Tsakos Energy Navigation Ltd (TEN) 2021 Q1 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to Tsakos Energy Navigation Conference Call on the First Quarter 2021 Financial Results. We have with us Mr. Takis Arapoglou, Chairman of the Board; Mr. Nikolas Tsakos, President and CEO; and Mr. Paul Durham, Chief Financial Officer; and Mr. George Saroglou, Chief Operating Officer of the company. (Operator Instructions) I must advise you that this conference is being recorded today.

And now I pass the floor to Mr. Nicolas Bornozis, President of Capital Link, investor relation adviser of Tsakos Energy Navigation. Please go ahead, sir.

Thank you very much, and good morning to all of our participants. I am Nicolas Bornozis of Capital Link, investor relations adviser to Tsakos Energy Navigation. This morning, the company publicly released its financial results for the first quarter of 2021. In case you do not have a copy of today's earnings release, please call us at (212) 661-7566 or e-mail us at ten@capitallink.com, and we will be happy to send a copy to you right away. Please note that parallel to today's conference call, there is also a live audio and slide webcast, which can be accessed on the company's website on the front page at www.tenn.gr.

The conference call will follow the presentation slides, so please we urge you to access the presentation slides on the company's website. Please note that the slides of the webcast presentation will be available and archived on the website of the company after the conference call. Also, please note that the slides of the webcast presentation are user-controlled, and that means that by clicking on the proper button, you can move to the next or to the previous slide on your own.

At this time, I would like to read the safe harbor statement. This conference call and slide presentation of the webcast contain certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties which may affect TEN's business prospects and results from operations.

And at this moment, I would like to pass the floor on to Mr. Arapoglou, the Chairman of Tsakos Energy Navigation. Mr. Arapoglou, please go ahead, sir.

Thank you, Nicolas. Good morning, good afternoon. Thank you for joining our call today. Producing a positive operating income under the present market conditions is a great feat, for which Nikos Tsakos and the team deserve congratulations once again. These results are fully in line with our industrial model and strategy, which is to provide high-quality service to our blue-chip customers, while ensuring high levels of cash generation to cover our obligations even in today's weak market.

Continuous fleet renewal, state-of-the-art vessels, operational excellence and ample liquidity protect TEN and position it to benefit greatly from a market upturn, as we all expect. Despite the challenging market, we continue to pay common dividends in an uninterrupted way since inception. We continue to reduce debt and repay outstanding preferred issues.

And lastly, the company is increasing its focus on our ESG footprint and maintain our high governance standards, both I know are areas of increased focus by you, the shareholders.

And with this, I pass on the floor to Nikos Tsakos. Thank you.

Thank you, Chairman. And although it's never a pleasure to report a loss-making quarter, I have to say that with the efforts from everybody in the right direction, the first quarter losses were significantly better than the fourth quarter because I think this is what we are -- that's what logically we are comparing ourselves to the last quarter of 2020. I think we had -- our loss was in excess of what the first quarter was. So in that way, we are going towards the right direction. As we have always been saying, the company strategy of protecting all our obligation with our time charter fleet and profit sharing is working once again.

We were able to have a positive operating performance, a small one, as Paul will say, just a couple of million dollars. But I think this gives us the ability to take care of all our obligations from the vessels that are on time charter and on profit shares and allows the company to maintain its growth. We are in -- on our fifth down cycle, as Mr. Saroglou will show in his slides and every time the company comes stronger out of it.

What we are facing today is not only a challenging market, but I think it is a structural change in our industry. And I think this is what we and the heads of our environmental and operational committee headed by Mr. Efthimios Mitropoulos, former Head of the IMO and his team. We are looking on talking to our clients of what will be the ship of the future.

And I think this is something we spend a lot of time, a lot of effort and we feel very proud so far with the results that we are achieving, without losing, of course, our eye from the goal of what we're doing day-to-day to make sure we run a tight ship. We make sure that our seafarers and personnel have been able to safely navigate through this unprecedented COVID crisis that seems to be coming back again from all over the world.

And I will, of course, make my comments further down, and I will be answering questions, but I will take, again, this opportunity to thank the command and the officers and staff of the U.S. Coast Guard for their immediate response to one of our seafarer's COVID scare and -- on our good vessel, the Artemis offshore, the west coast of the United States on its way, crossing towards Korea. And I have to say that within hours from our first report to the U.S. Coast Guard, 2 helicopters together with a bunkering fueling helicopter -- aeroplane were above the waters on our vessel actually picking up our seafarer, who now is recovering in a San Francisco hospital. I think these are things that make us proud and makes all our seafarers feel that they belong somewhere, and they're not alone in this vast ocean in these circumstances.

So again, thank you very much to all and I think we are going to be doing a much more formal thing in approaching the right authorities going forward.

And with that, I will ask George Saroglou to take us through the developments of the last, I would say, 90 or 180 days and we will be back to answer some questions. Thank you very much.

Thank you, Nikos. Good morning to all of you joining our earnings call today.

We start the call by thanking the officers and staff of the U.S. Coast Guard for their successful efforts in rescuing one of our seafarers, 250 miles off the coast of San Francisco. Human life is of paramount importance at sea or ashore, but saving life at sea, most of the times, is more challenging due to the prevailing circumstances, weather or otherwise, and events like this one make all of us very proud to belong to the international shipping community, by which the U.S. Coast Guard leads by example.

We navigated for over a year now through the COVID pandemic. And although we see the light at the end of the tunnel, this unprecedented crisis is not over yet. Our priority continues to be the health and well-being of our crew and shore personnel, to have no COVID incidents in the fleet and no disruptions of operations. I'm pleased to report that we have managed the situation with no major incidents.

And for this reason, I would like to offer, once again, congratulations to our seafarers and shore personnel for their resilience and professionalism during this stressful period, to thank Tsakos Columbia Shipmanagement, our technical managers, for their efforts in keeping seafarers safe and in managing crew changes in an environment where regulations and lockdown restrictions made planning a mission impossible; our IT for making sure we operate remotely seamlessly and without disruptions; and last but not least, the team of medical experts that is helping all of us almost daily with good advice in dealing with the deadly virus.

The tanker market has been very weak for more than a year now. The price of oil has recovered from the historical levels we have seen during the first half of last year, and that made the overall market weakness even harder as bunker prices came almost back to their pre-pandemic levels. But there are also a lot of positives to consider. Oil demand is recovering from the monumental losses of last year, and after a strong demand growth year in 2021, experts now see a return to the pre-COVID demand levels by next year.

OPEC+ managed the collapse in demand diligently and with discipline and has now restored more than 40% of the initial 10 million-plus production cuts and plans to gradually add more barrels, which means more cargoes to a market that is thirsty for oil as global oil stocks are now below the key 5-year average levels in all main demand areas, OECD and the developing world. And of course, the supply of new tankers continues to be at historical low levels, while the global fleet is getting older, and new upcoming regulations are expected to push the phase-out of a big part of this aging fleet.

Let us go to the slides of our presentation. In Slide 3, we see that since TEN's inception in 1993, we have faced 4 major crisis, but each time, the company, thanks to its operating model, which is built to be crisis-resistant, has come out stronger. From 4 modern tankers in 1993 to a pro forma fleet of 67 vessels for an average 15% annual growth in terms of deadweight tons in the 4 decades we operate.

In Slide 4, we see the pro forma fleet and its current employment profile. We have a combination of vessels in fixed time charters and flexible employment contracts, time charter with profit sharing, CoAs and spot trading that capture the market's upside. All dark blue color vessels, 24 in the slides, are on fixed time charter rates, while the light blue and red color vessels or 2/3 of the fleet currently in the water have exposure in the market's upside. This means that TEN is well positioned to capture the positive tanker market fundamentals and expected recovery in freight rates.

We took advantage of the low freight environment to bring forward a number of scheduled special surveys in order to have these vessels available once the tanker market rebounds. And since fleet modernity is a key element of our operating model, we recently concluded the sale of 3 of our older tankers, a 2003 build Panamax tanker and 2, 2005 build Suezmax tankers, which we replaced with 2 new building orders that will increase the company's exposure in 2 specialized sectors, namely in the DP2 shuttle tanker and LNG categories, with both vessels coming with long-term employments attached.

Slide 5. The left side presents the all-in breakeven cost for the vessel types we operate in TEN. As you can see, the cost base is low. During the first quarter of this year, the revenue generated from the time charter contracts was again sufficient to cover the company's cash expenses, paying for the vessel operating expenses, overhead chartering cost and loan interest.

In addition, we have to highlight the purchasing power of TCM and the continuous cost control efforts by management to maintain a low OpEx environment for the fleet, while keeping a very high fleet utilization rate quarter after quarter and, which for this quarter, despite bringing forward scheduled dry dockings ahead of time, we achieved an overall 92% utilization. And thanks to the profit-sharing element, a cornerstone of TEN's chartering strategy, for every $1,000 increase in spot rates per day, we have a positive impact of $0.57 to the annual EPS based on the number of TEN vessels that currently have exposure to spot rates.

Slide 6. Debt reduction is an integral part -- is also an integral part of the company's capital allocation strategy. Since the company's debt peaked in December of 2016, we have repaid $281 million of debt and repurchased $100 million in 2 series of step-up preferred shares, the B and C series that we had outstanding. Today, the net debt to capital ratio is at 50.1%.

Slide 7, in addition to paying down debt and growing the company through timely sale and purchase and newbuilding transactions, we continue to reward shareholders with dividend payments. We announced today $0.10 per share dividend for common shareholders that will be paid on July 2021. Since the company New York Stock Exchange listing in 2002, TEN has rewarded the company's shareholders with almost $0.5 billion in dividend payments.

Regarding the market, Slide 8, it has been an unprecedented year for global oil demand because of the COVID pandemic and the measures to contain it. In 2020, we had the first year of negative growth since the period of the Great Recession in 2008/2009. Year-end demand was approximately down 8.6 million barrels per day, below the levels of the 2019 year-end demand figures, or approximately 8% down. Most of the losses were in jet aviation fuel category as mobility and traveling came to an almost complete standstill last year.

The expectations for 2021 is for oil demand to grow back 5.4 million barrels per day and another 3.1 million barrels per day in 2022, reaching the pre-COVID oil demand levels at year-end 2022. Full demand recovery, of course, depends on how effective we are going to be in continuing to deal with the virus and its mutations. Nearly most of the 2020 demand reductions were found in the OECD countries, mainly North America and Europe. For the non-OECD world, even from the second half of last year, the International Energy Agency raised demand estimates, particularly for China and the rest of the developing Asia. This year, we have seen the OECD countries rebound from the low base level in addition to the expected demand growth coming out of China and developing Asia.

On the global oil supply front, OPEC+ producers continue to manage supply with discipline. Almost half of the 10 million barrels of production cuts have been returned to the market. The next OPEC meeting in 2 days will decide on production levels from August 2021. As inventories in developed countries and in the developing worlds are coming down below the 5-year average levels and oil demand is expected to grow, OPEC+ will continue to grow production levels in order to meet incremental oil demand. Higher demand from the second half of the year and the release of additional barrels to the market should be the positive catalyst for tanker demand and tanker rates.

Supply on Slide 9. With the oil demand recovering, let us look at the forecast for the supply of tankers. The order book as of May stands at around 6.6% over the next 3 years, the lowest in almost more than 20 years and, at the same time, a big part of the fleet is over 15 years. 360 vessels or almost 8% are currently above 20 years. Upcoming environmental regulations could push more tankers approaching our above 20 years to go for scrapping.

And as the next slide highlights, 2018 was the highest scrapping year of recent records. Last year, scrapping was lower as expected. However, this year, with the first 6 months gone, scrapping in both absolute number of scrapped vessels and in deadweight ton already exceeds the full year 2020 statistics. And with regulations coming and approximately 8% of the global fleet above 20 years, we expect the scrapping numbers for 2021 to accelerate further.

To summarize, oil demand, the recovery continues with strong growth expected in '21 and '22.

Oil supply. More production increases are on the horizon by both OPEC+ and other non-OPEC producers.

Order book supply of tankers. The order book to current fleet ratio is at historical low level, which points to a recovering and stronger freight market for the next 18 to 24 months.

TEN's balance sheet. We have built a crisis-resistant operating model. We have a modern fleet well positioned to capture the positive market developments, which are expected to start from the second half of this year. We have a strong balance sheet, strong banking relationships that will allow the company to take advantage of the opportunities that will be presented.

And lastly, looking at how other shipping sectors are faring right now, freight rates and asset prices for both containers and bulkers are currently going through a very strong market. If past history can be guidance for the future, there is always about a 6-months lag before there is a positive spillover effect to the lagging shipping sector. And so tankers should be the next shipping sector to enjoy a better market.

With the expectation of better days ahead of us, I will ask Paul to walk us through the first quarter '21 financials. Paul?

Yes. Thank you, George. Well, quarter 1 started with positive expectations despite the difficult market. And we still have such expectations as revenue was $140 million and our loss in quarter 1 was only $4.8 million, which was less than feared as the loss was successfully contained by our time charters that were still able -- as George has mentioned, still able to cover all cash expenses, leaving a surplus of $12 million, while half of our fleet on spot were able to generate a further $18.5 million.

Much of our optimism was also due to the healthy cash reserve inherited from the strong market of the past year, allowing us to meet the challenges of the current downturn.

Our results were also affected by taking advantage of the market lull to advance 4 dry dockings into quarter 1, allowing the vessels to exploit a better market later in the year. However, market conditions did not allow us to benefit much from profit share arrangements in contrast to the strong prior quarter 1, although we do expect profit share will play a major role in the eventual rebound.

Daily average TCE per ship was $18,000, a satisfactory average given the large increase in bunker costs and the poor rates available in the market. Operating expenses fell $4 million due to tighter economies in the light of market conditions and partly due to reversal of prior year accruals relating to [crew tanks].

Average daily OpEx per vessel fell 6% to $7,400 to -- I beg your pardon, from $7,900 to $7,400, that is rounded numbers, despite dry dock costs and a weak dollar. G&A expenses in quarter 1 fell 10% as management also applied tighter controls on the overheads. As a result of all these factors, TEN achieved a positive operating income of $2.2 million.

In addition, finance costs fell by $27 million due to reduced debt by $30 million and to lower interest rates and margins and to a $5 million increase in bunker valuations compared to the prior quarter 1.

Since the start of the year, poor rates reduced our EBITDA to $37 million, but we were still able to maintain adequate cash reserves, while time charters and vessel sale continued to generate decent cash flow. In fact, we recently sold 2 more Suezmaxes in a sale and leaseback deal, releasing $17 million cash after repaying $27 million debt.

Plus the Panamax, the tanker Maya releasing $4 million cash after $5 million debt repayment, and we aim to sell more vessels as part of our fleet renewal.

Also, we continue our ATM program, having raised about $19 million so far this year. And in effect, we believe the market will turn during the second half due to positive fundamentals, plus a possible demand rebound as lockdown measures abate and normality returns.

And now I'll return the call back to Nikos.

Paul, thank you very much and looking forward for more positive results next time. And with that, we would like to open the floor for any questions.

(Operator Instructions) Our first question for today is from Randy Giveans from Jefferies.

A few questions for me. First, I guess just the most timely question. It was reported in the news this morning, you're partnering with Equinor for 4 dual-fuel Aframax newbuildings. Can you comment on that story or maybe provide some additional details with these Equinor assets?

Well, as you know, TEN's model depends on partnering with first-class clients. We are in the process of discussing not only with Equinor, but with other clients for the step forward. Our industry is changing. The structure of the industry is changing. We had the biggest change back in the '90s when the OPA 90 changed the actual hull of the vessel. I think we are in the process of the changing of the actual [composition] of the ships right now, and this is something we are discussing with clients. There's not much details we can say. But for us, we are very proud to have the expertise of our clients together with our team in looking for the future even more environmentally friendly vessels out there and always with an accretive transaction in mind.

Okay. That's fair. And then with those kind of accretive transactions segueing to your LNG charters and those counterparties, can you give a little more color on those 3 LNG contracts in terms of durations, rates, counterparties?

Well, the star of the energy market for the last, I would say, 2 quarters so far have been the LNGs. So we were very lucky and very well placed and thanks to the efforts of our in-house team, we were able to actually deliver their vessels back to back from their previous employments to their new employments without any loss of a single day. So I think that this is very good. And when we're talking for LNGs, you know that the figures are significantly high. So that was very important. Also passing the survey is very on budget of those vessels. And they range from, I would say, an average of 2 years to a minimum then of 5 years for the other employment with option that takes it up to the 8-year period.

Got it. Okay. And then I guess, looking at kind of just further fleet renewal efforts and maybe on the sales side, right, you've taken around or you still have around 15 tankers all around 15 years of age. So is the plan to kind of divest those as you're building these new kind of dual-fuel vessels?

Yes. I mean this is the next. We will be phasing out these very good quality ships. I think perhaps we must be one of the very few companies that we have maintained a very firm belief in where we build our assets, and the majority of our assets have been built in places like Korea and Japan. And I think this is where we are maintaining right now our position. So we are looking to replace those very good assets with assets that are built in sister yards.

Got it. I guess last question, 2Q is now pretty much literally complete. All the other peers gave kind of quarter-to-date rate guidance. Can you provide that for 2Q? And just trying to get a sense of how that compares to 1Q.

Well, Q1 was a difficult quarter, but I think, as Paul has very eloquently said, I think it was a modest loss, managed because of the company's strategy of time charters in the vessels. So it was a much -- it was a significantly better quarter than the fourth quarter. And I believe that the second quarter with the help of our LNG input, which is going to be significant, will be a better quarter than the one that we just reported.

So I think that as much as I can say and I think as George and the Chairman said, we are looking at the better days ahead. We have a strong indication from charterers that are out there looking for long-term employment or vessels. The supply side is the lowest in recent memory since the early '90s. So I think the light at the end of the tunnel is appearing slowly but steadily.

Our next question is from Magnus Fyhr from H.C. Wainwright.

Just couple of questions on the appetite among oil companies for time charter contracts. I mean the trading firms have been pretty busy securing tonnage over the last couple of months. Rates are still very low, but have you seen much of a change from the oil companies as far as the appetite on maybe taking in more tonnage? And I don't know, how do you structure these contracts with rates still depressed?

Well, I think from what George described earlier, we actually played defense, as you say, in the United States. So when a lot of our renewals came in, we decided not to go for our long-term charters at this stage. The appetite is there. There are companies that are looking for, I would say, a lowballing numbers. But we are in discussion for anyone who is usually on a minimum and a profit share. So there are quite a few of those businesses that we are discussing. And we are seeing signs that people have belief in the market. We've seen companies like Frontline making investments in VLCCs recently and not only. So I think it is a good sign.

And we are seeing also pooling. I mean we are big supporters of pools. We strongly believe that pools are the best way of consolidation. It actually allows you to keep your interest on your ship while your ship properly maintained. I mean, as George reported or Paul reported, we were able to control our expenses, have another reduction of 6% or 7% in different circumstances, which we are proud of. We went down from to $7,900 to $7,400 in OpEx in a difficult time when COVID restrictions put a lot of pressure on expenses. So I think we are thankful to our men and women on the ships and the officers that are being able to do so. And then through consolidation, we are able to have a better en bloc negotiation with our clients.

All right. And just going back to the prior questions regarding selling some of these older ships. I mean these ships are typically the ones that will have the best rebound in asset values if the market recovers and they could generate significant cash flow as well. How do you balance that having these very well-maintained ships that you know very well and keeping them and maybe capturing some of the market recovery going forward versus staying compliant with new regulations?

Well, Magnus, we are doing transactions, trying to have some imagination in what we do. So one of the ways that you can achieve exactly what you described is with some sales and leaseback transactions, that to -- as you know, are something that the company has always believed in. So in that sense, you are able to sell the vessel forward at a premium or a significant premium for her age, but then maintain exactly what you said, use for another 3 years, so here trying to capture the upside. So I think you hit the nail on the head with your point.

All right. Good. Good. I guess one more question. As far as the dry docking, you brought back some dry dockings in 1Q. What -- refresh my memory, what's your plans now for 2Q -- I'm sorry, 3Q? We're almost -- we're basically done with 2Q. So what can you bring forward in 3Q or in 4Q?

We're doing another 4, bringing forward. We're doing on the Thomas, the Elias. So we're bringing ships that are due early '22, doing them now because they are in the right location at the right time. So I think it's better to use the summer lull and have them ready as we go forward in the fourth quarter. So I think we'll have another 4 ships, but I would say, efficient dry dockings when there is the right area.

And just one last question, if I may. What -- I mean the cash balance dropped quite a bit. It's a little bit below your comfort level, even though it's above my comfort level. What -- do you guys feel comfortable with current cash position, even though it's come down a little bit?

Thanks to the efforts of our Chairman and the team here, you will find out in the third quarter, it has rebounded significantly.

(Operator Instructions) There are no further questions that are waiting at this time. I'll hand the call back to Nikolas Tsakos, CEO. Please go ahead.

Well, before I ask our Chairman to take his last wise words, I would like again to restate that we are in a process of a structural change in our industry. The structural change, as a company we faced it again back in the early '90s with the OPA 90. At the time within 4 years, we transformed the company from a single-single company to a fully double-double company with the help of everybody.

We are -- that was a big change in the hull design of the ship. I would say, the biggest hull change since the inception of shipping, where today, it looks like it's a usual thing, but at the time, there was a lot of discussion about its size, safety and about how efficient and safe it would have been going forward, but it has been proved that it has reduced pollution and I'm talking about by 99.9%. And having Mr. Mitropoulos here who is in the forefront of those discussions at the time I think it was a very important move and thank you very much.

The same team, our environmental and operation team, is now in discussion with our clients for the change in the engine design, which is the next step. So we -- I think the industry took the environmental changes of the hull in the early '90s for the OPA 90, and we are in the same process. And the company is there with exactly the same enthusiasm, much, much stronger company with the support of our clients in discussing with our clients over the next step. And I think one of your questions earlier about discussions with clients, yes, that's what we do. We sit around with them, and we try to find what will be the ship of the future. And hopefully, we can do it by making some good returns in the meantime.

And with that, I would like -- thank you.

Thank you, Nikos. All the best in the next quarters. And congratulations for the proactive management that has positioned TEN where it is ready to benefit from market recovery. Well done.

Welcome. Thank you. Thank you to all.

Ladies and gentlemen, that does conclude the call for today. Thank you everyone for joining. You may now disconnect.