Tsakos Energy Navigation Ltd (TEN) 2022 Q2 法說會逐字稿

Thank you for standing by ladies and gentlemen. Welcome to Tsakos Energy Navigation Conference Call on the Second Quarter 2022 Financial Results. We have with us today, Mr. Takis Arapoglou, Chairman of the Board; Mr. Nikolas Tsakos, President and CEO; Mr. Paul Durham, Chief Financial Officer; and Mr. George Saroglou, Chief Operating Officer of the company. (Operator Instructions) This call is being recorded. (Operator Instructions)

I will now pass the floor over to Mr. Bornozis, President of Capital Link, Investor Relations Adviser for Tsakos Energy Navigation. Please go ahead, sir.

Thank you very much. I'm Nicolas Bornozis Capital Link, Investor Relations Adviser to Tsakos Energy Navigation. This morning, the company publicly released its financial results for the second quarter of 2022. In case we do not have a copy of today's earnings release, please call us at (212) 661-7566 or emails ten@capitallink.com and we will have a copy for you right away. We will send a copy to you by email. 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 go 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 of operations. TEN is celebrating this year its 20th anniversary for its listing on the New York Stock Exchange. During this 20-year period, the company has the enviable track record of uninterrupted dividend payments regardless of market cycles. Including the current dividend, TEN have distributed $0.5 billion in dividends to its shareholders.

At this moment, I would like to pass the floor on to Mr. Takis Arapoglou, the Chairman of the Board of Tsakos Energy Navigation. Please go ahead, Mr. Arapoglou.

Thank you, Nicolas. Good morning, and good afternoon to all. Thank you for joining us today for our second quarter and 6 months 2022 results presentation. Once again, our results and the revolution throughout the first half of the year justifies our business model. In bad markets, it offers us stability and downside protection that allows us to perform far better than all of our peers. We continue to pay dividends and all our obligations and interactively maintaining integrable relationship with our banks, reducing debt, raising capital countercyclically and all these nice things, which we always say.

And in good markets, the model allows us to immediately benefit from market recovery, as is the case now, which in turn allows us to continue all the previous mentioned actions to a higher degree and paying substantially higher dividends rewarding our shareholders in line with our increased profitability. This is the model. This is how it works. It has been tested many times and congratulations once again to Nikolas Tsakos and his team for this excellent results and for a perfectly designed and executed strategy. Thank you.

Nikos Tsakos, over to you.

Gentlemen, thank you very much. And first of all, we would like to offer our deep condolences for all our U.K. and British investors and friends and colleagues to starters around the world for losing Queen Elizabeth the second, and we hope that her memory and I'm sure to all of us who never had any other queen that we knew of and long live the King. So please accept all of our condolences to all our British and Common Wealth Friends. And thank you, gentlemen, for your good words.

Our predictions in the last couple of quarters have been that the market only because of exiting the pandemic and returning to normality and with a very low and further shrinking order book of ships was going to turn. The unexpected events, at least for us, of March and February 2022, have actually also surpassed our expectations and our forecast. The geopolitical events that have dislocated the energy routes have given us many more ton miles, perhaps more ton miles than the current tanker fleet can actually cope and that's why we are seeing rates since the first quarter, second quarter. And I would say, the third and the fourth quarter seems that the best according to rates is yet there to come. So the first 6 months of the year have been positive as we were expecting, but we expect the second half to be even stronger as we're going forward.

And with this right now, I will ask George to give us an update of where we have been and what the company has been doing, and then Paul will take us through the numbers. Thank you.

Thank you, Nikolas. Good morning to all of you joining our earnings call today. Let's go to the slides of our presentation, and let's start to Slide #3, where we see that TEN since inception in 1993, we have faced 5 major crisis and each time the company has come out stronger, thanks to its countercyclical operating model. This time is no exception. When we started the year, it appeared that we were finally near the end of the COVID pandemic, and we expected the post-COVID oil demand recovery to materialize gradually through the year.

But since the end of February, we are facing another crisis a war in Europe with tragic loss of human lives. The world created new challenges for the world and our industry.

Voluntary self-imposed, but also many rounds of strict western sanctions against Russia, which is a major commodity exporter changed prewar trading routes for all commodities, including oil, oil products and natural gas. Europe started replacing its short-haul Russian crude oil imports with longer haul barrels from the United States, Brazil, West Africa and the Middle East, significantly increasing ton miles for European crude oil imports. Europe's sanction plan is to stop importing any Russian crude oil from December. Substituting these Russian barrels, we had an even higher multiplying effect on ton-mile growth, which should keep the good freight market growing stronger for longer.

At the same time, Russia is trying to find alternative customers for its crude oil output, most likely in Asia, China and India, in particular. India recently reported the Russian barrels in their import mix increased from 2% before the war to 12% currently and European oil product imports, like, for example, diesel, where Russia was also remaining exported will stop going to Europe from February of next year will also have to be replaced with imports from the U.S. Gulf, India, the Middle East or from other locations, adding more to ton-mile growth and freight prospects for product tankers. We are already benefiting from this trend with our product fleet. With a low order book and the redesign of the global energy map for both crude and oil product trades, we expect the tanker industry to go through a sustained strong market.

Next slide, Slide 4, we see the fleet and its current employment profile. 40 out of 7 vessels in the pro forma fleet of 57% of the fleet as market exposure, a combination of spot contract of affreightment and time charter with profit sharing. While 45 out of the 70 vessels in the fleet or 64% is in secured products, fixed time charters, time charters with profit-sharing and contract offer affreightment. This means that TEN is well positioned to capture the prevailing positive tanker market fundamentals. Fleet mortality is a key element of our operating model.

In August, we sold the 2003 built Panamax tankers. Asset prices are going higher. There is renewed interest for tankers irrespective of ads for some buyers. Management is actively exploring opportunities to divest some of its earlier generation vessels and replace them with more modern eco-friendly greener vessels. We still have 4 remaining new buildings, which we expect to take delivery from the fourth quarter of next year, which are part of our green ship dual fuel LNG from a order, plus we have a 2020 built scrubber feet at South Korean built VLCC that we expect to take delivery in November.

All 4 newbuilding vessels are coming with long-term employment attached In the next slide, we present the breakeven cost for the various vessel types we operate. We maintained a low cost base. During the year, the revenues generated from time charter contracts was again sufficient to cover the company's cash expenses paid for the vessel OpEx, finance expenses, overheads, chartering costs and commissions. We must also highlight the purchasing power of TCM and the continuous cost control efforts by management to maintain the low OpEx for the fleet while keeping a high fleet utilization year-after-year, quarter-after-quarter.

Despite 9 special surveys during the first half of the year, 4 of which were ahead of schedule in preparation of an anticipated market upturn, we achieved an overall utilization in excess of 93% for the whole fleet. And thanks to the profit-sharing element, a cornerstone of TEN's chartering strategy for every $1,000 increase in spot rates, we have a positive 0.28 impact in annual earnings per share based on the number of vessels that have currently have exposure in the spot each quarter 8.

Debt reduction in Slide 6 is also important for the companies in the company's capital allocation strategy. The company's debt peaked in December of 2017 and since then, we have repaid 450 million of debt and repurchased 100 million in 2 series of step-up preferred shares.

In addition to paying down debt, dividend continuity as Slide 7 indicates is also important for common shareholders and management. TEN has always paid the dividend irrespective of the market cyclicality. Today, we announced a dividend of $0.15 per common share to be paid in December. It represents a 50% increase from our July $0.10 a share dividend. The company has paid 0.5 billion in dividends since the New York Stock Exchange listing in 2002 or about 25 million per year. Global oil demand continues to recover despite lockdowns in China as a result of the strict COVID zero policy and negative global economic sentiment due to the war in Ukraine and higher-than-expected inflation worldwide.

Despite these headwinds, global oil demand in the second half is expected to break the pre-pandemic level. Large scale switching from natural gas to oil for power generation in Europe and the Middle East as a result of record natural gas and electricity prices is providing support. For the year, oil demand is expected to grow by 2 million barrels. Next year, we expect growth to be another 2.1 million barrels. Developed economies lead the oil demand expansion this year but next year, most of the demand growth is going to come from the non-OECD capitals.

On the supply, OPEC-plus producers have restored all the pandemic production cuts in their August meeting. Global oil stocks continue to fall and are now almost 275 million barrels below the 5-year average. Non-OPEC production is set to rise this year and next. Our global oil demand continues to rebounce and grow. Let's look at the forecast for the supply of tankers on Slide 9. The order book stands at a little over 4% or 234 tankers over the next 3 years, which is the lowest that we have seen in at least the last 30 years. At the same time, a big part of the fleet, almost 800 vessels or 33% is over 15 years. 9% of the fleet almost 500 tankers are currently over 20 years.

And as the next slide, sold 2018 was one of the highest scrapping years of record with 21 million deadweight tons to be moved. Last year, we've seen an acceleration of scrapping from the second half, and we ended with 14.5 million deadweight on removed. So fan-out, we have 65 vessels removed, totaling 5.2 million deadweight ton. Scrap prices continue to be at high levels, currently hovering around $600 per light ton and with more environmental regulations coming with discussions for alternative propulsion fuels and 9% of the global fleet above 20 years, we expect scrapping activity to remain elevated and act as a balancing factor for the fleet supply going forward.

To summarize, oil demand, we are reaching and passing the prepandemic level during the second half of this year oil supply. OPEC plus has restored all pandemic production cuts. Non-OPEC production is set to increase, bringing more cargoes to the market at the time when global oil stocks are below the 5-year levels and demand is growing above pre-COVID levels. The war in Ukraine is redrawing the global energy map, adding to significantly turn mile growth for both crude and product tangles order book supply of tankers.

The order book to current fleet ratio is at historical low levels, and a big part of the fleet is reaching phaseout age, pointing to a tighter supply for the next 18 to 24 months. And if you look at TEN, we have a modern fleet. We already started the transition towards the next generation of green vessels. We have in the waters and operating fleet that is well positioned to capture a strong freight market. We continue to reduce debt. We have a strong balance sheet and a strong banking relationships that will allow the company to take advantage of any opportunities that will be presented to us.

And with that, I will ask Paul to walk us through the financial highlights of the second quarter and the first half. Paul?

Thank you, George. In quarter 2, TEN turned the net income of just over $46 million after generating void revenue of August $217 million, which was $80 million more than in the prior second quarter, a 60% increase in revenues. Operating income in quarter 2 amounted to over $57.4 million, a positive turnaround of $70 million from the prior quarter 2. While our time charter vessels generated over $97 million, the market environment created by geopolitical issues since February allowed our stops vessels to add a further $120 million to total revenue.

This, in turn, provided over $91 million of EBITDA, a threefold increase. The 6-month performance was also impressive within the period, with EBITDA reaching over $133 million double the previous EBITDA. While the company achieved a net income of $51.7 million in the 6 months. The fleet in quarter 2 enjoyed a high utilization of 93.6%, partly due to a reduction in the number of dry dockings in the quarter with only 3 vessels completing dry dock in quarter 2.

Daily TCE per vessel in quarter 2 averaged close to $29,300, a 70% increase from the prior quarter, while in the 6-month period, daily TCE was on average $24,500. Mortgage expenses, which include fuel costs increased due to rising oil prices caused by the market conditions relating to energy supplies throughout Europe. However, total operating expense remained fairly stable with an increase of about 1%, nudging average daily OpEx per vessel to about $8,300 partly due to a modest fleet increase.

The 6-month daily OpEx also remained at $8,000, partly due to a stronger dollar. Depreciation fell $2 million due to the value reductions last year of circle vessels, offset by a similar amount of deferred amortization. Quarter 2 finance costs remained relatively low at just $11 million, although increases in interest rates pushed finance costs up fortunately to a manageable level. The company utilizing interest rate swaps to cover much of its exposure. The recent months have seen our cash resources increased substantially, placing 10 in a considerably better position than at the start of the year.

This has provided us the ability to comfortably take delivery of the new shuttle tanker and allow the construction of the 4 new Aframaxes, plus the signing of an acquisition of a VLCC as mentioned, which altogether should significantly change the age profile of the fleet and generate new revenue sources. Following our usual pattern for financing new acquisitions, much of the financing for these vessels or with employment will be from our own resources with our usual kind lender likely to participate in providing finance.

However, clearly, new financing may have an impact on our future total outstanding bank debt, which had come down by $70 million recently. If we estimate that the overall pace of debt reduction will still continue, if not accelerate, given our current cash resources, which should please our lenders as well the recent indications of increasing tanker values, which will also much please us if it continues as we expect. And indeed, we do expect a strong remainder of the year, hopefully within a feasible environment.

And now of course, up to you Nikolas.

Well, thank you for the good news and hopefully, we can report better news in November or as good at least. And with this, I would like to open the floor for any questions. Thank you very much.

(Operator Instructions) Our first question is from Ben Nolan with Stifel.

I guess my first question relates to asset prices, which you guys are just discussing a bit. Obviously, asset prices are a lot higher, both for second hand and newbuilds. With a few exceptions, most of the growth recently has come through the new building market. Can you maybe just talk through sort of your appetite there and how you feel about ordering ships, given how much of an increase there has been in the cost of doing so?

Thank you. Well, I believe our timing so far has been quite on target. We try to always keep a good position and as the Chairman said, very close relationships to our financials. So we can move when the prices are lower. And in that view, we have started Greenship initiative or in 4 fuel vessels. So I would say, at the direct times of pricing 1.5 years ago or a year and a bit ago in the summer of 2021 in the middle of the pandemic. And also I would say, our LNG and shuttle tankers were added about the same time.

So we have a significant book profit from our investment share there and we'll be enjoying a very good market with low operative and courses Georgios Saroglou said. In the meantime, we're not looking at an order book, which I have never seen an order book also such a low order book in my 30 years in business so we believe that the earning capacity of our existing fleet is going to be maintained relatively strong to be conservative for the next couple years. You cannot have enough vessels right now as we see it, and we expect some of the ships with maintaining high scrap values basically to have to leave the market. On the pricing, we will be only looking at dual fuel vessels going forward. I think we said this in a couple of calls in the past, and nothing has changed on that.

On the new buildings, we will be looking at dual fuel ships. We know that the value of those ships with inflation will be increased, and we will be looking to do those ships together with one of our clients, which we are discussing, as we've done in the previous one. Our model of profit saying that will cover all our obligations and gives us a small profit and profit saving above that with the major oil and end users, we will maintain it. So we will not stop looking or rebuilding the future as long as the figures make sense.

Okay. I appreciate the color there. And then my second one, and I'll turn it over, relates to the ATM. I know you guys did sell a little over $4 million, almost $5 million worth of shares on the ATM during the second quarter in the release. And obviously, the share price is materially higher than it had been. Just trying to get a sense of where you think about that. You're making a lot more money, so you don't need the ATM. It wouldn't appear as much as you did, but the flip side of that is the cost of capital is meaningfully better than it had been. So how are you thinking about the use of that going forward here?

Well, that was actually completing a program that the Board of Directors have authorized within the second quarter. So I think that's why we have this small amount just to do some housekeeping from our side. And as you rightly saw, there's a significant daily cash flow building up as we speak today. And so we will not be using the program in any significant manner going forward as we see things today.

(Operator Instructions) There are no questions. I will hand the conference back over to management for closing comments.

Thank you. Well, I guess when we have good news, you don't need any more news so I think that is a good sign. Again, I would like thank all of our long-term shareholders for supporting the company. We've been here quarter after quarter, maintaining and having a stable hand through the storms that we really went through.

I think George mentioned that we've been through 5 major crisis and every time the company came out stronger. I think the year on a bit ago in one of those calls, we said that there is a storm happening out there, but we are now ash steadily, and we're looking forward to take advantage of the storm on the other side. And it seems that we can see the horizon now. I think there is more good news to come forward. I get the feeling from the appetite of our clients, which are out there looking to put their hands on good quality management, good quality ships.

So our model, as the Chairman said, has not changed. We are not changing our views depending on each quarter. We have a long-term view of where we want to go and with a mix of spot and time charter employment. We know that we can sleep at night whatever happens by repaying all our obligations and leaving a little bit to pay dividend even in the worst market conditions. So I think a few companies can have this model. I can say that I'm sure many are very successful. And when things are strong, we still have a lot of ammunition to be able to take off the market immediately as it has seen in the last couple of quarters and mainly. And I think we have about close to $0.30 every $1,000 that the market goes up, the way we are structured that's another $0.30 or $0.28 as Paul said on our bottom line.

And with that, hopefully, we would be reporting as good or better news for the 9 months and the 9 months. And I would like to take also because we do not forget the expenses. We are in inflation, our technical managers, super are putting a lot of effort to maintain a logical good and under budget operating expenses and I think we have been doing this. We took the preemptive action with their advice to take 9 vessels. If you remember, and if you go back to our audio we said that we're taking 9 vessels that were supposed to be drydocked in 2023 and the later part of the 2022 out in the market. It was painful at the time, but now those ships that are in the market, and they're actually adding much more and that's why we're expecting much more or better results for the good here on the remaining of the year.

And that's why I want to thank all our associates, our people onboard the ships, our bank shifters who as soon as they were coming out of the pandemic, they had to face a war situation than some of our ships and quite a number of our ships were mount by a combination of Russian and Ukraine and seafarers and all of them very professionally coexisted and made sure that the company's interests are above anything else, and we want to thank them. And also to wish our General Manager, [Mr. Haima] here, happy birthday and keeps us in line here and all the best and looking forward to seeing you soon, face-to-face. And I hope the remainder of the year will be healthy, prosperous and peaceful for all. Thank you very much.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.