Tsakos Energy Navigation Ltd (TEN) 2008 Q4 法說會逐字稿

Good morning. My name is Tamara and I will be your conference operator today. At this time, I would like to welcome everyone to the Tsakos Energy Navigation Quarter Four Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Rozycki, you may begin your conference.

Thank you, Tamara, and thank you all for joining us this morning for Tsakos Energy Navigation's Fourth Quarter and Full Year 2008 Earnings Conference Call. By now, you should have received a copy of the earnings press release. And if you have not, please contact Sarah Freeman of CJP Communications at 212-279-3115, extension 244, and she'll be happy to e-mail a copy of the release to you.

Again this quarter, TEN is providing a supplemental slide presentation with fleet, employment and financial data which can be accessed from the front page of TEN's website at www.tenn.gr -- T-E-N-N.gr. Please note that this is an informational presentation only and will not directly reflect the flow of management's comments on the call this morning. 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'd like to read the Safe Harbor statement. This conference call and the accompanying slide presentation contain certain forward-looking statements within the meaning of the Safe Harbor provision of the Privacy Securities Litigation Reform Act of 1995 and thus, there is a caution that such forward-looking statements involve risks and uncertainties which may affect TEN's business prospects and results of operation. Such risks are more fully disclosed in TEN's filings with the Securities and Exchange Commission.

At this time, I'd like to turn the call over to Mr. Nikolas Tsakos, President and CEO of Tsakos Energy Navigation. Nik?

Tom, thank you, and good morning to all of you in New York and good afternoon to all of you on the European side. We are very happy and proud to have on this call today the completion of our 15th year of operation. It has been quite a successful period regardless of the ups and downs that are happening around us as we speak and all the turbulence.

TEN was able, on our 15th anniversary to continue our profitable streak. And not only that, it was a record year with record income above $600 million -- $623 million -- above record earnings of $203 million and, of course, a record earnings share per [share]. So, it is with this very exciting note that we are cautiously looking in the -- on the future optimistically.

I would ask our chairman, Mr. Stavropoulos, to give us his, as always, wise direction and then our COO, George Saroglou, will talk about the developments of 2008, a very exciting year for us. And specifically for the fourth quarter, our CFO Paul Durham will talk to us about how the figures adapt. And then, we will all be available for your questions and thank you very much for your time.

Mr. Chairman?

Thank you very much, Niko. Hello, everyone. Thank you very much for joining us. I think you will recall that we expressed some severe concerns on our previous conference calls in May, August and November and today, things have become progressively dire. Today's call will not express great optimism about the world economy, but it will talk specifically about the prospects of TEN. It's well known that the velocity of the financial panic and the byproduct of the economic turmoil have now reached every corner of the planet.

The declines in industrial production, also [wealth] and now growing unemployment have resulted in significant demand [restriction] for petroleum products. The back-to-back declines in oil production and consumption in 2008 and now 2009 are feeding into the demand and pricing power of Tsakos, particularly the product areas. It is times like these that corporate strategies and the related business matters are put to the test. TEN has entered 2009 with a backdrop, as Niko just reported, of record profits, record earnings, a return on equity of 24% and by far the highest cash position in the Company's history.

These results and financial strength encouraged the Board of Directors of TEN to declare record dividends related to fiscal 2008 operations. I believe the strategies with a balanced fleet, a balanced employment policy with emphasis on term employment with long-established clients, and a balanced approach to financial risk management through selective hedging provides the comfort that all basic requirements will be covered while maintaining a strong balance sheet with a significant complement of cash.

Those of you who frequently participate in our earnings calls may have tired of hearing it. But I never tire of applauding our management for its consistently superior performance. Niko, once again I congratulate you, your management group, and the entire Tsakos team for an outstanding year. Bravo.

Well, thank you, Chairman, and nothing would work [today] without the very strong support of our Board. And then now, George Saroglou is going to give us the details of how 2008 has fared and especially the fourth quarter. George?

Thank you, Nik, and thank you, Mr. Chairman. It's my pleasure to speak with all of you today to provide you with the details of another commercially gratifying quarter and year. Despite the global financial turmoil, which became the daily reality for almost everybody after September 2008, TEN enjoyed the best year since the Company's inception in 1993. TEN operated a fleet of 46 tankers during the fourth quarter in comparison with 43 in the same period last year.

Crude oil [spot separates] were strong during the fourth quarter despite a deteriorating global economy, which caused crude oil prices to plunge by more than 70% since the highest published in early July 2008. As the world was in a state of shock due to the financial crisis, the tanker market lived a life of its own.

First, we experienced strong rates as a result of production disruptions due to the hurricanes in the US Gulf and by late October, due to the steep contango in the price of oil. The result of this contango was that approximately 40 VLCCs and Suezmax tankers all together were [trapped] for storage. We tightened the tanker fleet supply fundamentals and helped tanker rates remain at very simple levels.

Highlights for the fourth quarter and for the full year. We operated a fleet of 46 tankers at 97.5% capacity versus 97.3% utilization in the prior year's fourth quarter. We took the liberty, during the fourth quarter, of two DNA Aframax tankers, Maria Princess and Nippon Princess, from the Sumitomo [cepiate] in Japan, which were both chartered [ex-cepiates] on a re-positioning [volume] from Japan to the Mediterranean. In the first half of '08, we took delivery of another two tankers to Panama's product tankers as they've been chartered to a major South American [stationery] company for three years at a fixed time charter rate.

Extended during the fourth quarter for three more years the employment of Handymax product tanker Delphi to a major [staple] company in South America. We delivered Neo Energy, the company's energy carrier for 22 months to the vessels initial period charter in international energy concerns. The charter has options to extend the charter until the end of 2011 initially and then until the end of 2012. A four-year time charter in total, before optional periods are exercised.

We acquired Cape Baker and Cape Balboa from a German fleet system to send -- sold the vessels under a sale and leave back transactions back in 2002. The vessels regained their original names, Decathlon and Pentathlon. Continued to operate the corporate fleet through a combination of four charters -- four tankers, CoAs -- two tankers, and period tankers with fixed rates -- 15 tankers, and period charters with fixed rate with minimum, with profit sharing and minimum [mark] arrangements -- 25 tankers.

If you turn to slide six, on the online presentation, you can see the current employment details. We have eight tankers trading in the spot market, two tankers in contact of affreightments, and 36 tankers with secured employment on fixed and varied variation of Min-Max out of which 11 tankers are on period tanker with fixed rate and 25 tankers with period charters and profit sales are in Min-Max. We paid, on October 30th, 2008, a dividend of $0.90 per share in comparison to $0.75 per share or 20% increase from the dividend payment of October 2007 and we'll pay an additional $0.85 per share on April 30th, 2009.

During 2008, we also extended the charters of Aframax tankers Proteas and Propontis, which [net] the oil for two more years and Handymax product tanker Didimon, also for two more years to a major [stable] company in South America. In 2008 overall, our fleet transported almost 407 million barrels of oil and products worldwide.

To put this number into perspective, one needs to consider that currently, the US is importing on average nine million barrels of oil, which implies that TEN transported the equivalent of the US imports for 45 days during 2008. Continued our share repurchase program through an automatic 10B-51 plan, which was initiated in the beginning of 2008.

We repurchased 459,800 shares during the fourth quarter at an average oil cost of $23.53 per share. For the year, we repurchased a total of 1,205,100 shares for an average oil price of $28.36 per share. Since August 12th, 2008, all shares repurchased, 812,700 have been held as treasury stock.

Of these, 286 were used on December 31st, 2008 for vesting of half of the restricted sale units issued under TEN's compensation plan to management, staff, and [hires]. In [debt] returns, TEN operates $4.9 million debt returns with average age of 6.3 years in comparison with 9.9 years for the [world banker] fleet. In slides two and three, you can see a representation of the fleet and its details.

[The treatment] purchase is an integral part of the operation and the philosophy that we have a [recipient] company. We keep looking for opportunities to both invest in [mobile donors] and [diverse the all performance] of the fleet, especially the 300 tankers we currently operate, which were built during 1990 to 1991, in order to maintain fleet modernity. However, the global credit crunch and the turmoil in the global banking systems which severely affected ship finance capacity, together with a widening gap in the bid asked of secondhand tankers, there's almost zero transactions, at least for now.

Our new building program continues and we are coming closer to the completion of our program to build eight DNA [optimal] tankers at Sumitomo shipyard in Japan. We have four more DNA tankers to take delivery, two in the third quarter of 2009, one on July 17th, the other on September 15th, and two vessels in 2010, one in January 2010 and the last one during the second quarter of 2010.

Slide 10 gives details of our new building program including the CapEx. We're always looking for vessel opportunities in the new building front, in the secondhand market and in available consolidated opportunities. The current financial environment will present opportunities for further growth.

TEN, thanks to a strong balance sheet, well-built cash reserves, and a strong banking relationship is well positioned to take advantage of any opportunity that will be presented without the need to access the equity markets. We will keep, however, the same discipline, prudence, and investment criteria while evaluating individual opportunities for fleet acquisitions with no deviation from our current philosophy that has helped us build the Company since 1993.

From the commercial front, our profit sharing arrangement with the majority of our time charters allows the Company to participate in spot market rallies, supports and protects the Company's cash flow generation and profitability, especially in winter freight rate environments. In slide seven, you can see that, as of today, we have 66% of the available 2009 fleet operating days and 42% of 2010 available fleet operating days.

We have currently 36 vessels with fixed time charter, time charters with profit sharing and CoAs with Min-Max out of an operating fleet of 46 tankers and assuming only the minimum rate, TEN has secured 670 months going forward of employment or 1.6 years per vessel and just under $500 million in minimum gross revenues until the end of the vessel respective charters.

Looking at the markets in general, despite the problems of the global economy, the tanker market enjoyed a banner year in 2004. In fact, it was the best year in the period 2002 to 2008, surpassing 2004, which before last year was considered to be the best year ever for Tsakos. The credit crunch and the collapse of the global banking lending system became more evident after mid-September and led to the down flow of freight rates on vessel values in other shipping sectors. In total, the [bank head] market showed resilience despite the fall in the global demand for oil. 2008 was the first year since the '80s with negative growth.

The reason for the fall in demand was a non-stop rally of crude prices during the first seven months of the year, with -- together with the global financial crisis and the negative consumer sentiment, led to demand destruction, which is expected to continue in 2009, marking the first two years since 1982, '83, that the world will undergo two consecutive years of negative global oil demand.

The resilience of the tanker market continues in the first quarter of '09 with earnings, especially for good carriers and good positive territories. The main reasons, the oil price contango, which continued and the usual weather-related delays that kept the utilization of fuel tankers high and the freight rate in [profitable] levels.

In this period, in the period market, big charters, oil mergers and government companies continue to have an appetite to fixed [tankers forward]. In TEN, during the first quarter of '09, we announced a one-year extension for our [fuel max tanker triathlon], the last optional period in the three one-year charter extension option charters had the vessels. Reaction for [months] this 10-year time charter in 2004.

There is, however, uncertainty about the market's future direction and for this reason, most time charters under discussions at present are for around 12 to 24 month period since neither the owner nor the charters want to commit themselves for longer periods and feel they have a more clear view about the direction of the freight market.

Going forward, the freight market will be influenced by the following facts. The compliance to the [OPEC cuts] which now stands at 82% from the 4.2 million miles per day or production for [bet cut] in the last meeting during 2008. It will also be interesting to see how non-OPEC suppliers like Russia, Brazil, Norway and Mexico will respond to these cuts, the quality of the existing tanker order book for the years 2010, '11, and '12.

It is believed that over 60% of the existing order book has not secured cost delivered finance. Nobody can say with certainty today how many of these orders will fail and not materialize because of the failure to secure delivery finance in the shipping finance universe that is shrinking and restructuring with many shipping banks in financial turmoil, national life and uncertain about their shipping portfolios and their future shipping lending practices.

The 2010 phase-out of single hull tankers -- unfortunately, 17% of the world banker fleet is of single hull design. With stock prices around $350 per lightweight ton and the freight of single hull tankers following the [herbage period, oils period, oil field], who might see the [molition] picking up, which will help with 2009 fleet, statistics, and growth.

How quickly governments, bankers and policymakers will manage to stabilize and restore the faith in the global economic system and turnaround the doom and gloom sentiment that is upon all of us, influencing our daily business and social lives. It will also be interesting to see the effects, if any, of the various stimulus packages announced at both developed and developing economies in the real economy and the consumers all over the world.

For shipping, the capital intensive business is healthy, operating banking system is a necessity. The Company continued its impressive ramp of growth and profitability for the 61st consecutive quarter. [Like closed] our dividend distribution sheet 2002 and give an update on our buyback program. As you can see, we paid dividend of $0.90 on October 30, which is an increase of [12%] since [year of product 2007] dividend payout.

Following today's dividend announcement of $0.85 per share, payable April 30th, the total dividend distribution for 2008 amounts to $1.75 per share versus $1.725 in fiscal 2007. This is a modest 1.5% increase during a time when cost is seen again.

The Company has regular distributions every year since the cash dividend payout was introduced in 2002. Since inception, we paid back approximately $285 million in the form of dividends and replaced the stock worth a little over $81.5 million worth. For the time being and as the global economic crisis unfolds, as the everyday life of consumers, worker companies, businesses all over the world is affected by this negative news.

Shipping, which plays a major role in the evolution of developing economies cannot remain totally insulated from the current global economic realities. The degree of suffering may vary. Containers and dry cargo vessels have already been affected since the day after the collapse of Lehman Brothers in mid-September 2008.

Tanker values and tanker rates have somewhat been insulated, using 25% to 30% of the 2008 values when the balance sheet [in seconds] values in rate and assets came down much more. In tankers, spot and period rates continue to be significantly above water, unless your top price assets would clearly need higher numbers to be profitable.

Although our market participants are looking and expect to see a lot of opportunities for growth, as a result of the prices, the bid ask for assets, is still very wide, which results in an illiquid selling purchase market for modern tankers and so, we have nothing to report at least for now in the market that we monitor very closely.

In which direction the gap will be bridged remains to be seen. Nevertheless, spend with a strong balance sheet, [onto] liquidity and strong banking relations can afford to wait until the right opportunity will appear that will fit the operating and financial profile of our Company. In the meantime, all of us in TEN will focus on the date of the operation of the fleet in keeping vessels employed at full utilization, if possible, in managing cost pressures, controlling costs, and in navigating the Company safely through these challenging times.

Without further ado, I would like to turn the call over to Paul Durham for a review of the financials. Paul?

Thank you, George, and thank you all for joining us today. A summary of collected financial data is included in the press release. I'll now say a few more words on the significant items occurring for 2008. So just a recap, in 2008, TEN's mixed income was $203 million compared to $182 million in 2007, an 11% increase. Diluted earnings per share was $5.33 compared to $4.79 in the previous year.

The gain on the sale of just one vessel in 2008 was approximately $35 million compared to $69 million in 2007 on the sale of three. Excluding these gains, net income for 2008 was $168 million compared to $114 million for 2007. That's a 47% increase. Operating income for 2008 increased by $29 million over 2007 and without capital gains increased by [$64 million]. For quarter four, net income was $27.6 million in 2008 with no vessel sales in the quarter compared to $52.2 million in 2007, which includes $31 million capital gains. Excluding such gains, net income was 29% higher than in quarter four 2007.

Now, as George was saying, part of the Company's stock repurchase program, the net total of shares outstanding was reduced by 914,000 shares in 2008. That's a 2.4% reduction, after taking account of the vesting of half the outstanding stock runs. Total revenue for the year amounted to $623 million, a 25% increase over the $501 million for 2007. This was due partly to the increase of the average fleet from 41.7 to 44.1 vessels, but mainly due to higher charter rates.

Total quarter full revenue was $156 million compared to $131 million in quarter four 2007, a 19% increase. The average charter equivalent rate achieved was $33,800 for quarter four 2008 compared to $29,900 in the fourth quarter 2007. The crude market especially is enjoying another strong quarter. For the year 2008, the average TCE was $34,600 compared to $29,400 in 2007, making this our best year to date in terms of average TCE per vessel.

Total operating expenses in quarter four amounted to $39 million, a 24% increase in quarter four 2007. Due to the two extra vessels and increasing costs, which increased the daily average operating expense per vessel from $7,669 to $9,450 on an annual basis and between the two fourth quarters, from $8,542 to $9,662. For the year, this was primarily due to higher crude costs following pay increases in 2007 and the weaker dollar. A somewhat stronger dollar in quarter four resulted in a slight decrease in crude costs compared to fourth quarter 2007.

Extensive repair work performed on seven vessels in dry dock, the cost of which could not be deferred, impacted both the year and quarter four. And also towards the end of the year, [higher] insurance costs at certain P&I [clubs] imposed unexpectedly large backhauls. Total daily overheads per vessel, which includes G&A, management fees, incentive award and stock compensation expense fell to $1,954 in quarter four 2008 compared to $2,597 in quarter four 2007, mainly due to reduced order fees and amortization of stock rise.

Total net finance costs for the year amounted to nearly [$83 million] compared to over $37 million in 2007. The loan interest actually fell by $19 million due to the fall in bank interest rates by an average of 1.5%. But falling interest rates gave rise to increased interest paid on swaps by $7 million in the year and a non-cash $15 million negative increase in the value of non-hedging swaps, of which $11 million was born in quarter four compared to a negative $4 million in quarter four 2007.

In quarter four, we drew down $28 million for the repurchase of Pentathlon and $44 million each on the building [re-oppourtunity] Aframaxes, bringing outstanding loans at the year end to $1.5 billion. We expect that repayment less new drawdowns will result in a slight decrease in total debts outstanding in 2009. Our net debt to capital ratio was 57% and the leverage that takes account the value was 48%.

We currently have four Aframax tankers under construction, on which $194 million remains to be paid -- $109 million in 2009 and $85 million in 2010. To cover much of this, we expect additional debt of approximately $72 million in 2009 and [$32 million] in 2010. This debt is in the process of being arranged.

We believe we are in a strong and liquid position with $350 million currently in cash. Also, if we apply the average of 2009 rates currently assumed by industry analysts to those of our vessels which may be subject to variable rates, we expect to generate enough cash this year to meet all our operational expenditure, all our debt service requirements, all our known, non-finance capital expenditure and still be able to [access] our dividend policy.

This concludes my comments and now, I'll hand the call back to Nikolas.

Thank you, Paul. Well, ladies and gentlemen, we would be very happy to answer any of your questions. So, we can open the floor to all of you listening in. Thank you.

(Operator Instructions).

Your first question comes from the line of Jon Chappell with JPMorgan.

Good afternoon, guys.

Hello, Jon.

A lot of other shipping companies have been cutting their dividends for basically two reasons. The first is, I think, because of liquidity problems and loan-to-value covenants with the banks. The second is maybe a little bit proactive in the sense of they think there might be good acquisition opportunities and they want to keep some dry powder.

Clearly, especially with Paul's wrap up, you don't have the liquidity issues. You're very flush with cash. Your time charter coverage provides a lot of cash flow visibility and stability. But also, in George's comments, there was some talk about maybe some potential acquisition opportunities. Do you anticipate maintaining the current dividend levels or at least the current dividend policy because of the cash flow visibility that you have or do you think that you might be apt to retain some cash in anticipation of some good growth options?

Jon, this is John Stavropoulos. If I may, I'd like to answer your question.

Sure.

We will maintain or at least intend to maintain our dividend policy, which is to pay out 25% to 50% of earnings. And we'll do that in two semiannual installments, one to be paid in October and the final one to be paid in April. However, as to the maintenance of a level, it will be dependent on net income and earnings. So, I can't tell you that the dividend policy will dictate that we will maintain the present flow.

That's fair. That's the way I should have asked it.

Does that answer your question?

Yes, it does. And if the right opportunity came along, maybe more than just a one or two ship acquisition -- maybe a 10-ship acquisition, Paul, do you think that the credit facilities are available, given once again the visibility of your cash flows, that TEN could go out there and raise the capital in order to be opportunistic?

No, [there's no doubt it's going to be a challenge], but as we've mentioned, our banking relationships with a lot of banks are very, very strong. And there have been one or two banks who are, as indicated to us that they are there in the event of us making such a move. So yes, obviously, not as easy as it was a year ago, but yes, it's still available for us, we believe.

Okay. And then, finally, one last one just to incorporate everybody. New builds or secondhand vessels -- I know that George mentioned the secondhand market is very illiquid and we've seen very limited acquisitions. Given TEN's history of building a modern fleet through your own new building contracts, is there one type of asset -- and by that I mean going to yards and buying distressed slots or buying modern distressed assets, that TEN would prefer to grow with going forward, new builds or secondhand?

Yes, hi, Jon. This is Nik. As you very correctly said, we have built our own future so far and we have managed, even in the remaining four Aframaxes that we are taking delivery this year and next year have been ordered on the back of many options even today at the prices that are very, very healthy, I mean, very low even in today's market.

So and we have stayed away from new building orders in the last couple of years because we thought things were becoming a bit expensive. And I think we might be soon entering our policy of -- for looking at [reasons]. Of course, a lot has to do with the needs of our customers. We are negotiating -- we have negotiated a long contract for two vessels and we are looking out to identify the right side versus the right side to -- that we're going to respond to this contract. So, I think we are starting -- we will be starting to look as we speak.

Okay. Thank you, Nik. And thanks, John and Paul.

Thank you.

(Operator Instructions).

Your next question comes from the line of Natasha Boyden with Cantor Fitzgerald.

Hi, gentlemen. Thank you, operator.

Hi, Natasha.

Yes, I just wanted to sort of follow on from Jon's question there in terms of current market conditions. The drive-up market, S&P asset values have really come down dramatically. Can you see and sort of tell us what you're seeing in terms of asset values in the tanker market and, as well, as S&P activity and overall, what you're seeing as far as resale opportunities?

Yes, hi, Natasha. Well, I mean, what we're seeing right now is very little activity on the tanker side. We are seeing, which I think is a good sign, a lot of scrapping going on of all the single ships and having 2010 coming closer as we speak. I think we will see close to 20% -- between 18% and 20% of the fleet in this dropping market for single ships. It's taking a lot of [bend] now out of the supply side.

Actually, there are no real -- there's no real liquidity in this market. There has been a couple of, in a sense, predetermined of the [stressed] sales that have put some value, but again, those sales are mainly either from some traditional Japanese trade [in houses] or owners.

And they might have taken a decision nine months ago about selling a ship by the end of their fiscal year, which is in a couple of weeks. So now, regardless of the price. So, these are the transactions we are seeing right now in the time period spectrum. And we are seeing some opportunistic passages of ships by some of the traditional Greek players, but that is -- I mean, since the beginning of the year, I think we have not see more than three or four S&P transactions and most of them in the [investments] -- based on what I said. So, that's why the market right now is very illiquid.

Right. So -- did I -- just in terms of your sort of responses to Jon, would it be fair to say you're sort of just sitting on the sidelines right now just in terms of looking at transactions and just seeing really what's out there? Would that be fair to say?

Yes, I think we are -- we have stayed away from the S&P and new building markets for awhile and I think things are normalizing themselves right now and becoming much more interesting.

Okay. Just moving on to -- sort of in terms of the cash that you do have, how do you think about balancing the share repurchases versus deleveraging in this environment? I mean, I guess what I'm trying to get at is, are you comfortable with your current level of leverage right now?

I think we have always had the policy of staying between 60% and 70%. At the most, I think we are close to 55% or 56% now. So, we take -- we are comfortable we have some space to grow in that. Paul?

Yes, I mean for the time being, in some respects, we're still under leveraged, especially given the cost of debt at the moment, which is still very low. So, we haven't got any great urgency to deleverage at the moment. We're happy in the kind of state we are. And we believe we can take on an amount of more debt with the current fleet. So, we feel fairly comfortable at the moment.

Excellent. Okay. Well, thank you very much.

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

Chairman?

We'll see you in three months and hopefully, we'll have some positive news to report. Thank you for joining us today.

And we will definitely know that the management of TEN is going to be in New York next week and we would be very happy to set up meetings with whoever of you is available and we will be participating in various events and will be very happy to see you there. Thank you very much.

This concludes today's conference call. You may now disconnect.