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TEN, Ltd. (NYSE:TNP)
Q3 2019 Earnings Call
Nov 26, 2019, 9:00 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 Third Quarter 2019 Financial Results. We have with us 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. At this time, all participants are in a listen-only mode.

[Operator Instructions]

I must advise you the conference is being recorded today. I'll now pass the floor to Mr. Nicolas Bornozis, President of Capital Link Investor Relation, Adviser of Tsakos Energy Navigation. Please go ahead, sir.

Nicolas Bornozis -- Investor Relations

Thank you very much and good morning to all of our participants. I am Nicolas Bornozis of Capital Link, Investor Relations Adviser to Tsakos Energy Navigation. This morning, the Company publicly released its financial results for the third quarter and the nine-month period of 2019. 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@capitallink.com, and we will have a copy for you emailed right away.

Please note that parallel to today's conference call, there is also a live audio and slide webcast, which can be accessed on the Company's website on the front page at www.tenn.gr. The conference call will follow the presentation slides. So please, we urge you to access the presentation slides on the company's website. Please note that the slides of the webcast presentation will be available and archived on the website of the company after the conference call. Also, please note that the slides of the webcast presentation are user controlled, and that means that by clicking on the proper button you can move to the next or to the previous slide on your own.

At this time, I would like to read the safe harbor statement. This conference call and slide presentation of the webcast contains 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. And at this moment -- at this time, I would like to pass the floor to Mr. Nikolas Tsakos, President and Chief Executive Officer of Tsakos Energy Navigation. Please go ahead, sir.

Nikolas P. Tsakos -- Founder, President and Chief Executive Officer

Thank you, Nick and good morning ladies and gentlemen. It is, again, a pleasure to report the Company's growth developments and results and it's even more a pleasure because we are able to finally do this in a much better long-term positive environment I would say, after a very long period of time. The year so far has been really a roller coaster, started with a market that was a positive and started giving us indications of things that were there to come. We got a cold shower very quickly in the second and third quarter with the market dropping to significantly and then of course, we have had this significant freight strengthening eruption that is a gaining strength to strength day to day. So overall, an interesting year and TEN always has been for 26 years now, navigating harsh conditions and always able to be successful through them. We took advantage of the harsh conditions of the second and third quarter to do our housekeeping which means take out ships pre-emptively out of service and prepare them from the -- for the change in legislations of water ballast tank and of course 2020. And I think looking back, it was a wise move, it has of course affected the third quarter results but it has kept us profitable for the year and for sure, the fourth quarter, we are going to be rewarded for these actions.

In the meantime, we still grow the business. Our LNG footprint is growing. It's a business that we believe there is a future into it. However, we are not willing to sacrifice shareholders equity in participating in this market, accepting very low rates, and that's why we are very choosy when we look at these transactions. However, we have doubled out our footprint in this at the right time when the value over those assets were at the lowest in the middle of the soft period in around June and July.

Also, our long-term strategic conventional relationships go from strength to strength. Four more ships are being built, one delivered already to a major end user for a very long period of employment, very accretive transactions that are the base of the company's -- of the company's growth. The company maintained strong liquidity. However, not only we pay a dividend which we announced today, but we reduced debt by another $144 million year-to-date. In the middle of July, we repaid our first preferred and of course, we have outperformed the market by 20% for the first nine months, but more importantly or as importantly for us that we are on hands [Indecipherable] that we maintain good control of operating expenses. So we want to thank our technical managements and everybody on the ships basically and around that are -- when we were knocking on wood, keep our ships running at very, very attractive, low operating expenses that allows us to be able to navigate through the harsh waters. Talking about harsh waters, we can see the environment is much calmer out there. We have 23 ships, which will be starting to -- and you will see this in the presentation on top of our existing 27 vessels on the spot market that take full advantage of that, 23 vessels are going to be opening up, I think seven already in the first quarter and so going forward for rechartering and today's much, much higher rates. So with this in mind, we believe that we will have a very strong year for 2019 and hopefully this will be continued in 2020 and we will be able to enhance even our dividend when we have our full year results in March.

And with this, I will ask George Saroglou, our COO to give us a more analytical description of what has happened in the nine months and in the last quarter and then we will be available for questions. Thank you very much.

George V. Saroglou -- Chief Operating Officer

Thank you, Nikolas and good morning to you all. We are very pleased to report a profitable nine months for 2019 operations as a result of a better freight market environment that started gradually improving since the end of the fourth quarter in 2018. Both long-term and short-term market fundamentals are favorable for tankers. We have a low order book and aging fleet growing of global oil demand and shorter term effects created by sanctions, geopolitical events, delays in retrofits, vessel storage ahead of the new IMO regulations, stronger second half 2019 demand for oil due to seasonality and the return on -- of refineries from longer maintenance than typical. This combination created from the end of September freight market that initially broke records for the VLCC class before eventually spreading down to the rest of the tanker asset classes.

In this strong freight environment, TEN is well positioned to take advantage of the market's current upside, as today we have 36 vessels out of pro forma fleet of 70 that have their freight income related to the spot market. Next year, with 23 vessels during 2020, up for recharter in a rising market, the number of TEN vessels with revenue will be related to the spot market increases to 50, or about 75% of the pro forma fleet. In the last three years, the Company built 21 vessels and this number includes the option we have for one LNG carrier, mostly against long term industrial business. TEN is in the final stages of the current expansion undertaken at competitive levels during the low levels of the cycle. 16 ships have already been successfully delivered, financed and employed on long-term accretive charters to first class end users. During 2020, the remaining three vessels, all fully financed and chartered to major oil concerns for a minimum of five years will complete the Company's current expansion on conventional tankers and will secure revenues going forward.

On the LNG newbuilding front, we announced the order for one more -- a 174,000 cubic meter vessel for delivery during the second half of 2021 and have the option for one more for delivery during the first half of 2022. With this order and option, the Company's LNG pro forma fleet rises to four vessels. We expect for these vessels to follow the same employment path as the other two vessels and be employed on time charter with major natural gas and trading companies.

Moving to the presentation. To the online presentation on -- in Slide 3, we see the Company's versatile and modern fleet spanning across all vessel types and sizes in crude, product tankers and specialized categories like LNG and shuttle tankers. Thanks to the Company's employment strategy that has a bias toward medium to long-term time charters with a combination of fixed rates, profit sharing and min/max rate, TEN is able to outperform the average spot market indices.

You see here, all vessels in red are spot trading vessels and in yellow shade are all the vessels that are due for recharter in 2020. So if you look again at the slide, 32 vessels are on fixed rate time charter, while 36 vessels or 52% of the combined pro forma fleet has spot market exposure in a combination of pure spot COAs and time charters with profit sharing and min/max formulas. On average, on the vessels with forward secured employment, we have approximately two years of employment and a backlog of just over 1 billion in minimum contracted revenue.

The next slide, we have the 23 vessels that open for recharter during 2020. In addition to the 16 tankers trading in the spot market and COAs today, and 11 tankers with profit sharing arrangements with charters expiring -- expire after 2020, TEN has 50 vessels or approximately 75% of the pro forma fleet that is expected to take advantage of the strong freight market of next year. On Slide 5, the left side of the equation, we see here the breakeven costs for the various vessel types that we operate in the Company. As you can see, the cost base is low. In addition to the low building cost, we must highlight the purchasing power of Tsakos Columbia Shipmanagement, the continuous cost control efforts by management to maintain a low OpEx average for the fleet and the low general and administrative expenses while keeping at the same time a very high fleet utilization rate quarter after quarter. TEN's flexible chartering strategy ensures that most of the times the Company outperformed the spot market and this helps the Company maintain an impeccable debt record. On the next slide, we see the debt reduction since the end of December 2017. We have reduced debt by $234 million. In the last 12 months, the company paid back $94 million, taking down the net debt to capital ratio at the end of the third quarter 2019 at below 50%. In addition, at the end of July, TEN fully redeemed the highly successful 50 million Series B preferred shares.

If we look at the market on Slide 7, despite the headwinds from the US-China trade war and its potential spillover effects to the rest of the world, global oil demand continues to grow. The latest forecast from the International Energy Agency calls for 1 million barrels per day oil demand growth in 2019 and 1.2 million barrels per day growth in 2020. The United States of America is now the biggest crude oil producers and US crude oil exports continue to grow. This combined with geopolitical tension, supply disruptions, the US-led sanctions and OPEC production cuts are positive for tonne miles and global fleet utilization as substitute barrels travel longer distances to each importers, refiners, consumers.

We had a longer than usual refinery maintenance period in the first half of 2019 as global refineries were preparing for the IMO 2020 low sulfur fuel switch. We see global refinery throughputs are picking up now and we expect to require an average 2 million barrels per day more crude oil in the second half of the year than the first half of the year. Crude oil demand is currently in excess of 101 million barrels per day versus on average 99 million during the first half of 2019.

On the supply of tonnage, we see here the order book standing at 7.7% which is low compared to historical levels. A big part of the fleet is over 15 years and environmental regulation starting with retrofitting of water ballast treatment systems could push more tankers approaching or above 20 years to scrapping. Last year, of course was one of the highest scrapping years of record. This year, scrapping is expected to be lower but with more than 1,000 tankers older than 15 years, we could see a pickup in scrapping with more environmental regulations on the horizon, especially for those vessels approaching or being above 20 years.

On Slide 10, we see the forecast from Fearnleys, a well known ship broker from Norway. In past calls, we made reference to Fearnleys forecast for VLCC spot rates rising significantly from the second half of 2019. They have been proven rights and rates, not just for VLCCs, but for all tanker classes are currently enjoying multi-year highs. With strong market fundamentals and 50 vessels expected to capture a strong freight market in 2020, TEN is very well positioned to take advantage of the market's upcycle that just started. That concludes the operational part of our presentation. Paul will walk you through the financial highlights for the nine-month and the third quarter. Paul?

Paul Durham -- Chief Financial Officer

Yes. Thank you, George. Well, having enjoyed a strong first half, a weaker seasonal market followed in quarter three, affecting all tanker companies. For the nine months, TEN achieved a profit of $2 million, but in the quarter, incurred a loss of $9.5 million. Thanks to our charter strategy that was $5 million better than in the prior quarter three and we avoided the heavy losses suffered by those operators, mainly in the spot market.

We had five vessels in dry dock in quarter three as Nikolas has mentioned, mostly brought forward in preparation of 2020 and to take advantage of the slower market. The fleet is still achieving 93% utilization, 96% in the nine months. Quarter three revenue was up 4%, constrained by the market and dry dockings, but up 12% in the nine months, due to the good half-year and accretive renewal of charters, notably for the LNG carriers.

Operating income was over $58 million for the nine months and $12 million in quarter three, a six-fold improvement. Later in quarter three, we saw strong rates that continued in quarter four and may even continue through 2020 which will let our vessels on spot and with profit share, enjoy significant earnings. Daily TCE per vessel in quarter three was $19,000 and $20,000 in the nine months, above average market rates, generating strong EBITDA of $47 million in quarter three, a 17% increase and over $167 million in the nine months.

Average daily OpEx per vessel remained at $7,600 and dry-dock costs being partly offset by a strengthening of the dollar, while other expenses were stable or fell from prior quarter three. However, finance costs increased by $4 million in quarter three, mainly related to bunker hedges. But loan interest remained stable with increased interest rates, offset by the impact of $94 million reduction in outstanding debt since the prior quarter three and reduced margins. Net debt was reduced to $1.54 billion by the end of quarter three with net debt to capital at 48% and is scheduled to be reduced further in quarter four. We believe the crude tanker spot market will remain strong through 2020 as George has mentioned with product carriers also likely to do well. With 40 vessels on spot and profit share and with other tankers freeing up in the next months, we will benefit from what appears to be sustainable recovery for the near future.

We have four vessels on order, an Aframax, two Suezmaxes and an LNG carrier. The total cost is $380 million. $60 million has been paid to date, $187 million will be paid in 2020 and $135 million in 2021. Most will be paid through bank finance, largely, already arranged at competitive terms.

And finally, we emphasize that we are a growth company with a long-term vision, but also have an eye to selling our older vessels as opportunities arise, which is very possible in the current buoyant [Phonetic] market. I'll now hand the call back to Nikolas.

Nikolas P. Tsakos -- Founder, President and Chief Executive Officer

Thank you, Paul and thank you, George. Well, looking at the presentation, as I said, about a year ago, when the Fearnleys came out with a report, I have to say I was on the opinion that it's a typical -- Norwegians are usually never in doubt but very often wrong, but I'm very, very happy to announce that this time to our all surprise they have been very right. So I hope they would continue with this positive news. You will see in our presentation that the market expectation is there. We have positioned the company in order to be able to take advantage right now of this and we have been enjoying the fruits of our hard labor, I would say for the last -- for the fourth quarter and looking forward to continue in the first quarter and for the majority of 2020.

What is also very important which we very often do not talk is that the reduction of debt, a significant reduction of debt, more than a $0.25 billion in the last two years on average. On top of that, another $50 million of preferred repayment and still maintaining close to $180 million and hopefully more by the end of the year of cash once we're paying a dividend. So I think we are preparing the company for hopefully -- finally, a very exciting super cycle going forward which we hope to be able to see also in our share price and our dividend yields. And with that, I would like to open the floor for any questions. Thank you.

Questions and Answers:

Operator

Thank you, ladies and gentlemen, we'll now begin the question-and-answer session.

[Operator Instructions]

Thank you. We have our first question. Please go ahead, your line is open.

George Burmann -- Cabot Lodge Securities -- Analyst

Hello, this is George Burmann calling from Cabot Lodge Securities. How are you today?

Nikolas P. Tsakos -- Founder, President and Chief Executive Officer

Very well. Thank you, George.

George Burmann -- Cabot Lodge Securities -- Analyst

Good. Got a couple of quick questions for you. How big is your profit share in the current season of your tanker? I understand that a lot of them are being renewed in the upcoming year, but what kind of profit sharing -- do you usually have 50-50 at a certain level or how exactly does that work?

Nikolas P. Tsakos -- Founder, President and Chief Executive Officer

Yes, I think, that's a good point. Although we do not want to spill all the beans in case any of our competitors are listening, but I think if you go to page, and I would say in the presentation which is page -- page 3 of the presentations where we have -- you see our time charter income and our expense income, there in the column. So you see what we try to do is cover all our expenses by the minimum rate on a profit share and usually then, go 50-50 above that. Many times we have been able to secure depending on the time of negotiations an additional $5,000 all coming to us based on the index and then 50-50, but I would say, on average, it's a -- I would say it's 55 to us 45 overall.

George Burmann -- Cabot Lodge Securities -- Analyst

Okay. Next question. How many of these preferred series do you have outstanding and at what interest rates at this point in time. I know you paid off completely one series earlier this year, right?

Nikolas P. Tsakos -- Founder, President and Chief Executive Officer

Yes. I mean, we have four, one is coming due in October of this year or next year 2020 which much probably again we will be repaying out of our cash. And then we will be down to three -- with an average that -- with an average yield of issue yield of just under 9%.

George Burmann -- Cabot Lodge Securities -- Analyst

In today's environment and with your low leverage as a company, I would consider that pretty high and being a company based in Europe with the interest rates currently at many times negative, it would seem to me that there would be opportunities for you to somehow refinance these preferred series, because, if you take the dividends that you have to pay on top of your last generated. the numbers don't look too strong and I think they are single handedly the reason for the -- somewhat very disappointing performance of your common shares. And I'm wondering if that is something that you might look at into the future?

Nikolas P. Tsakos -- Founder, President and Chief Executive Officer

I think George, you are very correct and we feel the same way. As I said, you have of course to look at the environment when we were -- we had to raise the -- we had to raise finance for our growth. As you know, in shipping, in order to make a good return, you have to be counter cyclical, which means that you have to go out, order and buy ship at the time that no one wants to talk about tankers or ships at all. And of course that's the time that you would have to -- be able to finance this growth at a higher rate. I agree with you and that's why we have paid the one, we're paying the next one in less than a year and in the meantime, we are working to refinance at least one or two of the remaining ones. Although they are perpetuals at much, much more competitive levels, but if you go back to the -- I would call it the dark ages of 2013 when those, when we were issuing our preference -- we were using, of course, the proceeds to order ships that today have gone up to value by more than 30% or 40%. [Speech Overlap]

George Burmann -- Cabot Lodge Securities -- Analyst

And if you were to sell some of the older vessels at today's elevated prices due to the rates, you might be able to use the proceeds there also to reduce or buyback some of those preferred shares?

Nikolas P. Tsakos -- Founder, President and Chief Executive Officer

I guess, and this is -- we are in the process of perhaps, announcing transactions even the side of the year.

George Burmann -- Cabot Lodge Securities -- Analyst

Right. How many dry docks do you have scheduled for the fourth quarter and into next year?

Nikolas P. Tsakos -- Founder, President and Chief Executive Officer

We don't have any more for this year, as a finished.

George V. Saroglou -- Chief Operating Officer

As we said, we did a lot of pre-emptive ones in order to be able to take advantage of fourth year and most of -- sorry Paul.

Paul Durham -- Chief Financial Officer

And we're looking for in quarter one, two more. So I'll do it by quarter, quarter one, we got two vessels scheduled, quarter two, we have three vessels scheduled, quarter three, it looks like another difficult quarter because, we've got four scheduled. And then one at the end of the year, but all this of course might change during the course of the year and we might have to take advantage of given situations.

Operator

Thank you.

[Operator Instructions]

Thank you. Please go ahead, your line is open.

Randy Giveans -- Jefferies -- Analyst

Howdy gentlemen? It's Randy Giveans from Jefferies. How's it going?

Nikolas P. Tsakos -- Founder, President and Chief Executive Officer

Hi, Randy.

Randy Giveans -- Jefferies -- Analyst

You mentioned the kind of upside exposure, obviously the current spot rates well above your profit sharing splits, plus you have, I don't know $177 million in cash on hand, your share price is obviously trading at a pretty steep discount to NAV. So kind of use of cash going forward with the expected kind of uplift here in the fourth quarter. Looking at share repurchases, possibly increasing the dividend, what are your thoughts on those two options for returning capital to shareholders?

George V. Saroglou -- Chief Operating Officer

Yes, as well. As I said, our first increasing the dividend is our first priority. I mean, we believe that's the best way to reward the existing shareholders who have stuck with us over long years. So this is something that we will -- we come up, as you know with our results in the middle of March for the end of the year and that's when we will be looking to hopefully significantly top up the existing dividend in this new era. So that would be -- and the second one would be in reduce -- further reducing debt, but we're putting aside money to purchase in October -- our 8.5% -- 8.875% yielding preferred would is due to be paid at the end of October. So I think in this line, at the same time, of course, we are looking at opportunities.

Randy Giveans -- Jefferies -- Analyst

Okay. And then what about your kind of quarter-to-date rates? Can you give any guidance on what you booked now that we're kind of at the end of November?

George V. Saroglou -- Chief Operating Officer

Yes, I think, if you see that the nine months, if the nine months were in the average 20 [Phonetic], I think, we might be able to -- the average across the board for the fleet be in the high 20s for start to three [Phonetic], and that's the -- which is a significant and if the market maintains then with 23 ships coming up and within 2020 on top of the 27 purely spot vessels, I think you have a graph in there that shows that we are looking, and I think a crude calculation we have is that for every $1,000 increase of the spot market, we get the $0.06 to the bottom line.

Randy Giveans -- Jefferies -- Analyst

Got it, OK. And then I guess lastly, you mentioned there is still some interest in scrubbers outstanding by your charterers. Has that kind of increased or kind of remained the same in the past few months? And then any clarity or maybe details you can provide on the scrubber premiums you're getting where the charterers are increasing the daily charter rates?

George V. Saroglou -- Chief Operating Officer

Yes, I have seen -- I think for two reasons, we have seen actually charterers of existing investors reluctant to take ships out of the market in order to retrofit -- in order to retrofit the scrubbers, because of course, if you are making $50,000, $60,000, $70,000 a day, you don't want to take a ship out for two months. That's one of the reasons. On the other side, which means that you have more -- the biggest the delay the more time works because the oil companies can provide 0.5. I think today you have a premium on every category of ship on average of about 10% for scrubber fitted vessels. But really there is no -- we have not seen any charter refusing to charter long-term non-scrubber ships.

Randy Giveans -- Jefferies -- Analyst

Got it. All right. That's it from me. Thank you so much for the time.

Operator

Thank you.

[Operator Instructions]

There are no more questions coming through on the line. I'll now pass the floor back -- just bear with me, please. One second. No questions coming through on the line, sir.

Nikolas P. Tsakos -- Founder, President and Chief Executive Officer

Well, thank you very much. And again, looking to wish everybody a very, very happy, peaceful and Thanksgiving coming up and looking forward to end this quarter with very good results and looking for a very exciting 2020. Thanks to our shareholders that have stuck with us for all these years. Thank you for our technical managers, Tsakos Shipping & Trading, the crew on our ships. It's been a long period of 10 years without a lot of significant positive news that seems to have turned and looking for a much more exciting 2020. We have prepared the company right now and we are ready to take advantage of it most than any other of our peer group out there. And with that again, happy Thanksgiving and thank you very much.

Operator

[Operator Closing Remarks]

Duration: 36 minutes

Call participants:

Nicolas Bornozis -- Investor Relations

Nikolas P. Tsakos -- Founder, President and Chief Executive Officer

George V. Saroglou -- Chief Operating Officer

Paul Durham -- Chief Financial Officer

George Burmann -- Cabot Lodge Securities -- Analyst

Randy Giveans -- Jefferies -- Analyst

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