer voyages are two dynamics that are not compatible with the current limited availability of oil tankers. According to the most updated figures, 170 new vessels should be built in 2023 and 2024 but that could not be enough to meet demand, particularly if we consider that 33% of the current vessels are more than 15 years old and might need to be replaced, thus reducing supply.

Risks

The main risk I see for Tsakos Energy is associated with a potential drop in oil demand that would imply a lower demand for oil and product tankers leading to lower day rates and revenues. Possible reasons for such a decline in oil demand could be either new lockdowns in China due to higher Covid cases after the re-opening or a global recession. However, I believe that this risk, despite having a potentially large magnitude, has a low probability of occurrence. Moreover, Tsakos operates a significant part of its vessels via long-term time charters, allowing the company to lock in high day rates.

Tsakos Energy Navigation is a buy

Increasing demand for oil, longer voyages and a limited supply of tankers are forces that will support the current high tanker daily rates: with its fleet comprised of time-charters and spot vessels, Tsakos is well positioned to benefit from these dynamics. The only aspect that I do not like is the high indebtedness but Tsakos’ management is aware of that and is focused on initiatives to reduce debt.