Tsakos Energy Navigation Limited (NYSE:TNP) Q4 2023 Earnings Call Transcript

Tsakos Energy Navigation Limited (NYSE:TNP) Q4 2023 Earnings Call Transcript March 27, 2024

Tsakos Energy Navigation Limited  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by, and welcome to Tsakos Energy Navigation Conference Call on the Fourth Quarter 2023 Financial Results. We have with us Mr. Takis Arapoglou, Chairman of the Board; Dr. Nikolas Tsakos, Founder and CEO; Mr. Paul Durham, Chief Financial Officer; and Mr. George Saroglou, Chief Operating Officer 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. And now, I will pass the floor to Mr. Nicolas Bornozis, President of Capital Link. Please go ahead, sir.

Nicolas Bornozis: Thank you very much, and good morning to all of our participants. I am Nicolas Bornozis of Capital Link, Investor Relations Advisor to Tsakos Energy Navigation. This morning, the company publicly released its financial results for the fourth quarter and year ended December 31, 2023. In case, we do not have a copy of today’s earnings release, please call us at 212-661-7566 or email us at ten T-E-N @capitallink.com and we will have a copy for you e-mailed 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 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. And 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 with risks and uncertainties, which may affect TEN’s business prospects and results of operations.

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

Takis Arapoglou: Thank you, Nicolas. Good morning, everyone. Thank you for joining our call today. TEN continues to deliver very strong financial performance based on very positive market fundamentals and also best-in-class operational performance. At the same time, the company keeps renewing its fleet, selling all the tonnage at today’s high prices and acquiring eco-friendly vessels, increasing its grid footprint. And it also reinforces its leading position as a very successful operator of specialized modern dynamically positioned tankers. All these are highly accretive acquisitions. The results of which are not included in today’s results, but will definitely contribute very positively going forward, which will allow us to continue our strong growth, a strong growth that we have demonstrated quarter-after-quarter.

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Q&A Session

We’re also using this current positive market to increase the number of vessels on the time charter. But at the same time, we keep enough vessels to benefit from the very attractive current returns of the spot market and profit sharing arrangements, driven by the otherwise quite unfortunate geopolitical developments. In doing so, we continue to maintain a very healthy cash balance, which allows us to be flexible and capitalize on attracting acquisition opportunities as they arise. And to continue uninterruptedly to pay sizable dividends to reward our shareholders, we’re proposing as a first semiannual installment $0.60. So on behalf of the Board, I wish to once again congratulate Nikos Tsakos, and his team for the excellent performance and wish them continued success going forward.

So thank you for me, and over to Nikos Tsakos.

Nikolas Tsakos: Chairman, thank you very much. And first of all, we would like to express our support to the victims and all affected by the tragic events in Delaware. And we hope that very soon things will go back to normal with a minimum loss of life. As for TEN, we concluded our 30th year, milestone with another record year and we are looking forward to continue the trend. And I think as our Chairman said, the growth that has been embedded is not yet, is not portrayed in these results, but hopefully, it will be portrayed in the remaining of 2024. Since we will be taking a significant amount, we will grow our fleet almost by 10% by the time, by the middle of the coming year. In the meantime, our fundamentals of the industry, the long-term fundamentals still look very positive.

And they look positive not only because of the geopolitical events and the delays and closures in the canal. But I think long-term, we are still seeing a very small replacement of the fleet with less than 7%, and in some categories, much lesser than that, like the larger ships, the VLCCs. And on top of that, of course, you have a very aging fleet and the shadow fleet, which is close to 20% in the major in some of the major categories. So without trying to foresee the future, we are trying to, we believe that 2024 will be at least as good for us as the year, we are enjoying. So this is where we are. At this moment, it has been, I think, for us a springboard year, milestone year. We were able to renew our fleet in a very drastic. I think it is the largest growth in our history, which shows that already we are 30 years old.

We have not aged yet. And as our Chairman said, this year has seen us sell 9 vessels with an average age of 18.5 years and adding 18 vessels with an average age of 1.3 years, of which 8 of them will be contributing immediately to our bottom-line very soon. And on top of that, we are adding 1.5 million of deadweight tons in our fleet earning capacity and carrying capacity. So this has been really our 30th year, has been the springboard of a very significant growth and we have been able to continue this growth at the same time that we have been reducing our debt, increasing our dividend, as the Chairman kindly said, by doubling the dividend at least for the first six months of the year. And growing the fleet, modernizing the fleet, and with some surprising way that Paul and his team will tell us, maintain very strong cash reserves.

So, with that as an introduction, we would like to thank everyone for their support in our 30 years. And although this has been our second consecutive record year, we expect or we hope that next year, we will maintain the same momentum with the new acquisitions and, as the Chairman said, the very accretive transactions that we have secured with the company. And I will give now to our President, Mr. George Saroglou. Welcome, George, and to give us a little bit more of the picture and the nitty-gritty of what’s happening out there.

George Saroglou : Thank you, Nikos, and thank you for the whole team. Good morning to all of you joining our earnings call today. 2023 has been a banner year for TEN. We celebrated our 30th anniversary as a public company and posted another record year, the second record year in a row after 2022. Key takeaways for TEN during the fourth quarter and 2023, we took delivery of the Company’s first two dual fuel LNG powered Aframax tankers in a series of four new buildings of high spec, eco designed vessels built against long-term employment to a major oil concern. During the early part of January ’24, we took delivery of the remaining two. The delivery of these four vessels marks TEN’s entrance to greener vessels. We continued the sale of older first generational vessels.

During 2023 TEN sold eight tankers built between 2005 and 2007. In January ’24, we announced the sale of a 2005 built Suezmax tanker. The nine tankers that we sold since January 1, 2023 had an average age of 18.5 years. At the same time, we continue to grow the company and replace these first generation vessels with newbuilding orders that fit existing transportation requirements of term company clients. We announced today in the press release the signing of a newbuilding contract for one more shuttle tanker, the third newbuilding under construction against a long time charter with a major energy concern. This brings our current newbuilding order book to seven vessels. In addition, we recently announced the acquisitions of a high spec environmentally friendly 5 vessel fleet from Viken.

The Viken acquisition includes two 2023-built dual fuel LNG powered LR2 Aframax tankers, one 2019 built super-eco Suezmax and two 1A ice-class scrubber-fitted Aframax tankers, built in 2018 and 2019, respectively. We took delivery of the first vessel, the DF Montmartre yesterday. We expect to take delivery of the remaining four from April until June of this year. All five vessels are chartered to a major European energy concern. The freight market was strong last year and remains strong as we speak. We continue to renew time charters at higher tank charter rates. Oil majors continue to fix vessels forward, which is a testament to a market that is expected to sustain current freight levels. The order book continues to be low due to the uncertainty of availability and affordability of alternative fuels other than biofuel and LNG currently.

We continue to experience the largest change in trade flows, ongoing crude and oil product movements as a result of Western sanctions on Russian seaborne oil, and more recently on changes in the production of the Red Sea as a result of the Houthis attacks on merchant vessels. A lot of charterers send vessels through the Cape of Good Hope instead of the shorter distance through the Red Sea and the Suez Canal to avoid being attacked. As we said in previous calls, most of these changes appear to be permanent. Before the war in Ukraine, Europe was the biggest client of Russian oil, but as the war continues, Russian oil has been replaced with oil from the United States, West Africa, Guyana, Brazil and the Middle East, creating a positive ton-mile multiplier effect for tanker demand and freight rates.

At the same time, global oil demand continues to grow post-COVID. 2024 is expected to be another record year for global oil demand, rating on average 1.32 million barrels per day versus approximately 1.18 million barrels per day in 2023. Of course, there are global headwinds that we have acknowledged and are in our radar screens for quite some time now, like inflation, which might be coming down but we could end up with higher interest rates for longer, the world in Ukraine and in Gaza, the OPEC plus production cuts and voluntary cuts by Saudi Arabia and Russia, which have been extended at least until the end of second quarter of 2024, if not more probably until the end of the year. However, we have a global economy that continues to grow, and the International Monetary Fund in its most recent report anticipates 2024, the global economy to grow with 3.1% and 3.2% in 2025.

And as mentioned above, oil demand is expected to grow another 1.3 million barrels per day higher in 2024 than in 2023. Strong non-OPEC growth coming out of the United States of America, Canada, Guyana, Brazil will counter for now any OPEC production cuts and tanker fundamentals continue to favor a strong market for the next 2 to 3 years. Let’s now move to the slides of our presentation. Starting with Slide 3, we see that since inception in 1993, we have faced 5 major crisis, and each time the company came out stronger, thanks to its operating model. The average company growth is 21% in terms of total fleet deadweight owned. In the next slides, we see the company’s fleet growth in capital market access since inception. We raised capital for growth not at the top of the market, but at times when asset prices were usually low.

In this slide, the numbers in the blue boxes represent the company’s common share offerings and in red, the series of preferred shares offering since the company’s New York Stock Exchange listing. The first three preferred series totaling $188 million of par value, the Series B, C and D, plus a private place preferred instrument of $35 million initial par value have been fully redeemed, saving the company in excess of $18 million per year in coupon payments for all retired preferred shares. In Slide 5, we see the fleet and its current fleet employment, including the weakened fleet that we acquired with the first of the 5 tankers in operations already for 10 since yesterday, we have a pro forma operational fleet of 66 tankers. 34 out of these 66 vessels or 52% of their fleet in the water has market exposure, a combination of spot, contract of affreightments and time charter with profit sharings.

51 out of the 66 vessels or 77% are in secured contracts, fixed time charters and time charters with profit sharing. This means that TEN is well-positioned to continue capturing the positive tanker market fundamentals. Slide 6 presents the company’s current and long-term clients. As you see, we have a blue chip customer base consisting of all major global energy companies, refineries, commodity traders with Equinor currently topping the list as our largest charterer. The left side of Slide 7 presents the all in breakeven cost for the various vessel types we operate in TEN. Our operating model is simple. We try to have our time charter vessels generate revenue to cover the company’s cash expenses, paying for the vessel operating expenses, finance expenses, overheads, chartering costs and commissions, and net revenue from the spot rating vessels contribute to the profitability of the Company.

This year, fleet utilization climbed to 96.3% from 94.7% the prior year. Both numbers are very strong utilization numbers. And thanks to the profit sharing elements, for every $1,000 per day increase in spot rates, we have a positive $0.18 impact in annual EPS based on the number of 10 vessels that currently have exposure to spot rates. Spot debt reduction is an integral part of the company’s capital allocation strategy, the company’s debt kicking December of 2016. Since then, we have repaid $349 million of debt and redeemed $211 million in three series of preferred shares, plus a privately placed preferred instrument. Slide 9, sale and purchase activity is a cornerstone of TEN’s strategy and this resulting fleet modernity is a key element for our operating model.

The left side of the slide shows the divestments in tankers since the start of 2023. We sold nine vessels, six, 2005 built MRs, two 2006 built Handysize product tankers and one 2005 built Suezmax tanker, totaling 560,000 deadweight tons, having an average age of the vessels that we sold of 18.5 years. Looking at the right side of the slide, under growth, we have the number of vessels we are currently building and acquired since the same period, the 1 January 2023. 16 vessels in total, eco-friendly, greener vessels. We have a currently newbuilding program of seven firm tankers, which consist of three shuttle tankers for delivery in 2025 and in 2026, two eco-friendly scrubber fitted Suezmax’s for delivery also in 2025 and two scrubber fitted MRs for delivery in early ’26.

Except for the two Suezmax’s that will be delivered after 2 years and the two MR tankers, the rest of the company’s new buildings have been fixed forward against medium- to long-term time charters. In addition to the firm orders, the company has options for three vessels, a second shuttle tanker for delivery during the first half — the second half of ’26 and options for 2 LR tankers for delivery also during the second half of ’26. As you see, the vessels that we have acquired have an average age of 1.2 years and in deadweight capacity are 4x the vessels that we sold, plus you have to consider the quality characteristics, the eco-friendly and the more environmentally friendly trades they have. And of course, they will become the springboard of the company’s growth going forward.

In addition to paying down debt, dividend continuity is important for common shareholders and management. TEN has also paid a dividend irrespective of the market cycle. Our dividend policy is semiannual. Last year, we paid a dividend of $0.30 in June 2023, a special dividend of $0.40 in October and the second semiannual dividend of $0.30 in December 2023. This year, we announced $0.60 per share for the June 2024 distribution, which is double the amount distributed in June 2023. Management intends to distribute a second semiannual dividend to holders of its common shares in December 2024. Overall, and since our listing in the New York Stock Exchange, the Company has distributed $546 million to its common shareholders since the New York listing in 2002 or an average of about $25 million per year.

If we add the dividends paid to the holders of the company’s preferred shares since 2003, the year the first Series B was issued, then TEN has returned in excess of $823 million to both common and preferred shareholders. Global oil demand continues to grow. Despite financial and geopolitical headwinds, the International Energy Agency expects global oil demand to grow by approximately 1.3 million barrels to a total of 1.3.2 in 2024. It’s going to be another record year after last year. Most of the growth is coming again from Asia Pacific, mainly China and India. On the supply side, most of the growth this year is coming again from non-OPEC countries like Brazil, the United States, Guyana, Canada, Mexico and Norway. As global oil demand continues to grow, let’s look at the forecast for the supply of tankers.

The order book as of February 24 stands at less than 8% or 453 tankers offered over the next 3 years. This figure represents a low number going back to newbuilding statistics for the last 30 years. At the same time, a big part of the fleet, 2,293 vessels or 40% is over 15 years, and almost 830 vessels or 14.6% of the current tanker fleet is over 20 years. The next slide shows the scrapping activity since 2018. Looking at the statistics, it seems that 2023 will reach the bottom for scrapping. We believe scrapping activity will pick up as the global fleet is getting older and older tankers are getting out of favor for long-term business by major charters. And with that, I will ask Paul to walk you through the financial highlights of the fourth quarter and the year.

Paul?

Paul Durham: Thank you, George. Just a few remarks. TEN achieved net income in the year amounted to $300 million. And on top of this, there was a further $500 million coming from EBITDA and altogether adding to the company’s considerable cash reserves. Revenue in the fourth quarter totaled $220 million while total revenues in the year amounted to almost $900 million the 3.4% increase over the prior year. Time charters generated about $540 million of which $72 million related to profit share. Total operating income in the year amounted to almost $390 million a significant increase by 53% over the previous year. Our average daily TCE for the year amounted to $37,000 on average in a market that effectively operated with almost full employment for our vessels.

In the year, eight vessels undertook dry dock. In the fourth quarter, vessel operating expenses by 2% while voyage expenses decreased by 21%. Our new vessel buildings are expected to achieve their delivery date soon and vessel financing has now been mostly covered. We believe the new buildings are expected to generate strong rewards over the years. In the meantime, the company will continue as always to ensure perfect debt service. Given our cash availability, use of funds will remain for us as a priority and in this respect, we are acquiring 11 new excellent vessels and preparing plans accordingly regarding the company’s future. Finally, we believe that the production cuts that hit demand in the latter part of last year were temporary and that cargo growth has already begun to swell again in the early part of this year.

And that’s really all I have.

Nikolas Tsakos : Thank you, Paul. I mean, good news do not have to come in many words. Thank you very much for this. Well, I think as we have seen, it has been a very, very productive year, setting the base of the company’s future. And we are looking I know that many people since we announce every year a record year believe that at some stage we have reached the peak of our profitability. We hope that this is not the case and this by setting the new ships. And I think, George, if you can put the slide on, I think of the future growth, not the one or the ship, that’s the one. And we might be including a couple of new acquisitions and opportunities. Our newbuilding department here, Mr. Arapoglou, is not in his head. In this list, we are very close in securing additional very accretive transactions to the 16 vessels that are out there.

But hopefully, we can announce something after the — within April on that. And with this, we would like to open the floor for any comments or questions. Thank you.

Operator: [Operator Instructions] Our first questions come from the line of Climent Molins with Value Investor’s Edge.

Climent Molins : I wanted to start by asking about your fleet positioning. You already provided some commentary on it, but over the past couple of years, you’ve pursued quite an aggressive plan to renew a fleet and the recent Beacon acquisition further improved the age profile. You mentioned you’re working on several additional opportunities with newbuildings. And I was wondering, should we expect the size of the fleet to grow further or will the other side of the fleet be sold in conjunction with additional acquisitions?

Nikolas Tsakos: Well, we are looking this is an ongoing growing concern as a company. However, in the strong market environment, we are looking, we have a lot of vessels approaching graduation years from the TEN academy and we will wish them they will be very profitably graduating for the rest of the fleet. I think we were able by selling the 9 vessels last year and part of this year, we added $160 million net to our cash reserve, which we have used to further grow the fleet. And I think the growth is significant, selling 9 vessels and actually replacing them with double that. So the answer is, there will be growth, but there will be also this investment of the first generation vessels.

Climent Molins : I also wanted to ask about the Neo Energy, which supposedly came off contract in February. Could you talk a bit about the prospects for the vessel?

Nikolas Tsakos: Well, the Neo Energy has been one of our luckiest vessels since she was built on February 7, 2007. She has always been and I think she earned up to last month one of our highest time charters for a year and a half in excess of $115,000 a day. And we believe that she will maintain to be one of our likeliest vessels and you will hear an announcement soon.

Climent Molins : And final question from me. On the dividend side, you mentioned you expect to distribute another dividend later this year. Could you provide some commentary on the amount you expect to distribute?

Nikolas Tsakos: Well, I think our Chairman who is responsible for the dividend. Takis?

Takis Arapoglou : Well, we are in the approaching the middle of the year. We felt that $0.60 represents what our performance last year and how things are looking right now. The second installment of the dividend depends on the rest of the year and we cannot really make any predictions. So, because we’re not allowed. But we are confident that our performance will continue to be strong.

Operator: [Operator Instructions] I’m showing no further questions in the queue. I would like to pass the call back over to management for any closing remarks.

Nikolas Tsakos : Well, from our side, we would like to take the opportunity and thanks our shareholders for their support. The management being the main shareholder is working to achieve the results for all of us. Regardless of the geopolitical situation that we are facing, just by the fundamentals, we are seeing that the market which is under built and it’s maintaining this. Less than 7% of the fleet is on order, and on top of that, an aging fleet and a shadow fleet, which we do not expect to see within the normal trading route. So we can conservatively say that we are looking for another couple of years of significant growth, and then we are placing the company to take advantage of that. From our side, we would like again to pass our support to all the victims of the Delaware tragic incident, and wish everybody happy and peaceful Easter going forward. And thank you very much.

Operator: Thank you. That does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.