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Tsakos Energy Navigation Ltd (NYSE:TNP)
Q3 2020 Earnings Call
Nov 23, 2020, 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 Third Quarter and Nine Months 2020 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]

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

Nicolas Bornozis -- President and 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 nine months and third quarter ended September 30, 2020. 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 emailed to you right away.

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

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

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

Efstratios Arapoglou -- Chairman of the Board

Thank you, Nicolas. Good morning and good afternoon to all. Thank you for joining us on our call today reporting third quarter and nine months results. As you've seen more than double increase year-on-year in operating income and positive quarterly results in such a weak market, while paying off all our obligations, replacing all the tonnage with new accretive business, maintaining our comfortable cash position, redeeming recently our preferred issue and maintaining a healthy dividend, all this demonstrates alertness and flexibility by our management and fully validates our strategy and positioning in the market that you've been hearing all along. These attributes will certainly allow us to benefit from the anticipating gradual recovery in the market. So that we can continue offering our shareholders' value going forward.

Thank you. From my side, Happy Thanksgiving to all, and I'll now pass the floor to Nikolas Tsakos, who deserves together with his management once again, congratulations. Nikolas, the floor is yours.

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

Thank you, Chairman, and good morning to all of our participants. It has been, as described in the press release, a very, very strange, I would say in painful years on personal basis for many of us. However, in the meantime, we have been able to maintain a steady course in taking TEN a one step further to its goal, which is the full appreciation of its shareholders' value and the company's growing business. As a Chairman, I was kind enough to mention with the help of all on board, our seafarers, our technical management team, the whole Tsakos organization, we have been able to maintain and have presented high utilization in very difficult times, operational difficult times. And the last quarter, the third quarter which seasonally is a low quarter was actually also influenced by operational barriers to doing business as usual caused by the pandemic.

In the meantime, TEN was able to achieve its goals regardless of the circumstances. The most important part of it has been the modernization of the fleet, in the first nine months, we have sold six of our older ladies, as we say, and we have replaced them with a significant for economically designed and environmentally designed vessels, all of them with accretive businesses. This has been, I think, also in our bottom line, we have been able to maintain our very high utilization, reduced debt, reduce our preferred obligations and prepare the company going forward in a much more normalized environment.

We are seeing around us significant signs in the other segments of the shipping business, that goal in parallel or with a time lag. We're seeing that the dry cargo market has turned the corner and going from strength to strength, wishing a very strong recovery from a very, very low starting point of the container sector. And in the last -- and since November, we are seeing a similar signs of recovery in our business. So with this introduction, we are looking -- going forward in an environment where the supply, which is usually what hurts our business, is very, very normalized. We have the lowest supply in the last 30 years and also a very significant scrapping. We finally -- the pain of the last quarter has led to finally some of the older vessels being scrapped after a very long time and we are already have seen 380 tankers being scrapped, a strong 7% of the tonnage -- there have been scrapped within this year and growing. So this gives us a very, very good prospects going forward.

The company has maintained its uninterrupted dividend pay out and having a strong balance sheet and a strong cash position, we are looking at better times going ahead. I will ask George Saroglou to give you a detailed analysis over the last three and nine months and then we will be available all of us to answer any questions. Thank you.

George V. Saroglou -- Chief Operating Officer

Thank you, Nikolas. Good morning to all of you joining our earnings call. We report today a profitable third quarter and nine months of 2020 operation. It has been a roller coaster year for the tanker industry and the world because of the COVID-19 pandemic and its economic, social and health-related repercussions. We continue to successfully navigate the logistic and regulatory challenges of COVID-19 with no impact to our operations so far. Thank god. The shipping industry, because of the pandemic, the lockdowns, border closures and reduced airline capacity has experienced significant challenges with crew changes.

We have safely performed crew changes, but the problems with restrictions and logistics remain as different parts of the world navigate through the second wave of the pandemic. We anticipate that the second wave and plant all crew changes before it arrived with no stop at this for disruption in our operation, no cases of contaminations for the sign on crew on board in our vessels and in full support of our charterers trade requirements 24/7. It has been a herculean task.

I want to take the opportunity to thank one more time and tell how proud we are for all our seafarers and onshore personnel for their hard work, patience, perseverance and professionalism during this unprecedented time. We will continue to work hard to normalize crew changes and bring seafarers safely back home to their families without disrupting the operational readiness and efficiency of the fleet. This has been and will continue to be our Number 1 priority, while the pandemic lasts and until we return to normal industry practices for crew changes.

Let us now go to the slides of our presentation. In Slide 3, we'd see that since TEN's inception in 1993, we have faced four major crisis: the Far East crisis in 1999, the 9/11 crisis, the credit crisis of the credit recession in 2008-2009, and currently the COVID-19 pandemic. But each time, the company thanks to its operating model, which is built to be crisis resistant has come out stronger from four modern vessels in 1993 to a pro forma fleet of 50 vessels for an average 15% annual growth in terms of deadweight tons in the four decades we operate.

This time has not been an exception. Since the start of the year, we sold six tankers with an average age of 14.7 years and replaced them with new building orders for four eco design conventional tankers plus one option one shuttle tankers. Last week, we reported the delivery of the last vessel in this four-series newbuilding program, consisting of two suezmaxes and two aframaxes in South Korea that can move with minimum five-year contracts to an oil major that's expected to generate approximately $200 million during the minimum higher period. The company continues its current growth program with the construction of two vessels in the specialized shipping sectors, namely, DP2 shuttle tankers and LNG, both with long-term employment.

In slide 4, we see the pro forma fleet and its current employment profile. We have a combination of vessels in fixed time charters and flexible employment contracts, time charters with profit sharing, contract of affreightments and spot trading that capture the market's upside. All dark blue colar vessels, 23 in the slide, are on fixed rate time charters, while the light blue and red colored vessels, currently in the water, have exposure in the market's upside. Approximately 55% of the fleet is in secured contracts.

On the next slide, we see the breakeven costs for the various vessel types we operate. As you can see, we have a cost base that is very low. In addition to the low shipbuilding cost, we must highlight the purchasing power of Tsakos Columbia Ship Management, the continuous cost control efforts by management to maintain a low opex average for the fleet and the low general and admin expenses, while keeping a very high fleet utilization rate quarter-after-quarter in excess of 95% for the first nine months of the 2020. We should highlight again the high utilization number for the fleet as we navigate through the pandemic.

Thanks to the profit sharing element, that a big portion of the fleet enjoys, TEN benefits further when market conditions are strong, like the freight market we have witnessed during the first half of the year. As demand for oil continues to recover from the lows of the second quarter and oil inventories continue to fall, we expect the freight market to recover from the current levels. Every $1,000 per day increase in spot rates, has a $0.59 impact in annual EPS based on the number of TEN vessels that currently have spot exposures.

Slide 6, debt repayment and reduction is an integral part of our company's capital allocation strategy. Since the end of 2016 when the company's debt peaked, we have reduced debt by $262 million. In addition, we have repaid $100 million of preferred shares by retiring $50 million Series B in July 2019 and the $50 million Series C preferred shares in October 2020. Net debt to cap ratio at the end of September is at 46.5%. In addition to paying down debts, growing the company through timely sale and purchase a new building acquisitions, we continue to reward shareholders with dividend payments. We announced today a $0.125 per share dividend for common shareholders that will be paid on December 22. The full year dividend is $0.50 for the common shareholders. If we add the June 26 payment and then December 22 upcoming distribution and factor the reverse stock split of July 1.

Since our New York Stock Exchange listing in 2002, the company has paid dividends without interruption and has distributed almost $0.5 billion to common shareholders for an average yield [Phonetic] of 5.25% [Phonetic]. In addition, the company has an active share buyback program and has repurchased a little over 5% of its common shares outstanding. So, besides debt repayments, cash dividends and buybacks of common and preferred shares, our three main pillars of the company's capital allocation with fleet growth and renewal the fourth pillar.

It has been an unprecedented year for global oil demand because of the COVID-19 pandemic and the measures to contain it. 2020 will be the first year of negative growth since the period of the Great Recession in 2008/2009. Year-end demand will be approximately 8.8 million barrels per day below the levels of the 2019 year-end demand or approximately down 8%. Most of the losses are in Jet Aviation fuel. The expectations for 2021, oil demand to grow by 5.4 million barrels per day. Full demand recovery to the pre-COVID-19 levels is deferred to late 2021 or in 2022 subject to how well the world will manage the resurgence of the pandemic, how effective the two vaccines are and the other vaccines that are being developed and how quickly they will be approved and distributed worldwide in order to allow the gradual return to normal, social and economic life.

Nearly all of these massive reductions are found in OECD countries. For the non-OECD world, the International Energy Agency has raised demand estimates, mainly due to improved demand expectations in China, in India. Non-OECD countries continue to be the growth engine for oil demand. On the global oil supply front, OPEC plus producers ease production cuts by 2 million barrels per day from August. There is an additional 7.7 million barrels per day of shut-in production that OPEC plus plans to gradually restore over the next 16 months. Compliance with this cuts continues to be very high, almost 100%. The return of Libya in the oil market following the recent ceasefire to the civil war and the quick increase in production from 100,000 barrels per day back in August prior to the ceasefire to 1 million barrels per day currently will more formally lead OPEC plus producers in their upcoming meeting on December 1 to agree to relax production cuts by another 2 million barrels per day at the end of the first quarter of 2021. With oil inventories, especially in OECD countries, continuing to grow, the expected growth in global oil demand in 2021 together with OPEC plus further oil production increases should be very positive for tanker demand and tanker rates.

Slide number 9, with oil demand expected to grow over the next year, let us look at the forecast for the supply of tankers. The order book as of October, stands at around 7% or 348 tankers over the next three years, the lowest in almost 30 years, and at the same time, a big part of the fleet is over 15 years, to be exact, 1,350 vessels or 28% of the fleet. 360 vessels or 7.1% of the current fleet are at or above 20 years. Upcoming environmental regulations could push more tankers approaching or above 20 years to go for scrapping.

The next slide shows 2018 was one of the highest scrapping years of records. Last year, scrapping was lower as expected. The strong freight market and the pandemic has put scrapping to a standstill, but with so many tankers older than 15 years, we could see a pickup in scrapping as more environmental regulation on the horizon, especially create an unfavorable trading environment for those vessels approaching or currently above 20 years.

To summarize, demand for oil -- on the demand for oil, the recovery continues with strong growth expected in 2021 with the speed of this demand recovery related and affected by COVID-19 developments. On the supply of oil, production increases are on the horizon in 2021 by both OPEC plus producers and other non-OPEC producers. We should note that despite the fall in US production, US crude oil exports continue to be strong at approximately 3 million barrels per day with those -- with most of these exports destined to long-term destinations, including Asia. Vessel supply, the order book to current fleet ratio is at historical low levels which implies at minimum a balanced market for the next 18 to 24 months. And finally, TEN's balance sheet, we have a modern fleet, a strong balance sheet, strong cash reserves and strong banking relationships that will allow the company to take advantage of the opportunities that will be presented.

With the expectations of better days ahead we conclude the operational part of our presentation. Paul will walk you through the financial highlights for the third quarter and the nine months. Paul?

Paul Durham -- Chief Financial Officer

Thank you, George. As expected, on top of seasonal factors, quarter three results were impacted by pandemic lockdowns, low oil demand and the continuous draw on oil inventories globally. Quarter three operating income was $15 million and net income $1.4 million. Well, in the nine months, operating income reached $117 million, double that of the prior quarter three, with net income of $54 million. In a weak market, revenue in quarter three was still up 9% to $143 million, including $4 million profit share and 21% up in the nine months. TEN had two vessels dry docked in quarter three and three in the nine months and still achieved 93% utilization in quarter three, 95% employment in the nine months.

Daily TCE per vessel in quarter three averaged nearly $21,000 and over $25,000 for the nine months, again, exceeding average market price. Time charter has generated $86 million in quarter three, enough to cover most expenses in the quarter, while vessels operating mainly in the spot market generated a further $57 million before voyage expenses.

Turning to OPEC state at $45 million, an average daily OPEC per vessel increased to just $7,900 due to extra dry dock costs and a weaker dollar, but remained at about $7,700 for the nine months. EBITDA in quarter three amounted to $48 million, just 2%, up from the prior quarter three due to the more difficult market, while nine-month EBITDA increased by 40% to $230 million. Quarter three finance costs totaled $13.5 million, down from $22 million in the prior quarter three. Due to reduced loan interest, our cost of debt falling from over 4% to about 2% due to LIBOR -- lower LIBOR and margins. Also, average outstanding debt fell by about $79 million since the prior quarter three. There was also a $4 million positive turnaround in bunker hedge valuations since the prior quarter three.

In quarter three, total net debt did increase by $34 million, mainly due to the delivery installment for the new suezmax., but much of this has already been offset by repayments in quarter four. In fact, we are expecting total net debt in this year to have decreased by about $90 million by the year-end. Part of this decrease was due to the sale of six tankers earlier in the year, which in itself, reduced debt by $61 million and released $38 million cash, at the same time bringing the average age down.

In addition to loan reductions, we also had the recent $50 million redemption of preferred stock paid from our strengthened cash reserves. Due to our increased cash in the year and the time charter's strategy, we still remain in a comfortable liquidity position with our cash approaching the levels we had at the beginning of the year.

We now have just two vessels being built, an LNG carrier with delivery in a year and a shuttle tanker with $237 million remaining to be paid for these two vessels. And we are in the process of finalizing pre-delivery finance for both vessels at competitive terms. At the same time, we have three vessels under consideration for sale that are expected to free more cash after repayment of related debt.

Finally, while several market observers focus on the tanker recovery in 2022, we are more confident in a return to normality within a shorter timeframe, assuming a reduction in new vessel deliveries and successful COVID vaccinations, releasing pent-up demand.

And now, I'll give the call back to Nikolas.

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

Thank you, Paul. And I think as very well said by you and George, we have been able to tame the turbulent waters of most of 2020 and placed the company in the right track for being able to take advantage of what is going forward. With 40% of our fleet right now on the spot market and a significant part of our profit-sharing arrangements being able to take advantage over the higher market, we expect that as the beginning of the year finds the world in a bit more normalized state, both politically, but also health-wise.

We are seeing the signs of a stronger movement. I mean, we have seen already significant hardening in the last month of the trade, the transatlantic trade on -- in the product side. We're seeing the highest US imports registered in production since 2016. And that's -- I think that's a very strong signal and we're seeing the majority of MRs and LRs trading in that part of the world.

And we're seeing a slow increase in the demand, of course, with crude basically supported from a strong appetite of exports coming from Libya, which has been very slow in the past. And now it's increasing its output by about 1 million plus barrels a day, trying to become the major source of exports in the Med and competing very strongly with the Russian exports.

So we are seeing normalization and we are seeing trade happening much more than it -- that we were reporting back a quarter ago. The signs are good. The supply is non-existent. I think, this is something that I have not seen.

I have always been speaking and talking about actually importing and asking people and my colleagues through my position in the tanker some years ago. And in order for it to stop ordering, it seems like if you ask too many times, someone listens to you, but I'm sure I'm not the reason. But the confusion on propulsion technology right now has created the lowest supply in tankers and vessels in general for a very -- for a generation.

So, I mean, as we speak today, we see about eight, -- we have a fleet of 830 VLs in the water, some of them in storage, of which 220 are in excess of 15 years of age and normally 75 vessels being built. So that's less than 9% on the VLs, and it's a very similar situation across the Board as we speak forward.

I think that would show that with the confusion of all the regulations that are coming out, shipowners very rightly show or preferring to slow stream rather than find other solutions in order to achieve their target, their environmental targets, their emission targets that are being set as recently as last week by the IMO.

So in general, I think, I have the feeling that unless something really unless we get a fared severe way and I'm knocking on wood of the virus keeping us at the time after Christmas, but we are getting as close of being out of the woods as possible and better days are ahead of us. In the meantime, we have been able to successfully navigate the difficult times.

And with that, I would like to open the floor for any questions. Thank you.

Questions and Answers:

Operator

[Operator Instructions] Thank you. We will take our first question. Please go ahead, your line is open. Hello, Randy, your line is open.

Randy Giveans -- Jefferies & Company Inc. -- Analyst

Giveans -- it's Randy Giveans at Jefferies. How are you?

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

Hello, Randy, very well. Thank you.

Randy Giveans -- Jefferies & Company Inc. -- Analyst

Great, great. I'm doing well. So I guess a couple of questions. Can you provide maybe a little more color on that decision to repurchase the Series C preferreds? Do you plan on continuing to kind of look at repurchasing other preferreds? And then also, obviously, your cash balance is robust. You don't really have any more newbuildings. Your share price is at a steep discount to NAV. Any appetite for common share repurchases?

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

Yes, I think, as I said, our first obligation has been to repurchase actually within a bit more than a year. Within the last 18 months, we have spent $100 million of our hard-earned cash to repurchase the two step-up perpetuals. So that was our obligation.

Randy Giveans -- Jefferies & Company Inc. -- Analyst

Yes.

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

As George mentioned, we keep on -- we have bought back since May 5% of the company, which is -- it's a significant amount. So there is buying. We have set targets what is buying also from the government and, of course, maintaining our dividend.

So it is a balanced priority to reduce expensive paper that is out there, but is our first priority. Our dividend is also significant to continue this 5.25. I think, it is, I think, a significant achievement. But when almost 20 years now, we have an average of 5.25 dividend yield. I think, today, we are closer to 7% with the last payment.

So I think in a world where -- in an environment where you have a negative returns, in many cases, to have a dividend like that, it's positive. So I think that's how we look at it. Expensive paper has to be redeemed first; dividend, second; and of course, common -- support to our common shares.

Randy Giveans -- Jefferies & Company Inc. -- Analyst

Great. All right. Yes, it sounds like a prudent strategy there. Now looking at your fleet, as I've heard some differing reports. So can you just give an update on that LNG newbuilding option? It looks like you did not exercise that for later next year. And then on the shuttle tanker orders, it looks like you placed one firm order. When do you have to decide on the additional two shuttle tankers?

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

Well, as you, I'm sure, follow us close as we do, the -- right now, because of all of the issues I mentioned before, which many of them were commercial, economical and technical issues. You have a very low demand for newbuildings, which means the shipyards are offering quite attractive propositions for people.

So I don't think we have lost anything. I mean, it was our choice not to take our options at the time, because we believe the way things have gone that we will get ships that will be technologically more advanced going forward and perhaps then at a lesser price. There are not people going to take those options. I think, we are in the front of the queue, as I say.

Randy Giveans -- Jefferies & Company Inc. -- Analyst

Got it. That's fair. And then I guess, last question, on multiple calls in prior weeks, we've heard some of the crude players, we've heard from some of the product kind of product carrier only players. Which market are you more bullish on? Obviously, you have both crude tankers and refined products tankers. So do you kind of favor one of the other here in the next few months?

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

First of all, I have to say that we are glad that we are diversified within the Energy segment. This has been our strategy and policy going back to the families foundings, many many, many, many decades before. So we are a client-driven. We do not -- I would say, we do not have an opinion in actually following something stronger.

I believe we are light on the VLCCs on the crude. So this is something that we are looking positive going forward. But both segments move within perhaps a quarter or six months lag between themselves. We have seen already a movement, as I mentioned earlier, on the production -- our product carriers have taken advantage of that. And we hope that the crude will follow. There is less storage than it used to be some time a year or six months ago, which means there is less oil being stored, so more oil will be demanded or less oil been inventoried.

Randy Giveans -- Jefferies & Company Inc. -- Analyst

Yes, yes, that makes sense. All right. Well, that's it for me. Looks like the markets like in your responses today. So keep it up. Happy Thanksgiving.

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

Thank you. Same to you.

Operator

Thank you. [Operator Instructions] There are currently no further questions, sir. I'll hand back to you for closing remarks.

Efstratios Arapoglou -- Chairman of the Board

Well, once again, thank you all. Great call. Unfortunately, not many questions, but then the stock price shows that you're all happy. And we hope that our next call earlier -- early next year will be even more successful than this one today. So happy Thanksgiving to everyone. Nikolas, would like to say a few words?

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

Well, I hope the next presentation has not to -- has not -- I do not have to do it through a mask, which makes it a little blurry. But we wish everybody a very happy Thanksgiving and a very safe conclusion of this very strange year. And as Chairman said, early next year, hopefully, we will be able to talk about much more exciting and better things and a better and healthier visibility going forward. Thank you for your support. And as I said, I think that we are out of the worst part and moving to better times. Thank you very much. Stay safe. Happy Thanksgiving.

Paul Durham -- Chief Financial Officer

Bye.

Operator

[Operator Closing Remarks]

Duration: 38 minutes

Call participants:

Nicolas Bornozis -- President and Investor Relations

Efstratios Arapoglou -- Chairman of the Board

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

George V. Saroglou -- Chief Operating Officer

Paul Durham -- Chief Financial Officer

Randy Giveans -- Jefferies & Company Inc. -- Analyst

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