Tsakos Energy Navigation Ltd (TEN) 2010 Q2 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to Tsakos Energy Navigation conference call on the second-quarter 2010 financial results. We have with us Mr. Nikolas Tsakos, President and CEO 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, Thursday, August 5, 2010.

We now pass the floor to Mr. Nicolas Bornozis, President of Capital Link, investor relations advisor for Tsakos Energy Navigation. Please go ahead, sir.

Thank you very much and good morning to all of our participants. This is Nicolas Bornozis of Capital Link, investor relations advisor to Tsakos Energy Navigation.

The Company released financial results for the second-quarter and six-month period ended June 30, 2010. The press release has been distributed publicly and you should have received a copy of it by now. If you have not, please call us at 212-661-7566 or e-mail us at ten@capitallink.com and we will be happy to send it to you.

Today in addition to the conference call there is also a live audio and slides webcast which can be accessed through the Company's website at the front page at www.tenn.gr. The conference call will follow the presentation slides so we urge you to access the presentation and webcast.

Please note that the slides and webcast will also be available as an archive after the conference call. The slides of the webcast are user controlled, so 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 the slide presentation of the webcast contains certain forward-looking statements within the meaning of the safe harbor provision of the Private Security 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. Such risks are more fully disclosed in TEN's filings with the Securities and Exchange Commission.

At this point I would like to turn the call over to Mr. Nikolas Tsakos, President and CEO of Tsakos Energy Navigation. Mr. Tsakos, please go ahead, sir.

Thank you, Nicolas, thank you very much. Thank you for all of you listening in all over the United States and Europe and elsewhere. We would like to welcome you on our second-quarter and semi-annual results. Following the Company's trend since inception this has been another profitable quarter in quite a trying market.

We would be very happy to talk to you (technical difficulty) over $260 million and have paid until today $314 million in the form of cash dividends.

Let's move to slide number four, some financial highlights with Paul later on giving more details. The Voyage revenue for the second quarter was $112 million, net income $8.5 million, and for the six months Voyage revenues were $217.5 million, net income of $27.9 million.

The interesting thing is the OpEx line. We continue the tight cost containment program on the expense side of the business and we have registered a 14% reduction in the daily average OpEx of the fleet for the quarter and 12% in the six months as Paul will explain further down. Since July 1 the Tsakos Columbia Shipmanagement is in operation and (inaudible) we expect to see the benefits of this joint venture partnership which we hope to affect positively the operating expense side of business and hence the bottom line.

If we move to slide number five some subsequent events. First of all, in June we made an enhancement in the Company's policy; we went from semi-annual to quarterly. We have rechartered our LNG carrier, Neo Energy. We have taken delivery of the last DNA aframax tanker from the Sumitomo shipyard, Uraga Princess, and we have acquired in July the four 2009 built, fully coated panamax product tankers. And sold Victory III which was our oldest Panamax tanker, 1990 built, following the sale of her sister vessel, Hesnes, also built in 1990, in April of 2010.

Slide number six we have a picture of our fleet, our modern and versatile fleet is split between crude and product tankers. We have 23 crude carriers from VLCCs down to aframax size and 26 product tankers from aframax size going down to handysize. The majority of the fleet is built in South Korean and Japanese shipyards to high specification standards. 21 of the 50 vessels have highest class standards.

On the next slide, if we move to slide number seven, we continue the balanced employment strategy of the corporate fleet and we have a mixture of spot charters, contracts of affreightment, pooling arrangements, and period charters with fixed rates and period charters with profit sharing arrangements. We currently have 10 tankers trading in the spot market, 3 tankers in contract of affreightment, 4 vessels in pooling arrangements, and 29 tankers in period charters with fixed rate and profit sharing arrangements.

Moving on to slide number eight, we tried to put a dollar value to the current fleet employment profile. As of today we have fixed 76% of the remaining available 2010 fleet operating days and 58% of the 2011 available fleet operating days. Assuming only the minimum rate for the 29 tankers in the 46 vessel fleet we currently operate, we have secured 475 months of forward coverage or 1.3 years per vessel and $259 million in minimum gross revenues.

Moving on to slide number nine, this slide illustrates the fact that the sale and purchase of tankers is an integral part of our operation as we have demonstrated with a series of transaction over the years. Since 2002 we have sold 23 tankers with a capital gain of a little over $260 million.

The Company reinvested these capital gains via the renewal of the fleet by ordering the majority of its newbuilding tankers before newbuilding prices started to rise. 52 tankers have been acquired in this period, of which 49 were newbuildings. This way we manage to grow the size of the fleet and of course maintain fleet (technical difficulty) percent of our net income comes from capital gains. So this is something that we -- as we have demonstrated year over year.

If we go to slide number 10 this will show our dividend distribution since we listed the Company in the New York Stock Exchange in 2002. We have so far paid $8.33 in cash dividends. On June 4 the Board of Directors announced an enhancement to the Company's dividend policy going from semi-annually to quarterly distribution with the first quarterly dividend of $0.15 per share already being paid on July 15.

If one considers the IPO price on a split adjusted basis of $7.50 and on the other hand paying the dividend distributions since 2002 of $8.33, those people who have invested with us in 2002 and have stayed in the stock have already -- have their investments fully repaid and have currently the share price basically for free.

The basis of dividends will continue to target a payout ratio of 25% to 50% of net income subject of course to maintaining the appropriate level of liquidity as a function of the prudent and strong financial position. Each April, the Board of Directors will give consideration to the declaration of a supplemental dividend if and when the conditions will allow it. This concludes the operational part of the presentation.

Paul will walk you through the financial highlights of the quarter and the six months. Paul?

Thank you, George, and thank you all for joining us today. A summary of selected financial data is included in the press release and an abbreviated version you will find now on the next slides.

Now I will add a few words on the more significant financial issues of quarter two and the half year. Total revenue for the quarter was almost $113 million compared to $114 million in quarter two 2009. Although crude rates achieved were higher than in the previous quarter two, product rates were lower.

Net income was $8.5 million in quarter two 2010 compared to $18.8 million in quarter two 2009. There were two vessel sales in quarter two 2010 and that contributed net gains of $5.8 million with no vessel sales in quarter two 2009. Operating income, excluding capital gains, was about the same for both second quarters. What hits our bottom line therefore were the exceptionally high finance costs, which I shall come to.

For the six-month period net income was $27.9 million including the gain from the sale of vessels of $20.2 million, compared to last year's half-year results of $43.2 million with no capital gains. In this quarter two there was also a decrease in the average size of the fleet to 45 vessels from 46 in the previous quarter two, while the fleet peak utilization was the same at 97.8% of available days.

Lost days this second quarter primarily related to dry docking of Eurochampion and La Prudencia. The average daily TCE per vessel for quarter two 2010 was $22,059 compared to $22,890 in the previous year's quarter. For the six months $21,371 was achieved compared to $25,187 last year.

Total operating expenses amounted to $29.4 million, down from $34.9 million in last year's quarter two, partly due to one vessel less but mostly due to the further notable fall in daily vessel operating costs. The daily average operating cost per vessel in fact fell by 14% to $7,342 from $8,514 and significantly fell 13% from the quarter one figure.

There are various reasons for this fall. Part is due to the 7% strengthening of the dollar which mainly impacted crude costs and there were also reductions in insurance costs. Much, however, is due to the stronger purchasing power achieved by the cooperation between Tsakos Shipping & Trading and Columbia Ship Management prior to the creation of a new ship management entity, TCM. This has contributed to reductions in cost of lubricants, repairs, spares, and stores despite heavier dry docking non-capital expenses during the quarter.

In total and as its daily cost per ship, overhead costs have kept fairly stable since last year. Management fees and G&A expenses were modestly down from quarter two 2009 and amortization of stock grants increased in line with an issue of grants last year. Finance costs totaled (technical difficulty) million dollars in quarter two compared to only $6 million in quarter two 2009.

There was a significant fall in direct loan interest to $5.6 million from $10.3 million as the average loan interest nearly halved to 1.5%. However, as we had fixed interest rates on more than half our loans at a higher level through swaps, interest paid on those swaps was nearly $10 million compared to $3 million last year. In addition, while we are grateful for the continuation of low interest rates, the reemergence of financial clouds in June ultimately resulted in negative non-cash valuation movements which on the non-hedging swaps totaled $4.5 million as opposed to positive movement of $4 million in quarter two 2009.

On the bunker swaps, while we gained nearly $700,000 in cash receipts, there was also a negative non-cash movement in the valuation amounting to $2.5 million compared to a positive $3 million in the prior quarter two. This was due to reduced oil prices at the end of June which have since risen again.

In quarter two we took delivery of the aframax Sapporo Princess paying $43 million, of which $40 million was from new debt, and we drew down $39 million at the very end of quarter two to finance the delivery of the Uraga Princess which took place in the first days of quarter three. During quarter two we paid nearly $29 million in scheduled repayments and over $34 million of debt prepayments on the sale of Hesnes and Marathon. Our outstanding loans, therefore, increased by a net $16 million through quarter two to $1.467 billion, slightly lower than the outstanding balance at the end of quarter two 2009.

The net debt to capital ratio was 54.9% and leverage based on estimated vessel values was also approximately 55%. We now have two suezmaxes under construction on which a further $22 million will be paid this year and $60 million in 2011. We are in discussions with banks relating to financing arrangements for these vessels.

With respect to the acquisition of the four panamaxes, a new loan of $70 million has been finalized with regards to the first two of which $35 million was drawn on delivery of World Harmony, the first. The second vessel, Chantal, will be delivered shortly and the second tranche of $35 million drawn. The other pair of panamaxes will be taken in quarter four and we are in process of arranging similar financing of at least $70 million.

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

Thank you, Paul, for your detailed (inaudible) the financials. At this stage we would be very happy to open the floor for any questions, so please if there are any questions let us know.

(Operator Instructions) Gregory Lewis, Credit Suisse.

Thank you and good afternoon. Congratulations on the recent four-vessel panamax acquisition. Could you talk a little bit about what your decision process was into making this move now and sort of maybe what you are seeing in the markets that triggered this acquisition?

Well, I think, as we have always said, we are looking for ways to expand our fleet with modern vessels that meet our specifications and also have strategic employment business. And I think this acquisition, those [excellent] ships were -- are sister vessels to our own two vessels, the Selecao and the Socrates, who are fixed for a long period of time in South America.

These are exact sister vessels and that is the reason we are putting those ships in the fleet in order to have the economies of scale as we always had. And the timing was the correct timing after selling our two older panamax product carriers, our first generation, the Victory and the Hesnes.

The Victory actually was delivered to her new buyers yesterday and the Hesnes was in April. (technical difficulty) the average age of our fleet, so I think it fits all the characteristics of the way the Company has grown since inception by reducing, selling the older ships and buying younger ships within the (inaudible) over these years.

Selling two of our suezmaxes and replacing them with a newbuilding order, which is exactly the same this year by selling two of our older aframaxes. When I say older I mean built in 2002 and 2003, so they are not that old but I guess we have been spoiled by the quality of our fleet. We replaced them with the [DNA] series so it fits all the characteristics for us to go forward.

Okay. Just following up on the product tanker industry, it looks like there has been some S&P activity that has picked up more recently as well as yourselves and a couple of other transactions that have happened. Do we think we are now looking -- we are now coming out of the trough in the product tanker market as we look out over the next one, two, three years?

It seems that the bottom for this market was the beginning of the year and as you correctly say we are seeing more chartering activity also. We are seeing better rates being offered by a couple thousand dollars for a category of ships on longer periods of employment. You have big, major oil companies and traders trying to get their hands on good quality products.

So I believe that the bottom was earlier this year. I think that the world is getting a little bit more comfortable about consumption and that is why we believe it's a good time for the product, a carrier for the product market. And the market we hope will continue to strengthen from the lows of December to January.

Okay, great. And then just one last question, it's more of an operational positioning question. When we look at the product tanker fleet in terms of the LR1s that have the min-max ratio and the handys or the MRs that have the 50% profit sharing split, as I look at the [database] it looks like you indicate you have a vessel, pardon my pronunciation, the Aegeas and the -- I can't even read that -- the Andromeda. You indicated that one is in the Mediterranean and it looks like one is in the South Atlantic.

Are you able to sort of give guidance on maybe is there a basin where primarily most of these vessels are, so when we are thinking about profit sharing we can kind of look at where rates are in that basin and maybe extrapolate what profit sharing might be? Or is it something where the vessels are really just trading all over the world?

As I said, the vessels we have right now on the spot is the Andromeda, she was scary goddess. Andro means man; she was eating men alive so she was a scary character. So the Andromeda and the Aegeas, where the Aegean Sea is named from, are currently trading in the Mediterranean on the spot market. And actually they are working for the US government for the [CDE] command.

My chartering department thinks I am giving too much information here, but I think this is something that we were -- actually we are achieving which is the first time we are receiving higher payments in checks of the United States Treasury, which I think it's very nice. So they are trading on the spot.

However, the six that we have on profit sharings, the profit sharings -- I think if you get the basket we are not affected in any of our profit sharings from one market. We have a basket of which 50% on average is in the Mediterranean and then you have a split of 25% of the Far East and 25% of the Caribbean markets in all sorts of the different vessels. So you have a global basket, that is what we get regardless where our ships are trading.

So a major oil company might decide to hire one ship and keep it in storage for their own reasons for six or nine months. In a trade it would have been zero profit sharing. That market to us, that is positive for us because we are lowering operating expenses at the same time we are getting the benefit of what is happening in the basket in the world market. (technical difficulty)

No, answered it perfectly. Okay, guys. Thanks for the time and have a great summer.

Thank you, same to you.

Natasha Boyden, Cantor Fitzgerald.

Thank you, operator. Good morning, gentlemen. I just want to go back to the S&P market and the acquisitions that you are doing. Given the pretty rapid downturn in rates that we have seen, especially on the crude side, are you seeing more vessels for sale in general now or is there still a relative forfeiting of assets?

Actually, for a strange reason what we are seeing is a big demand for both vessels on the crude and the product side. We have seen the market increase since May significantly with a [re-emphasis], would have been close to $100 million. There is talk about vessels now going or people asking -- that is not to say we are at these levels -- but people are asking for $125 million from delivered the VLCCs.

So we have seen at least a 25% increase on the crude side values, and we are seeing of course an increase which has not yet taken the same level on the products. So there is a positive move on the values, whereas the actual market is in a very dull, [summering] mode for the last six weeks.

Okay. So given your recent purchase of the four panamax vessels, and obviously you found those values attractive, what vessel classes are most attractive to you at this point, particularly given your views on the market?

As I said, I think the panamax, which is a market that we like, first of all is a market which is one of the least -- you are much better and more analytical of this but the markets which is the least built. And we are seeing I think large panamax like the ones, the panamaxes that we have built -- the Selecao, the Socrates, and those four sister vessels -- are the largest vessels that can go through the Panama Canal so I think that is very important to know.

So you have close to 19% -- 18%, 19%, 20% there are about 85 panamaxes being built on top of a fleet of about 420, 430 depending. So that is one of the reasons we like this size.

I think another size that we are attracted and the Company really will be looking at the right time is the renewal of our VLCC fleet. We currently have a -- we have 10 suezmaxes, 10 aframaxes, so having our company called TEN we are fine with this, and we might need to renew part of our VLCC fleet. So we are looking at this category at, of course, logical levels.

Sure. So when you say renewing the VLCC fleet and you just talked about the values going up, would you look more to prompt delivery or would you look more to newbuilds?

What I think we, as responsible tanker owners, and I hope there are plenty of them out there, owners in general, would be to try and reduce the newbuildings coming out. So we would either look at very modern ships or we would look at cancellation of vessels or ships that have been already ordered.

I think it would be very foolish from owners -- and everybody pushes his own strategy -- to go out and order ships because I think that would really create, will prolong the low side in the market.

Okay. And then I just have a very general question for you. You mentioned the summer doldrums for the rates that we are seeing right now. The general consensus is that rates are going to have a pretty good spike up in the fourth quarter and that is probably going to be seasonal. Do you see any other catalysts that would cause the spike in rates in the fourth quarter in 2011?

Well, I think what we are seeing is -- we expect to see, with economists becoming more comfortable, we expect to see the product [rate] move higher and that is why we are looking in this category of vessels.

We are looking also at small changes in market movements. I mean (technical difficulty) which means that all the products that would go to Iran from a normal market now might go, from people who are still trading of course with them, some places like Venezuela and far away places of China. So that will create on the product side more tons and [tons miles] also.

Okay, great. Thank you very much for your time.

Jon Chappell, JPMorgan.

Thank you. Good afternoon. Paul, on the revenue side it came in much higher than our expectations and I know you have a couple of profit sharing arrangements that are done semiannually. Is there any way to quantify the impact of the six-month profit share in the second quarter?

I will let Paul answer because he is the money man. I just do the (inaudible).

Yes, the VLs, of course -- the two VLs, Madrina and Prudencia, are the profit share results and they came in rather nicely. I mean boosting our -- squeezing their profit into quarter two that boosted the VL rates for those particular vessels around, if I remember right, around the $55,000, $60,000 mark.

And anything else on the profit share front?

Not really. There was some back profit share on a couple of the suezmaxes where we had a bit of a dispute with one of the charters as to the exact determination. So they came into quarter two rather than in previous quarters and that might have helped $0.005 or so.

Okay. And then on the operating expense side, same thing but the opposite; lower than expected. And I know your joint venture with Columbia really didn't start until the beginning of the third quarter. Is it safe to assume that a lot of the savings that you are expecting to reap from that partnership were already achieved in the second quarter or can the DBOE drop even lower as you fully integrate that joint venture?

Having representatives of our technical management in the room at the moment I am not going to let them believe that the battle is won, so we would expect to see a thousand drop every quarter. But seriously though, I think we have seen good indications of what can be achieved and we hope now that we are going full throttle that we will see more savings. But as to what they would be I would hesitate to commit ourselves at this moment.

And then finally, just a follow-up question on the acquisition that was announced last week. The price paid per ship seems to be 15%, 16% higher than most brokerage accounts for an immediate delivery resale. You mentioned in the press release that they had some newbuilding extras for quality enhancement. Can you give a little bit of an explanation on what some of those enhancements were?

And then also in the current charters that you have with the South American state-affiliated company and in future charters, do you -- are you getting and do you expect to get compensated for the extras that are put on those vessels?

As you know, we are building most of our ships, the majority of our ships, based on the requirements of the major oil companies we are looking to employ. But these specific ships are on a seven-ship strategic alliance, with a major charter.

And I think we have a base rate, it's one of the charters where we have a base rate and an upside -- I hope they are not listening in on our conference call -- which is very strange. Which means that we actually get -- we have the protection of our investment, the 100%, and then we share 100% of the upside.

And the vessels have exactly the same characteristics and extras that (inaudible). And we (inaudible) our existing vessels have already in their vessel supposed -- because of the 2009 build that comply with all the future requirements, mainly for the Panama Canal crossing (inaudible) business that they do because they trade from the west coast of South America to the Caribbean.

Does your current South American customer have the appetite to take on the last two ships? And if not, are you confident in your ability to get the same type of charter base rates and upside because of the new building enhancements with another charter?

(technical difficulty) the discussions we are (inaudible). The vessels are in a pooling arrangement until, most part of this year and we are in discussions with the specific charters to take participation. As you know, we have this relationship also regardless of equity participation in our vessels and we are in these type of discussions right now.

Okay. Thanks, Nick. Thanks, Paul.

Fotis Giannakoulis, Morgan Stanley.

Hi, gentlemen. I would like to ask you also about this recent acquisition and give us a little bit of color of how the price was determined. And also what was the rationale of the selling entity that sold these vessels to TEN, if you can comment on that?

Sure. The price was done by three independent brokers and that was the, I think, average price. And on top of that, I think the extras which we have discussed before. The selling decided it is getting out of tankers and I think our aim is to have in them 100% of the tanker's fleet with sister vessels. So I think this has been the rationale.

So can we assume that the selling party is going to be completely out of tankers? There is not going to be any overlap between the businesses of TEN and the seller in the future?

Yes, this would be -- this has always been our aim. And I think this is achieved now almost 100%, yes.

My second question has to do with the stock price of TEN and the evaluation. The Company has been trading at a steep discount to net asset value. Is there any plan from your side of how you can bridge this gap and increase the stock price if you also think that the stock is undervalued?

Of course we think that the stock is very, very undervalued and that is why we have been selling I think a significant amount of our older assets in order to give also to the market what the real valuation is. I think we have gone and also gone on a quarterly dividend which I hope will help.

Mr. Chairman?

I was going to add, Niko, that we think an important step to satisfy the demands of certain classes of investors was to go to them on a quarterly dividend basis. But I would answer your question with a question. We would very much welcome any ideas you may have as to how our real values can be realized in the going stock price. We are at a loss to understand the deep discount that prevails today.

Our role is not to judge the market and that is the price that the market gives. But I want to ask further to that, if you are considering of potentially buying back shares or increasing your dividend. There is significant cash sitting on a balance sheet right now. And since you also think that the stock is undervalued, are there any thoughts of buying back your shares?

We have bought a considerable amount of shares in the past. It was at a time when we felt that the best investment available was to purchase our shares. That still is an attractive alternative, but at the same time we need to balance that with having the appropriate cash to pay a sustainable dividend and to grow the Company. So at the present time, looking at the alternative uses of cash, the decision has been that while we will not be buying shares in the immediate or foreseeable future.

My last question has to do with the LNG vessel. Can you give us an idea of what is the earning capacity of this ship? How much money is it making right now? And what do you think is going to be your strategy in relation to this vessel? Would you consider disposing of this vessel or expanding further in the LNG sector?

I think having one LNG is not -- you either have to have a significant fleet of LNGs but that one, our vessel has performed very well operationally. This is the reason that -- perhaps it's one of the few vessels that has been able to (technical difficulty) to be continuously on hire since the initial delivery three years ago; a long charter, to [be brief]. And our very long charter does not have a very large European end user because of the name and the reputation of the vessel.

Of course having one vessel is not, it is not a strategic investment. It's a big investment but it is not a strategic (inaudible). So I think we are looking and we are discussing with end users a different opportunity that will make this investment much more strategic in -- with equity participations, etc., etc., from their side. Right now the vessel has been covered for another year but of course this does not stop us from looking at opportunities and discussing with the end users about further -- the future for the LNG.

Thank you, gentlemen.

Thank you. There are no further questions at this time. I would now like to hand the call back for any closing comments.

Thank you very much for again following the Company. As the Chairman said, we hope that with our continuous performance we will get the share price in excess of $20 where it should be. And we are working hard for that.

We are looking at the very interesting environment. Right now we are facing a very slow market environment, but this is the time that opportunities arise. And we expect the next two quarters, although they might be difficult on the market side, through the strength of the Company and the long-term employment to be able to take advantage of opportunities that we will see.

So we want to wish all of you a very peaceful and relaxing August. We will not be relaxing ourselves too much and we would like to thank you very much. Chairman?

Ditto. Have a good summer.

Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.