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Tsakos Energy Navigation (NYSE:TNP)
Q1 2018 Earnings Conference Call
Jun. 15, 2018 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Tsakos Energy Navigation Conference Call on the 15th of June 2018 first-quarter 2018 financial results. We have with us 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] I must advise you that this conference is being recorded today. And I will now pass the floor to Mr.

Nicolas Bornozis, president of Capital Link, investor relations advisor of Tsakos Energy Navigation. Please go ahead, sir.

Unknown Speaker

Hello, Mr. Bornozis?

Nicolas Bornozis -- Capital Link

This morning, the company publicly released its financial results for the first quarter of 2018. In case you 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, ten@capitallink.com, and we will email a copy to you right away. Please note that parallel to today's conference call, there's 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 our presentation on the webcast -- on the website.

Please note that the slides of the webcast will be available as an archive on the company's website 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 of operations. Such risks are more fully disclosed in TEN's filings with the Securities and Exchange Commission. Before turning over the floor to Mr. Tsakos, I would like to mention that we just came back from very -- from a very busy, productive, and successful Posidonia week, where we visited the company's headquarters.

TEN is celebrating this year, 25 years as a public company, 25 years of continuous growth, growing the fleet from four to 66 double-hull vessels. We should also point out TEN's track record of uninterrupted dividend payments. Inclusive of the recently declared dividend, TEN will have distributed a total of $10.71 per share in uninterrupted dividends to its common shareholders since the company's listing on the New York Stock Exchange in March 2002 against an issue price at the time of $7.50. And now, before turning over the floor to Mr.

Tsakos, I would like also to point out how the company's prudent and balanced fleet-deployment strategy has resulted in outperforming the spot market in the first quarter of 2018 by over 100%. Ladies and gentlemen, 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.

Nikolas P. Tsakos -- President and Chief Executive Officer

Thank you, and good morning to everybody. Thank you from Greece, and thank you for all your good comments, and I hope that we will continue to many more profitable years. The first quarter of this year has not been a very positive quarter, but we look at it as the bottom of the recent market that will be in a down cycle for, I would say, the last -- the last two years. And we hope and we have the feeling that the Q1 was the bottom of the cycle.

We are looking -- it starts reminiscing -- if you looked at the graph of 2013, and by this, the first quarter of 2013 was the weakest part and then the market, for different reasons, started turning -- turning -- turning around. However, in TEN, we have followed a very prudent and sometimes boring model of running the commercial side of our business. And with 80% of our ships on long-term time charters, we always cover our financial and operational obligations with the 80% of that fleet and it covers the whole obligations of the fleet. And that leaves us, the 20%, of course, still a significant part, together with another 20% of profit sharing, to take advantage of a higher -- of a higher market.

So although it has been a very difficult period, I think, operationally, we have, again, more than 96% utilization, although we took the decision to take out of service five of our vessels and take advantage of this low market and pass the Spectra survey, which incurred, of course, expenses and downtime. We're very proud also of our operational record, 97% utilization. And also, we have moved in year to date 600 million barrels of oil and products, including gas, which is six days of world production of energy. And all of this, and I knock on wood, with no operational issues, which is always very important.

So we're looking forward to -- for a better quarter in the second quarter, which we're in into this quarter. We are seeing signs of betterness from a big part of this business and various segments of this coming mainly from the [Inaudible]. We are seeing a big appetite of major oil companies for long-term business, not only for newbuildings, but for existing tonnage, which is always a very good sign. And you know that we are always looking at this.

We are proud to announce another -- after finishing in the fourth quarter of 2017 our 15 vessels in newbuilding program, we are proud to be back in building responsible ships with employment for major oil companies. And this is something, again, which falls within the company's strategy and repeat business. Another segment that makes us believe that the second quarter will be significantly better or better from this quarter and the remaining of the year will return back profitable has to do with the turnaround of the LNG market. And as we see today, we have the LNG market almost double in the recent -- in within the last year.

So we have renewed the Maria Energy. It went up from $33,000 to $43,000 starting in April and we'll take this positive effect within this quarter. And of course, our other vessel, the Neo Energy, has almost doubled. Her employment will start in the third quarter from $19,000 to $38,000.

So this goes straight to our bottom line as we speak. Also, there are things that are not completely on the day-to-day business that have to do with the legislations that we are seeing. And we're seeing the scrubber and the worker balance arrangements on legislation that will make a significant part of the world click to either slow steaming or being out of service for fitting and upgrading its technical capacity. So I think we are looking at better times going forward.

And then -- and with that, I will ask George to tell us a little bit of the first quarter and his process. Thank you.

George V. Saroglou -- Chief Operating Officer

Thank you, Nikolas. We announced today the operating results of the first quarter of 2018. However, since 2018, this year marks the company's 25th-year anniversary, allow me to try to summarize the 25 years in one slide. If you actually can understand, it's not easy, but let me put out some key figures of the first 25 years.

As you know, we started with four modern vessels back in 1993 and we find ourselves today with a pro forma fleet of 66 vessels. Most of the vessels, especially since 1990 -- after 1997, have been built with newbuildings, meeting clients' requirement. The total net income generated since inception is $1.25 billion, of which $565 million, a figure growth to 55%, had been returned to the company's shareholders in the form of cash dividends and buybacks. Turning now into the first-quarter numbers.

OPEC supply cuts and an oversupply of tonnage, together with seasonal refinery utilization, continued to weigh on the crude tanker rates during the first quarter. The environment has been weak, but thanks to TEN's proven commercial strategy of fixing most of the fleet on medium- to long-term signed time charters, it paid dividends again as it helped the company to outperform the average spot market indices by beating them over 100% in all vessel categories that we operate. We believe that tanker rates have reached the low point of the current cycle. As we move into the second quarter, we already see signs of improvement.

For those of you who are connected to the Internet and our website, there's an online slide presentation whose format we will follow during the call. Turning to Slide No. 4, to the key corporate highlights. We have announced today the company's agreement with an oil major to build two new state-of-the-art Aframax tankers against long-term contracts.

We have also sold our oldest vessel, the 1998-built VLCC Millennium, after 20 years of profitable trade for the company. With this order, has now -- TEN has now a pro forma fleet of 66 vessels and 25 vessels in the fleet have ice-class capabilities. The average age of the fleet is 7.4 years against 10.3 years for the world tanker fleet. We have a balanced employment strategy that takes advantage of market peaks with profit-sharing arrangements.

Out of the 66-vessel pro forma fleet, 53 vessels are on secured employment contracts with an average duration of 2.5 years. The emphasis is on charters with profit sharing arrangements that enable TEN to take advantage of spikes and stronger freight markets. We have secured minimum contract -- contracted revenue of $1.3 billion with potential additional revenues from profit sharing arrangements. We have a modern diversified fleet covering client transportation requirements in crude products, shuttle and LNG.

And we have become the carrier of choice for many of the top oil majors, commodity traders and refineries. We have continued to keep a very high utilization with the latest figure being closer to 97%. In the next slide, we have a breakdown of the fleet, 66-vessel pro forma fleet, with 48 vessels being engaged in crude trading, 13 in products. We have three shuttle tankers and two LNG vessels.

The next slide has a main financial -- the next slide has -- basically, they're all in blue-chip clients of the company with whom we are doing repeat business over the years thanks to the modern fleet, the safety record and the quality of service. These 10 names that you see represents 72% of the revenue generated for the company. Strong secured coverage with upside potential. We have so far announced during the year new charters and charter extension of a total of 15 vessels in the fleet.

The charter periods for these vessels ranges from six months to three years. Fifty-one vessels out of the 66-vessel pro forma fleet are fixed under secured contracts, a combination of time charters, time charters with profit sharing and contracts of affreightment. Thirty-eight vessels are on market-related charters, including the vessels currently trading spot, securing the company's ability to immediately capture the market's upside. The revenues expected from the vessels in the fleet with secured employment cover the company's annual operating and financial obligations.

We have seen in the LNG -- we continue to see improvements in the LNG markets with two of our vessels that we operate having secured extensions in their rates and charter figures of significantly higher levels, 30% in the case of one vessel and doubling the rate in the second one. On the next slide, we present basically the breakeven costs for the various vessel types that we operate. And as you can see, the cost base is very low. In addition to the low shipbuilding, of course, we must highlight the purchasing power of our technical manager, Tsakos Columbia Ship management, and the continuous cost control effort by management in order to maintain a low opex average flow for the fleet while keeping a very high fleet utilization rate quarter after quarter that we believe qualifies as full employment.

With 80% of the fleet on secured employment, the revenue these charters generate cover the company's operating and finance expenses, including the dividend. In addition, the combination of time charters with profit sharing, contracts of affreightments and spot charters guarantee for TEN a share of the market's upside every time we have a spike or a sustained strong freight market. Based on the current number of vessels operating in the spot market and time charter with profit sharing, for every $1,000 increase in the spot market, we have a positive $0.07 impact in annual earnings per share. The next few slides, from 10 to 12, tell us what we see in the market.

Despite the weakness we have experienced in the market, we are near the bottom or we have passed the bottom of the current cycle and we see positive signs that point to the market's recovery. Some of these things are, first of all, the solid global economic background which translates to strong global oil demand. And the growth for global oil demand in 2018, it marks the fourth year in a row with global demand growing by at least 1.4 million barrels per day against the long-term demand growth figure of closer to 1.1 million barrels per day. This trend appears to be holding strong as the International Energy Agency, in their latest report, forecast the same demand growth number of 1.4 million barrels per day for 2019 as well.

With global oil stocks currently below the five-year average level that OPEC was targeting in order to reduce oil oversupply, the reintroduction of economic sanctions against Iran by the United States and with key OPEC producers suffering continuous production declines, OPEC and friends appear to be ready to increase production by a figure of up to 1.5 million barrels per day following their June 22 meeting. Increased OPEC production historically has always been [Inaudible] for tanker demands and freight rates. The U.S. continue to develop as a major crude oil exporter to the world.

During 2017, the average U.S. exports were in excess of 1.4 million barrels per day, then later the Department of Energy four-week average of U.S. crude oil exports exceeding 1.9 million barrels per day. The growing U.S.

exports have created new long-distance trade routes, mainly to Asian destinations, adding to tonne mile growth. High scrap prices and the weak market resulted in a significant increase in tanker scrapping, the highest that we have seen in quite some time. The average age of the scrapped vessels is coming down to about 20 years. With the upcoming regulations for the water ballast in 2019 and the global sulfur cap from 2020, we believe in the company that owners of older vessels will continue to prioritize in scrapping their older tonnage rather than passing them to an expensive forced special survey, the effect of which will be a lower net lid growth for the next couple of years.

In lieu of all the above, we announced today another dividend of $0.05 to be paid on August 8 to the shareholders of record on August 2. In total, since 2002, TEN has paid $10.71 in cash dividends or in excess of $466 million and this compares with the listing pricing in our IPO of $7.50. The average yield since the New York Stock Exchange listing in 2002 is 5.25% per annum. We believe that we have turned the corner and we are going to be positive again in 2018. And with that, we are turning to the numbers. Paul?

Paul Durham -- Chief Financial Officer

Thank you, George. Well, as Nikolas described, the tanker market in Quarter 1 was not conducive to generating strong results by any large tanker company, although we probably fared better than most others. Our net loss was limited to $11.9 million, thanks to our time charter cover and our fleet enjoying full employment. As a result, our vessels earned significantly better than market rates with an average daily TCE rate of nearly $18,000.

We had 16 vessels on spot, Aframaxes and Suezmaxes at least comfortably covering their running $13,000. We had five vessels dry-docked, as Nikolas mentioned, four losing their time charter revenue, including shuttle tanker Brazil losing $53,000 daily. However, our time charter vessels still managed again to generate enough cash to cover our operating, overhead and finance costs, but leaving a smaller surface than in recent quarters. Our average daily opex per vessel increased, but we regard this as a temporary aberration due to the five drydocks, the heavy restocking of vessels and the weak dollar.

In Quarter 2, we expect a reduced drydock schedule, regular supplies to vessels and a stronger dollar, so average daily opex per vessel should return to normal levels. Our daily overhead cost per vessel remained stable as there is no management at all and vessel management fees remained stable as they had been for six years. Finance costs increased by $6 million, mainly due to the loans relating to the new vessels at increased interest rates. Unlike the prior Quarter 1, there was no capitalized interest and no gains from early termination of interest rate swaps in this Quarter 1.

There were no new loans in Quarter 1. Repayments amounted to $42 million, bringing our outstanding balance to $1.72 billion. Net debt-to-capital is 51%. Our average cost of debt in Quarter 1 was only 3.9%.

In Quarter 2, we have successfully refinanced the debt on 11 of our vessels, extending the original life of the debt on these vessels for another five years with a reduced margin. We have also refinanced the shuttle Brazil, providing an extra $16 million of cash. Our old VLCC Millennium was sold and $10 million worth of debt repaid from sale proceeds. We soon expect to complete negotiations to finance the two newbuilding Aframaxes just announced at very competitive terms.

And this concludes my comments. And now, I'll hand the call back to Nikolas.

Nikolas P. Tsakos -- President and Chief Executive Officer

Thank you, Paul, and thank you, George. And as we said, this has been a challenging quarter, but the prospects look positive and we hope that 2018 will be another profitable year. It has -- in many words, it is reminiscent of the end of '13 when the market started turning around and we see a lot of this because of the appetite of the major oil companies for long-term business happening almost on a daily basis. And big names, all the majors are out there to take in the vessels.

And I said, again, not newbuildings, just the vessels out of the market. So with that positive note, I would like to open the floor for any questions.

Questions and Answers:

Operator

Thank you. [Operator instructions] Your first question comes from the line of Donald McLee from Berenberg. Please ask your question.

Donald McLee -- Berenberg Capital Markets -- Analyst

Good morning, guys.

Nikolas P. Tsakos -- President and Chief Executive Officer

Good morning.

Donald McLee -- Berenberg Capital Markets -- Analyst

So just to start with the newbuildings, could you provide any details around the Aframaxes in terms of its pricing, expected delivery, contract tenure, etc., and just things that will be helpful from a modeling perspective?

Nikolas P. Tsakos -- President and Chief Executive Officer

We will tell you this in private when you are going to offer to finance it. No, I'm just -- Well, I think these are vessels capturing all the new Tier 3 technology, which is required, and it's in the low 50s depending on the extras that the major company is going to be -- to adding. Yes, it's very close to 50 or under depending on the specification, on the price.

Donald McLee -- Berenberg Capital Markets -- Analyst

Great. And just in terms of the tenure on the contracts attached to the Aframaxes?

Nikolas P. Tsakos -- President and Chief Executive Officer

It's anywhere between five and seven years. I mean, five is the minimum.

Donald McLee -- Berenberg Capital Markets -- Analyst

OK.

Nikolas P. Tsakos -- President and Chief Executive Officer

And then there are options up to seven years.

Donald McLee -- Berenberg Capital Markets -- Analyst

OK. That makes sense. And then just taking a step back, in the past, you've talked about taking time to digest the recent capex program when referencing potential LNG carry orders. But with that Aframaxes are on the books, could you provide an update on if you still see LNGs in near term have enough growth and if there's been any change to the level that could be -- for any negotiations around those orders?

Nikolas P. Tsakos -- President and Chief Executive Officer

No, no. As I said, we are digesting the -- it took us one quarter to digest our growth program, and of course, LNGs are in the forefront of our growth program without wanting to take out of -- without stopping the day-to-day business which this order has to do with.

Donald McLee -- Berenberg Capital Markets -- Analyst

So I guess compared to three months ago, or six months ago, however, has there been any progress in the negotiations there, or is it kind of the same?

Nikolas P. Tsakos -- President and Chief Executive Officer

There is a vast appetite of the companies that are involved. The end-users of gas into wanting more vessels and we're participating -- participating in this.

Donald McLee -- Berenberg Capital Markets -- Analyst

All right. And then one more on the prefs before I turn it over. We have about $100 million that becomes redeemable in H2. How do you prioritize potentially paying those pref off against pursuing near-term growth opportunities?

Nikolas P. Tsakos -- President and Chief Executive Officer

I think our aim would be to repay the pref as soon as possible as early as 2019, I mean, our pref, the first one is due in July next year and the other one is in 2020, in October 2020. So they have a year in EBITDA part. I think it will be in 2009 -- the first one will be repaid in 2019.

Donald McLee -- Berenberg Capital Markets -- Analyst

OK, and then --

Nikolas P. Tsakos -- President and Chief Executive Officer

This is our priority. Of course, this is our obligation.

Donald McLee -- Berenberg Capital Markets -- Analyst

And then just sticking to that. So I think after July 2019 and October 2019, there's an escalation in the yield. What would be the increase if it would be on that period?

Nikolas P. Tsakos -- President and Chief Executive Officer

I don't know the increase, because we're not planning to get into that. It's not October -- it's not October 2019, it's October 2020, the second one.

Donald McLee -- Berenberg Capital Markets -- Analyst

Seriously?

Nikolas P. Tsakos -- President and Chief Executive Officer

Yes.

Donald McLee -- Berenberg Capital Markets -- Analyst

OK. That's it for me. I can turn it over now. Thank you.

Nikolas P. Tsakos -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Your next question comes from the line of Jon Chappell from Evercore. Please ask your question.

Jon Chappell -- Evercore ISI -- Analyst

Thank you. Good afternoon. Two quick follow-ups on the newbuilds. When is the delivery set to those? Is that mid- to late-2020?

Nikolas P. Tsakos -- President and Chief Executive Officer

Perhaps, yes, perhaps -- perhaps as early as the last quarter of '19 for the first vessel.

Jon Chappell -- Evercore ISI -- Analyst

OK. But that might slight -- I mean, you'd probably want to take a December 2019 delivery?

Nikolas P. Tsakos -- President and Chief Executive Officer

Yes. So although these -- the tankers are pushing because they need the ships, you're right, this is what we would do.

Jon Chappell -- Evercore ISI -- Analyst

OK. And then, Nik, you were on the record earlier this year saying that your constituents, I'm not sure if that's the right term, but your fellow owners in INTERTANKO would quote-unquote shoot you if you ordered newbuilds. So can you explain, with the Aframaxes that you have in your fleet today on the spot market, why those ships couldn't be used for this particular charter?

Nikolas P. Tsakos -- President and Chief Executive Officer

Yes. You are right, but you have missed my quotation, which has been responsibly -- like drink responsibly. So I think I've always said that we cannot stop anybody from ordering ships that a client will give to somebody else unless they are going to do it. So we are not looking to build opportunistic ships because of low prices of newbuilds or so, but we have never -- you know this, because we just delivered 15 ships last year, we'll never shy out of doing business.

One of the reasons that we think that the market will also be positive is, as you know, we have moved for environmental reasons into Tier 3, and new designs of engines and more environmental and a lot of [Inaudible] might for specific rates require this type of effort instead of existing. Our priority has been to offer them existing ships, but they need new technology.

Jon Chappell -- Evercore ISI -- Analyst

OK. So the other -- I mean, another way to ask the question is, is there a two-tiered market developing for time charters? And if you have a handful of 2007-2010 builds of Aframaxes in your fleet, when a customer comes to you, they specifically wanted the new technology and maybe even be involved in the oversight of the newbuild process rather than take existing ships?

Nikolas P. Tsakos -- President and Chief Executive Officer

Many of the buildings the clients that are asking for are newbuildings, because I said, we have a lot of business for existing charters by the major oil companies. And I think this is also very encouraging because it's not -- we see, I would say, 75% of the businesses out there for existing ships, for the 2007 to 2010, 2012 vessels, we're planning to announce some of this business, I think, later in -- within the third quarter. But there are some specific clients that, we have Statoil earlier -- later in 2017, but they need specific ships for specific ECO trade, [Inaudible]

Jon Chappell -- Evercore ISI -- Analyst

And then -- so that leads to my last question. You really had a pretty optimistic view on the bottoming of the cycle in the near- to medium-term outlook. And you have a fair amount of spot ships today but a bunch of contracts rolling off to the relatively near future. It sounds from that comment that you're still looking to kind of recharter ships and maintain the current time charter coverage as opposed to maybe be getting a bit more spot exposure in what you think would be a recovery market.

Is that accurate?

Nikolas P. Tsakos -- President and Chief Executive Officer

Yes, because, I mean, as you know, in order to -- or as I said in the beginning, we are a bit of a boarding company because we didn't have long-term charters. And because of the company's reputation, we tend not to have time to have our ships open for long before the next client comes for a long-term employment. And here, we have charter agreement. We have these type of examples on a daily basis.

And if you recall, I think, we made an announcement back in March, that already, in March, we have already chartered 16 vessels from the existing fleet. So two charters. So there is an appetite for that. I think, we have big companies out there, like the Exxons, Shells, that are looking for cover for existing fleet.

Jon Chappell -- Evercore ISI -- Analyst

OK. Final thing. More of a comment rather than a question. I've spoken this -- to one of my peers about this as well.

It's June 15. We're 15 days away from the end of the second quarter, and most of your peers have reported weeks, if not months ago. If possible, as far as staying relevant with the investor community, if you can kind of move the time frame up a little bit and be closer to peers, I think that would be helpful to the company, to us, and the analysts and to your valuation. That's just an observation.

So thanks for your time, Nik.

Nikolas P. Tsakos -- President and Chief Executive Officer

Thank you.

Operator

[Technical difficulty] And your line is open. Please ask your question.

Unknown Analyst

Thanks, operator. Two quick questions here. On Slide 5, you show that your three LR2s and two LR1s are currently operating on the crude trade. How hard or easy would it be to switch those vessels to transferring refined products and is that something you're thinking about doing?

Nikolas P. Tsakos -- President and Chief Executive Officer

I think, operationally, it's not -- those ships have been designed [Inaudible] operationally, it's not more than one week, and perhaps depending on opex for about $0.25 million of expenses to turn them from dirty to cleaner trades.

Unknown Analyst

OK. Is that something you think about doing or you're pretty committed to crude trade on this?

Nikolas P. Tsakos -- President and Chief Executive Officer

Well, I think, on the ships, our own charter employment, so the owners are -- who started under charter are working now more on the crude trades. But they can turn into clean.

Unknown Analyst

Sure. OK. Right now, those two buildings, basically, to be delivered are recent orders. Any other plans for fleet growth or maybe additional fleet sales, as you've already sold the Millennium, in the coming quarters?

Nikolas P. Tsakos -- President and Chief Executive Officer

I think, yes. On specific segments, we are looking as we have with gas. Like gas is a growth priority for us. And all of our first-generation ships, starting with the Millennium, are -- have been for sale and we're -- some of them, we are negotiating closely.

Unknown Analyst

Got it. OK. And then back to the market. Can you give some guidance on quarter to date or maybe current spot rate on some of your open Suezmax or even open Aframax tankers? Obviously, the headlined rate, according to some of brokers, are pretty low.

I would assume you're outperforming those.

Nikolas P. Tsakos -- President and Chief Executive Officer

Yes. I mean, we are addressing -- I'll give you the comparison in the first quarter. I think our -- and again, this has to do because we have coverage of our ships in a market that -- our real ships are close to 27 -- about 27,000 in a market of 11.5. Suezmax is 18 in a market of five, Aframax is 18 on a market of seven, and so on and so forth.

So I think today, some of these markets, mainly, the Aframax have recovered substantially, and we're seeing a bit -- a portion of the Suezmax trade.

Unknown Analyst

OK. So 2Q rates higher than 1Q for the spot vessels?

Nikolas P. Tsakos -- President and Chief Executive Officer

Excuse me?

Unknown Analyst

2Q rates higher than 1Q for the spot vessels?

Nikolas P. Tsakos -- President and Chief Executive Officer

Yes. Mainly VLs and Aframax, so they are the ones who have started reacting more positively.

Unknown Analyst

Sure, sure. OK. Last question. Share price, obviously, still trading at a pretty steep discount to NAV.

Are share repurchases part of your kind of return to capital plans this year? Are you just focused on buying back those preferred first?

Nikolas P. Tsakos -- President and Chief Executive Officer

I think buying back the preferred is our priority and maintaining our dividends is the No. 1 -- the two first priorities.

Unknown Analyst

Great. Thanks, again. Good chatting with you.

Nikolas P. Tsakos -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Next question is from the line of Ben Nolan from Stifel. Please ask your question.

Ben Nolan -- Stifel Financial Corp. -- Analyst

Yes. Thank you, operator. So my first question relates to, I guess, just the newbuild, and ultimately, the returns on them. Kind of backing into it, it sounds like your moderate returns are 10%, 11%, if that's correct, correct me if I'm wrong, but -- which is, I think, probably in line with these events historically for longer-term contracts on newbuildings.

But as you look forward, are you seeing any changes there, any evolutions in terms of what you guys and the market will, in due, require in terms of kind of a minimum level of return in order to be incentivized to build new vessels?

Nikolas P. Tsakos -- President and Chief Executive Officer

I think our equity return is closer to the mid-teens rather than 10%, 11%. I think we're trying -- we have lost a lot of business to others at 10% and 11%, and there are other people that would go for about, I think -- Paul, would you --

Paul Durham -- Chief Financial Officer

I agree. I mean, we've always -- in the past, we've gone for as much as 15%. But of course, that's going to whittle down after a year, our target that is. But I think we would be -- we are very happy to get 10% or 11%, but even this can be a bit of a struggle.

But we feel that by the end of the year, we'll be up again around the 12% kind of 11%.

Nikolas P. Tsakos -- President and Chief Executive Officer

Yes, Paul's comments has to do with the return on the fleet overall, but tonight's comments have been on the time charter market. But we let other people get the 10% or 11% on long-term charters. We are looking at something with mid-teens. I think, 15% is our sweet spot and we have examples in businesses that we let it go to undercut the market.

Operator

Thank you. Are you ready for the next question?

Nikolas P. Tsakos -- President and Chief Executive Officer

Yes.

Operator

Next question is from the line of Fotis Giannakoulis from Morgan Stanley. Please ask your question.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Yes. Hi, guys. Hi, Nik. I also want to ask about your capital allocation, your -- how comfortable you feel with your liquidity.

I know that you want to have plenty of cash in your balance sheet for opportunistic acquisitions. Given the fact that you have to -- I mean, plan to repay back the two prefers, which is $100 million, and you have also some equity to contribute for the newbuildings, what are the sources of liquidity that you can have? And if you would consider raising any external capital?

Nikolas P. Tsakos -- President and Chief Executive Officer

Well, I mean, as I said, our intention is -- we have two preferreds, the first one will be repaid, I think, will be in 2019; the second is during October 2020. And we're planning to -- as you know, priority to repay those preferreds or to refinance them. In the market, as you know, preferreds have performed very, very, very well, and they're performing very well because we have a very constant dividend from that side. Also, we're looking at fixed sales to create liquidity, and we're doing that.

We're enhancing the company's liquidity, which has -- is always on the high side for these preferreds. And we are securing businesses that the equity participation because of the signature of our name and the tanker's name, it's not so demanding. So I think the existing growth of the company will come from existing net cash flow for the new ships.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

So, you got any minimum threshold over cash that you want to have in your balance sheet? And you mentioned earlier your first priority for the repayment of the preferreds will be [Inaudible] your preferreds. Is this the game plan here?

Nikolas P. Tsakos -- President and Chief Executive Officer

Well, depends how the market conditions are going to be at the time. I mean, it is something we do not exclude.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

OK. Thank you. And Nick, you are, except of being the CEO and the chairman -- or the CEO of TEN, you're also the chairman of INTERTANKO, the association of tanker ship owners. I want to ask you, with both hats about the implications of -- of 2020, and the way that your fellowship owners are reacting to that.

We heard earlier this week one of your peers in the dry bulk sector mentioning that they have already ordered a number of scrubbers for capesize vessels, very similar size with the Suezmax that you own. Is this something that you expect to have a wide adaptation now that the first steps have already been done and it seems that the cost is a little bit lower than we previously talked?

Nikolas P. Tsakos -- President and Chief Executive Officer

Well, I think, first of all, Fotis, we will have to take -- you will have to spend here up to dinnertime in New York to discuss this issue. But I would try to give you a small summary of our thoughts here. I think, every one of our peers has his own right. We believe that scrubber is one of the solution, we believe, scrubber, is a short-term solution.

Owners are doing -- are taking this stance. However, whichever way it will go, even if the scrubber becomes much more acceptable day to day, the disruption and the dislocation that this will create in the market will be very positive for age, both in tankers, dry cargoes, and I'm not sure what will happen with containers because containers were actually the majority of the CO2 comes out from. So I think any disruption of that sort, even by slow steaming, even by growth of the yards, working for both the fitting scrubbers is going to make a big change for the market within -- stopping early in 2019, and that's why I say -- now my opinion is that scrubbers is a short-term solution, and that it might take -- to fit them. So I think everybody is taking a chance on that.

There are not enough scrubbers in the world to fit all the world's investments with scrubbers. But most of all the ships will grow from scrap. But I think you mentioned that I sound optimistic. I'm not all that optimistic.

I'm just looking also at the supply and demand figures, which you are much more analytical about. I mean, there are, let's say, more than 100, 120 VLCC in the order book. But close to 200 of those ships are above 15 years old, and more than 13 of those ships are always busy. So really, if you imagine that some of this 20-year-old ships, you will not, for sure, as we did with the Millennium, will not go through the scrubber or the water ballast treatments.

So neither of them -- the market is much, much more balanced than we think, and that is the reason that we feel optimistic. Our opinion as an association, with INTERTANKO, about the scrubbers is that it's a short-term cure with no real positive long-term effects for the environment we're talking about. But every owner takes his own economical decisions. The truth is, whichever way it goes, it's going to be positive for the market because it will create significant disruption.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Can you also give us your view about the level of compliance that you see after 2020, and also if you believe that this date is set in stone or there might be some extensions similar to what happened with the ballast water treatment?

Nikolas P. Tsakos -- President and Chief Executive Officer

What I can tell you is that, as we speak today, from now until September, a lot of very important discussions will be taking place in all of the legislative forums. And by September, there will be a decision. If you would ask me based on supply and demand, supply of old pipe and demand for old pipe, I would believe that some sort of transition time has to be given for vessels to comply. But I think, in September, the final decision will be taking, and then we will know much more on the effect on the market, depending on that will be significant.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

And jumping to the U.S. Gulf market and the ramp-up in exports, it seems to be one of the high expectations for the tanker sector. Can you give us an idea of how many vessels that you are engaged in U.S. exports right now? Why there are VLCCs or Suezmaxes, Aframaxes for reverse laboring? And how many vessels do you expect that will be engaged in the future if we have this growth in U.S.

exports? People are talking about 4.5 million, 5 million barrels-per-day growth.

Nikolas P. Tsakos -- President and Chief Executive Officer

Well, as we have seen, this is a market that we think is biting more and more into the demand for transportation business. The Aframax are basically used, you're right, you said for trade, for reverse laboring, and we have the first couple of VLCC cargoes that have been exported, and Suezmaxes. But so far, the market has been more effective and we see this because of the net performing market in 2018, it's the Aframax port market, and, I mean, today, it has gone close to $20,000 a day, which is very important.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Thank you very much, Nik. Thank you, everybody.

Nikolas P. Tsakos -- President and Chief Executive Officer

Thank you.

Operator

Next question comes from the line of Magnus Fyhr from Seaport Global. Please ask your question.

Magnus Fyhr -- Seaport Global -- Analyst

Yes. Hi, good afternoon. Just two follow-up questions. I guess, first, on the scrubbers.

We're seeing some of the oil companies taking a bigger interest and growing needs on their ships. Maybe you can tell me a little bit about of these most recent time charters for the two Aframaxes, was there any talks about putting scrubbers on these?

Nikolas P. Tsakos -- President and Chief Executive Officer

Yes. I think scrubbers is one of the options but it's being discussed and evaluated with the shipyard. And as you know, there are various types of scrubbers and we're learning more about scrubbers. I mean, we have our ambitions in our life when we started out, overlooked hybrid scrubbers.

So yes, these are options that are being discussed very, very seriously.

Magnus Fyhr -- Seaport Global -- Analyst

All right. Thank you. And then second question on the LNG market. I know we've set out some goals here a few years back, mid-2018 but still have two LNG ships.

Are the returns getting closer now? We've seen some longer-term charters being awarded that you think it could have maybe one or two ships more by 2020?

Nikolas P. Tsakos -- President and Chief Executive Officer

Yes. I think you are right. We went through a period that I think some owners, for their own reasons, more out of -- because they had a significant amount of ships, I do in the spot market -- as we said, the spot market has almost doubled in some segments of that, and that carries some way from the long-term side of the business. I think some of the owners that had idle ships have now employed them at low respectable level.

And the market is going through a period that we are approaching are -- in terms of, I mentioned earlier, of the mid-teens returns, at least for our equity.

Operator

Thank you. Next question comes from the line of James Jang from Maxim Group. Please ask your question.

James Jang -- Maxim Group -- Analyst

Hey, good afternoon, guys. So, I know you've mentioned that LNG is a focus for the near term, but any plans on replacing the Millenium?

Nikolas P. Tsakos -- President and Chief Executive Officer

I mean, yes. Big ships are always interesting. And there is a big appetite for big ships by the oil companies. So it is a segment that we are looking, not as a priority, more opportunistic.

And we're looking also at big ships that are retails.

James Jang -- Maxim Group -- Analyst

OK. And so, since you are the chairman of INTERTANKO, can you give us some insight into whether INTERTANKO is working with someone like Alfa Laval on the scrubbers?

Nikolas P. Tsakos -- President and Chief Executive Officer

I think INTERTANKO is -- INTERTANKO is giving information to its members for every technology available. We are -- we have our annual meeting for five beautiful days in Rome next week, and I know that the majority of our discussion we'll be talking about scrubbers and they get the ballast treatments, but we will have to bring a lot of grappa to Italy for all the technical issues. But yes, I mean, we are providing a forum for suppliers to come and talk to our members. We're not thinking of -- we're not a commercial organization because INTERTANKO -- but we have had in Houston last year, in our annual meeting, we had a lot of the water ballast treatments with the Coast Guard approval presenting the technology we will have at the level and others presenting their technology in our annual meeting now.

But I mean, we're not making a profit out of this. We're only telling our numbers what is out there as an option.

James Jang -- Maxim Group -- Analyst

I mean, wouldn't it benefit, I guess, in history, if you guys could come to some type of consensus on a scrubber system to help with cost, or is that not part of the discussion at this point?

Nikolas P. Tsakos -- President and Chief Executive Officer

I mean, we have strong opinions on scrubber technology, and we have a very confident technical team in INTERTANKO dealing with issues like this. But their aim is not to -- our aim is not to influence one technology.

James Jang -- Maxim Group -- Analyst

Gotcha. OK. And then one last one is, you mentioned that you believe that the sector is kind of exiting the trough right now. What are you seeing kind of to support that outlook?

Nikolas P. Tsakos -- President and Chief Executive Officer

You're talking about why we believe that the market has turned the corner?

James Jang -- Maxim Group -- Analyst

Yes.

Nikolas P. Tsakos -- President and Chief Executive Officer

Perhaps, as I said before, it reminds us very much, if you look also to the graphs of where we were in the same time, same period in 2013, which was, again, a very low period of time, we had a difficult summer in 2013 for those of us who have long memories, you remember, and that, I think, October last year, the market turned the corner without specifically -- we didn't have any major wars. I think, there's the usual, the Iraq skirmishes at the time. The reason is now because we are seeing that supply and ships are getting older, and the supply, other than the VLs, where the numbers is a bit scary is imbalanced, and the other segments that we're seeing is the dislocation that you guys are mentioning, if we have to go and close or have scrubbers fitted on their ships, they will have to have a lot of time out of service. And that will create significant market disruptions and dislocations, which will create -- as long as demand, and as George mentioned in his presentation, stays, increases where we expect to increase.

So we're going to see a positive remaining of the year. I mean, we know how many ships are coming in, we know -- we have already had the, let's say, more than 70 ships since -- in the first six months, and tankers have been scrubbed. Fifteen [Inaudible], 10 Suezmax and 20 Aframax, and then about 22 smaller ships. So it's a good sign.

James Jang -- Maxim Group -- Analyst

OK. And one final one is on the two new contracts. I think Jon touched upon this. Currently, you have the Sapporo and the Uraga Princess off charter.

Why were these vessels not looked at as candidates for the charter? Is it because of the age or the technical specs?

Nikolas P. Tsakos -- President and Chief Executive Officer

No, no, no. Actually, the ships are participating in contracts of a freight of major companies. They're not on a -- just because the ships are not [Inaudible, Cross talk] does not mean they're not operating. They're operating in the spot market, and if you look, our utilization of 97% is way, way above the industry average of 82%, 85%.

James Jang -- Maxim Group -- Analyst

Yes. OK.

Nikolas P. Tsakos -- President and Chief Executive Officer

So those ships are operating, and there is a big appetite. I mean, let's say, one of the major company is out there as of this week, looking for this type of vessels for long-term employment. Now, if they meet the rates, we believe it's appropriately might charter them long term. But the ships are working with 96% utilization.

So they're working with the majority of -- every single day.

James Jang -- Maxim Group -- Analyst

OK, thank you. Only one quick one, the two new Aframax has been, are they coated?

Nikolas P. Tsakos -- President and Chief Executive Officer

Of course, yes.

James Jang -- Maxim Group -- Analyst

OK. Great. That's all I have. Thank you.

Nikolas P. Tsakos -- President and Chief Executive Officer

Thank you.

Operator

Thank you. There are no further questions at this time.

Nikolas P. Tsakos -- President and Chief Executive Officer

OK, thank you, all. We would like to thank you very much for your interest in the company and the questions. We would be out in Marine Money next week, so you can see and have any more clarifications with our results being out. We believe that it has been a tough part of the year but our strategy of 80% employment and more than doubling -- outperforming by double the spot market has put us in the right direction.

We still have the positive cash production, a small one, but still, our strategy was 80% of the fleet are paying all our operational and financial obligations has started to operate in the first three quarters that we have a full fleet working. We took a decision to take a number of our ships out of service and passed the special surveys because of the low market, but it's something we will not have, I think, in this degree at all in the second quarter. So hopefully, our news will be either be much better when we talk to you after the summer. And with that, we would like to thank all of you very much.

Thank you.

Operator

[Operator signoff]

Duration: 60 minutes

Call Participants:

Unknown Speaker

Nicolas Bornozis -- Capital Link

Nikolas P. Tsakos -- President and Chief Executive Officer

George V. Saroglou -- Chief Operating Officer

Paul Durham -- Chief Financial Officer

Donald McLee -- Berenberg Capital Markets -- Analyst

Nikolas P. Tsakos -- President and Chief Executive Officer

Jon Chappell -- Evercore ISI -- Analyst

Unknown Analyst

Ben Nolan -- Stifel Financial Corp. -- Analyst

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Magnus Fyhr -- Seaport Global -- Analyst

James Jang -- Maxim Group -- Analyst

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