Tsakos Energy Navigation Ltd (TEN) 2005 Q4 法說會逐字稿

Good morning. My name is Luanna and I will be your conference operator. At this time, I would like to welcome everyone to the Tsakos Energy Navigation fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

Mr. (indiscernible), you may begin your conference.

Good morning and thank you for joining us for your fourth quarter and year-end 2005 conference call. By now, you should have received a copy of the earnings press release. If you have not, please contact Alan Katz at CJP Communications at 212-279-3115, extension 211 and he will be glad to fax or e-mail a copy of the release to you. As a reminder, this conference call is also being webcast. To access the webcast, please refer to the press release for the web address, which will direct you to the registration page.

At this time, I would like to read the Safe Harbor statement. This conference call 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 prospects and results of operation. Such risks are more fully discussed in TEN's filings with the Securities and Exchange Commission.

Thank you. At this time, I would like to turn the call over to Mr. Nikolas Tsakos, President and CEO of Tsakos Energy Navigation.

Thank you, Tom. Thank you very much. I'm very happy to talk to you from Athens, Greece, where here with me this afternoon we have our Chairman, Mr. Stavropoulos, our CFO, Paul Durham, our COO, Mr. Saroglou. Our Deputy Chairman must be somewhere -- calling in from London -- and myself.

I would first ask our Chairman to give you some of his wise words and I will take it from there. Thank you.

Thank you very much, Nikolas, and good afternoon to everyone. I am more than happy to report that it is a beautiful and warm day in Athens. For those of you who live in the northeast of the USA, we hope you are enjoying one-half of that equation.

It has been reported that January/February 2006 was one of the warmest winters on the record for much of the U.S., in particular the northeast sector. Contrarily, Europe and eastern Asia have been in the icebox.

On balance, the International Energy Agency, that is the IEA, has maintained its forecast of a strong demand for oil in 2006. At over 85 million barrels a day, that's up about 2.1% from 2005. The bulk of the demand growth is taking place in importing countries distant from the sources of oil production. That is a very important element.

The increase in demand for oil, combined with expanding ton miles, suggests higher transportation needs of about 4.2% or more compared to last year. The forecast for the tanker industry's capacity is that collectively we will add about 5.2%. This suggests that any reduction in capacity utilization will be quite modest, and that the existing supply/demand relationship will not be significantly altered.

As has been reported, TEN delivered outstanding results for last year. Return on starting capital was 19.6%. Return on beginning equity was 31.1%. The result was a third consecutive year of record earnings.

The application of earnings and related cash generation was deployed in several ways. A very important part of it that affects all of you directly is that the dividend for operations 2005 compared to 2004 was increased from $1.65 to $2.10. In fact, since listing on the New York Stock Exchange, dividends have been increased several times. The dividend for 2002 operations was $0.70; for 2003, $1; for 2004, $1.65; for 2005, $2.10. We certainly cannot promise that there be such significant increases in the future, but you can be sure we will work hard to make that possible.

TEN also invested over $37 million to acquire and retire 5% of the common shares. That was also a very significant employment of the cash flow and one that will stick to the bones for all future years.

More importantly, the Company's capacity to serve its customers is now poised for significant expansion through the fleet renewal program and, more recently, consolidating acquisitions, which the management group will discuss in great detail.

On behalf of the Board of Directors, I want to publicly state that we are very proud of the performance by TEN's CEO and his management team and the entire supporting Tsakos Group. Thank you, Nikolas. Well done.

Chairman, thank you very much for your very good words and thank you for the support we have got from the Board and the shareholders for this year.

Again today, we are very pleased as management and myself personally to report on another record year. This is our third consecutive record year and it's the 12th consecutive profitable one since the inception of the Company.

While the rates and the environment in our industry in 2005 was not as robust as 2004, due to the quality of our fleet and our long-term efficient chartering strategy, we were able to achieve very good revenues for our ships in 2005, and especially in the fourth quarter.

In fact, the revenues earned per vessel on average in 2005 were similar, and in many categories of vessels higher than the ones in the previous year, despite that the freight market did not reach in '05 the peaks achieved in '04.

I would just at the beginning like to give you a top-line review of the figures, the figures for the year and the fourth quarter. And then I will talk about our operating performance and strategy going forward.

Well, 2005, our net income, according to Paul Durham, our CFO, was 161.7 million, compared to 143.3 million a year ago. Our basic earnings per share was $8.18 versus $7.53 in '04, and our net revenues were $248 million compared to $263 million in '04, mainly due to a smaller size of fleet operated last year.

For the quarter, our net income was 60.8 million versus 54.2 in 2005, and our earnings $3.16 versus $2.69 in '04, and the revenues 77.7 million compared to 80.9 million for the fourth quarter of '04, again because of a smaller number of vessels being operated.

We are very happy and proud to continue and deliver this exceptional operational and financial results. And I believe that due to our modern and high-spec fleet, together with our balanced deployment profile, we will be able to continue doing so in the future.

Operationally, 2005, and especially the fourth quarter, were very busy and productive times for TEN. On the very important front of the S&P, the sales and purchase that is, which we look at as a really big part of our day-to-day business, we took advantage of the high demand for vessels and sold with significant capital gains four of our older units, together with two newbuilding vessels, thus recognizing a capital gain of $45.3 million.

At the same time, we took delivery of four newbuilding vessels, two Suezmax and two product carriers, and we signed five newbuilding contracts for three Aframaxes and two Ice-Class product carriers. That means that we replaced vessels with an average age of 14 years with brand-new ships.

So far this quarter, we have further expanded our fleet with the delivery and immediate charter of a secondhand VLCC and two 1A Ice-Class Suezmaxes, the motor tanker Archangel and the motor tanker Alaska, just two days ago from HHI. At least two further newbuilding deliveries of Ice-Class product tankers are expected within 2006, with another 11 or more vessels to be delivered within 2008. This is a staggering 40% or more built-in growth potential. At the same time, we envision that TEN will divest of all our older units within this year, and we focus on expanding the Ice-Class and product segments aggressively.

On the (indiscernible) side, we have been successful in expanding our relationships with clients and achieving continued repeat business. Currently, we have 19 of our 27 vessels being on full-utilization contracts -- which means that they earn money day-in, day-out -- seven of which are on fixed-rate employment, 12 of contract (indiscernible) freightments, variable rates or pooling arrangements, and eight vessels are enjoying the spot market, including our two new deliveries, the Suezmaxes Archangel and Alaska, that have been fixed [X] yard for the positioning voyages, together with our two VLCCs that will enter soon a minimum with a profit-sharing arrangement with a net [able] for five years for a major end-user, together with two of our newbuilding product carriers.

Currently, 76% of our operating days for 2006, representing $150 million in revenue, have been secured, and 50% for 2007. We are [fortunately] seeking new opportunities for all our vessels, with a focus on the creation of strategic alliances with our end-users. These, in order to secure more efficient and accretive transactions for our ever-growing diversified fleet.

Implementing the above strategy, we have come to an agreement with a major oil freighter to acquire the nine highly specialized Ice-Class product tankers built (indiscernible), all of them between 2005 and 2006. With this way, we can achieve growth and consolidation without the burden of a large operational structure.

The result of the above acquisition continues to strengthen our one-shop shipping strategy by increasing our participation in the highly demanded product and Ice-Class segments. We actually will become the leader in the Ice-Class segment; and of course, together with our proved carriers and our participation in the ever-important natural gas sector.

The above policy has served us well so far and has kept the Company always profitable since inception in 1993, and this in a very cyclical industry, and of course, as the Chairman said, has allowed us to pay an increasing dividend year after year.

I would like also to take this opportunity and thank all our shareholders that have been with us since the days of the fourth anniversary of our listing on the New York Stock Exchange. And we promise to work as hard as possible to make them increase their profitability. And also the management is very supportive of that, being the largest shareholder in the Company.

At the same time, I would like to thank the crew members of our ships and the women and men on land that have created a very [non-event] year. We need to congratulate them even more because they played a significant role in saving a lot of people at sea in distress.

And with all that, I would like to go back to the nitty-gritty of the numbers and ask Paul Durham to be more specific on that. Thank you very much and I will be available for questions later. Thank you.

Thank you, Nikolas, and thank you all for joining us today. Before I begin, please note that a summary of selected financial data is included in the press release for your reference. Now I will say a few words more on the significant items occurring during the quarter and during 2005.

First, just to repeat a few of the words of Nikolas, in 2005, TEN's net income increased 13% over 2004, from just over $143 million to almost $162 million. Earnings per share reached $8.18, compared to $7.53 in the previous year.

Part of our trading philosophy is to achieve gains on the sale of vessels when attractive opportunities arise. In total for 2005, we sold six vessels with combined capital gains of approximately $45 million, of which $20.5 million was earned in Quarter 4 on the sale of the Tamyra and Dionisos.

Excluding these gains, net income for the year was $116.5 million, compared to $121.9 million in 2004, a modest decrease in light of the softening in the market environment since 2004, and this primarily due to the reduction in the average size of fleet by approximately one vessel.

Total net income increased from $54.3 million in Quarter 4 2004 to $60.8 million in Quarter 4 2005. And earnings per share rose from $2.69, based on 20.2 million average shares to earnings per share of $3.16, based on 1 million less shares. Excluding capital gains, earnings per share actually rose from $2.07 in Quarter 4 2004 to $2.10 in Quarter 4 2005.

Total revenue for the year was nearly $296 million compared to $318 million in 2004, a 7% decrease, again primarily due to the slightly smaller fleet. Total revenue in the quarter was $89.4 million, compared to $94 million in Quarter 4 2004.

The average number of vessels was 25.3 compared to 26.8 in the previous year's quarter. However, in the fourth quarter of 2005 we had effectively 100% productivity, compared to 98% last year.

Significantly, average charter rates achieved were almost exactly the same in Quarters 4 2004 and 2005 at $35,400 for both quarters. And the same is true for the whole years 2004 and 2005, at $28,645 and $28,722 respectively.

Although our chartering pattern remained broadly the same throughout 2005 and 2004, with time charter at fixed rates occupying about 40 percent of total operating days, there was some shift away from spot trading to more emphasis on secured employment contracts at variable rate, especially with profit-sharing arrangements or pooled participation. Having said that, in Quarter 1, the recently delivered, newly-built Suezmaxes Archangel and Alaska and the VLCC La Prudencia were all placed in the spot market while rates remained relatively strong.

During Quarter 4, average rounded rates achieved by VLCCs, including the Millennium, were down from Quarter 4 2004, earning on average approximately $54,200, and Aframaxes achieved slightly less than last year at $38,600. However, Suezmaxes earned better than Quarter 4 2004 at $38,500, which includes long-term charter vessels; and Panamaxes and product carriers were significantly up at $30,500 and $21,700, respectively.

Total operating expenses in Quarter 4 amounted to $14 million, a 7% decrease from Quarter 4 2004. And on a daily average cost per vessel basis, increased by only 1% from $7041 to $7134 in Quarter 4 2005.

On an annual basis, daily operating costs have increased by 6.9%, from $6286 to $6534, again, a modest increasing, reflecting primarily the new cost-efficient vessels entering the fleet and the older ones leaving. On the other hand, costs relating to lubricants and insurance have been steadily increasing due to high oil prices and the turmoil caused by natural disasters around the world, significantly in the U.S. Gulf.

G&A expenses for the quarter increased by over $300,000 from Quarter 4 2004, primarily due to specific one-off professional fees. Including our management fees and excluding the management incentive award, our total overhead costs per vessel amounted to $954 per day for 2005, compared to $844 per day last year, a 13% increase due to professional fees and of course to the lower number of vessels. We do not expect overhead costs to significantly increase further, and on a per-vessel basis, we would expect per-day overheads to actually decrease as the fleet grows.

Total net finance costs for the quarter amounted to $5.2 million, a doubling of the Quarter 4 2004 figure. Loan interest alone was nearly $6 million in the quarter, partly due to average loans increasing, but more importantly, loan interest rates increased from 2.8% to 4.8%, an increase held in check by our interest rate swaps, which are expected to haven't an even more significant impact in 2006.

There were also substantial expenses in Quarter 4 relating to the write-off for accelerated amortization of loan expenses totaling over $2 million, following the refinancing and restructuring of our outstanding debt over the past few two months, a process that will continue through the current quarter. These changes have reduced average interest margins by over 30 basis points and will provide material future savings.

These increases in loan expenses were again mitigated by positive changes of $1.4 million to the values of swap instruments and another $1.5 million through capitalized interest. Income from time deposits and investments in Quarter 4 has also provided an extra $2 million over Quarter 4 2004.

At the end of the quarter, outstanding loans amounted to 434 million, and our net debt to capital ratio was 32%, the same as at the end of Quarter 4 2004.

There were no new deliveries within Quarter 4, but we have taken delivery this quarter, as mentioned, of two 1A Ice-Class Suezmaxes, the Archangel and Alaska, and acquired the VLCC La Prudencia. We have also purchased construction contracts for two Ice-Class product carriers and signed for one new construction contract for Aframax. Taking these transactions into account and other scheduled yard installments, we have expended this quarter to date $220 million, of which $162 million was funded by debt.

Taking into account the acquisition soon of the product carrier Delphi and the signing for a fourth Sumitomo Aframax and the 12 other building contracts, but excluding the latest announced deal today, we have before us today a total forecast capital expenditure of $592 million, of which $563 million is expected to be covered by debt, much of which has already been arranged. Of the total budget, $134 million will be paid during the remainder of this year, $364 million within 2007 and $94 million within 2008.

With regards to survey drydockings, we spent $9 million in 2005 on the sister Panamaxes Bregen, Hesnes, and Victory III, plus nearly a further $2 million for upgrading work on the Victory III.

As previously mentioned, we paid $19.3 million in October for the first dividend relating to 2005, bringing total dividend payments to $38 million in the year. In Quarter 4, we bought back another 278,000 shares for a total of $10.4 million, bringing the total in 2005 to just over 1 million shares for over $37 million. So prior this year, we purchased another 109,000 shares for nearly $4 million.

This concludes my comments and now I will hand the call back to Nikolas.

Thank you, Paul. Thank you very much for this very analytical description.

I think at this stage, we would be very happy to invite any questions from the participants.

(OPERATOR INSTRUCTIONS) Jon Chappell, JPMorgan.

A couple questions on your fleet. First, the new fleet that you have just signed the agreement for -- Nik, are there any contracts on the back of those ships with their current owner? And then what is your strategy with the employment of the ships? Do you plan on putting them on term contracts or do you think that the spot market might be reemployed [on the first]?

Yes, we envision that by the time of delivery, those ships -- there is a huge appetite for those ships. Also, from the existing owners, we have kept the business in order to do it simple separate. But we believe that a big number of those ships will be very effectively employed, many of them with the original owner.

Okay. Did you time charter back to Western Gas?

A large part. I think that they need all the ships they have access for, all 9 vessels. But I think we decided to keep this simple, as plain as possible, because I think the patterning could complicate it for longer the agreement.

There's been also a lot of other talk on your fleet in the market -- some stuff you probably can't comment on, like the sale of the rest of year non-double-hull ships, which you did mention you planned on doing by the end of this year.

But there is also some talk about contracts for your VLCCs, the two that are currently trading in the spot market. Is that something that you are looking at, putting those two ships on charter?

Yes. I think our intention, as I said, we look at our business as a long-term business. We try to keep you quarter-by-quarter, but looking at the long-term, I think also the long-term picture, we are coming closer to many end users. So one of the ideas is to have two of our VLs on what we like to have on a minimum rate, and then a significant profit share above that. And also, together with two of our product tankers; so it will be a four ship deal.

So something is imminent then?

Yes, and for the five- and three-year duration, which I think is -- yes, it's imminent and I think it's very accretive.

Okay. One last thing, you talked about the long-term. The LNG ship is getting closer and closer to delivery date and we haven't heard any update on any new contract for that. Is there a contract that's imminent to be signed or are you fielding offers from potential other owners to sell this ship in the secondhand market?

We believe that the natural gas market will play a significant role in energy transportation, so I think our aim is to continue with the vessel, although we have very profitable offers for selling our slot. We [are likely] to order that ship, but at a relatively low price.

I think we are exactly a year from the delivery of the ship, which will be at the beginning of -- or some time in February next year. And this is the first time that we are seeing strong and very, very focused interest of the ship. I would expect before the summer for us to have come to a conclusion on a contract for that.

Okay. Thank you.

John Kartsonas, Citigroup.

Good afternoon and congratulations on the deal. I want to go a bit through the thought process on this deal, and two questions. First of all, what kind of return on investment were you looking when you signed the deal? Second, what rate assumptions and operating cost assumptions are you using to get this return?

Well, I think we will be doing a bit more specific announcement on the deal later, closer to the delivery of all the vessels. I think we are looking at rates that are well below what the averages are, the averages over the last couple of years have been. And these rates still give us a very good, aggressive return on equity. But I think I will speak on this details, I think, on a separate occasion.

Okay. On the financing, you said cash and debt. Do you have an idea how much cash you are going to use and how much debt for the deal?

As you know, our balance sheet is very unlevered. We are close to 130% of debt to equities. I think we would never want to go above anywhere between above 60 to 70% of debt to equity. So I think these are the levels we would be looking for the finance.

Okay. I guess a question for Paul. On the operating expenses, on an annual basis for '05, what were your OpEx per vessel class approximately?

On average for the year?

Right, on a per-day basis.

Well, going from the top to the bottom then, the Suezmaxes were in the range of about $7,5000 to $8,000 -- sorry, I should mention the VLCCs are obviously around $9,000 to $10,500. The Aframaxes are between $6,500 and $7000. The Panamaxes, around $5500, and the Handysizes are around the $5200 mark.

Okay. That's all I had. Thank you very much.

Natasha Boyden, Cantor Fitzgerald.

Quick question. In the press release, you noted that costs were up slightly. But it appears you have kept expenses very level or perhaps even lower compared to last year. And that's something we have really not been hearing from a lot of your peers; we've been hearing a lot the costs are increasing and it's just a fact of life, have to deal with it. Can you tell us how you were able to achieve this?

Basically, it's as I said. It's the new ships coming on board and the old ships going away. Some of those older ships were -- the rates I was just mentioning to Jon -- the older ships were substantially more than that. They have gone out of the picture now, and the new ships can be run at what we believe is relatively lower costs.

Having said that, we're always [kicking] our managers into doing a superb job in keeping costs down. I think they're doing a superb job in that respect.

Okay, great. Also, you clearly are making a real push into the Ice-Class sector, and I would think you've got one of the larger fleets there. Are you seeing any premium on the rates or values that these vessels are getting?

Well, as we speak today, I think for this year we have not seen -- for 2005/2006 -- not a significant ice era. But I think we believe that this will become a more important market. Ships are being built for the future, and as we discussed, oil unfortunately is not coming out from the more -- it is coming out from areas it's harder and harder to get to, and that is why we are building those ships.

However, since we are building our ships that have exactly the same features and consumptions and expenses with any normal ship. So we're just getting an additional factor and feature on that ship for the future. We took delivery of the Alaska and the Archangel, and it makes more sense when we take the ships to trade them in the Med for the time being and not have them in the Baltic. But hopefully they will be used there very soon, and there is appetite from end-users for ice trading.

Right. I remember a couple years ago, the [DSSC] was being touted as the next big thing. And obviously, that kind of went away for a little while. Are we seeing any more activity there or do you think it's going to take another year or another couple years for that to really start picking up pace again? What are you seeing out there?

I think, Natasha, we are seeing significant infrastructure. I think the price of oil is helping, I think, countries like the FSU and the countries around there to expand their port facilities, their pipeline facilities. So I expect that in the next two years, we will see much, much more product coming out from that area. Right now, there is a huge infrastructural happening there, development.

Okay. Just lastly, it's a question that's been asked on many of the other calls, and I suppose I shall ask on this one. Is the situation in Nigeria having any impact on your business in any way, particularly on the Vs or the Suezmaxes?

Commercially, we have not -- it is very unsettling. We have a number of ships in that part of the world. It is not nice arriving to a port or to a loading facility and have people greeting you with grenades and machine guns. So I think this is not very settling for our crew members, and we are in touch with them on a continuous basis. But we have not lost any downtime commercially and financially because of that.

So at this point, you're still going to continue to operate there with the situation being as it is? Obviously, if it gets worse, I assume you'll take that on a day-to-day basis.

Exactly, and our insurance would not allow it. So until that time, we are still trading.

Okay. Thank you very much, gentlemen.

At this time, there are no further questions. Are there any further remarks?

Well, thank you very much. Thank you for listening in for us. This has been a very exciting year, a very exciting quarter. And with the transaction we're contemplating, we are in the middle of starting a very exciting new phase for the Company. Thank you very much and we will be talking to you very soon.

Management will be in the States starting March 15 and hoping to see many of you then. Thank you.

Thank you. This concludes today's Tsakos Energy Navigation fourth-quarter earnings conference call. You may now disconnect.