Tsakos Energy Navigation Limited (NYSE:TNP) Q1 2019 Earnings Conference Call June 6, 2019 9:00 AM ET
Nicolas Bornozis - Capital Link Inc.
Efstratios Arapoglou - Chairman
Nikolas P. Tsakos - Founder, President, and CEO
George V. Saroglou - COO
Paul Durham - CFO
Conference Call Participants
Randy Giveans - Jefferies & Company
Thank you for standing by, ladies and gentlemen, and welcome to Tsakos Energy Navigation Conference Call on the First Quarter 2019 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. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. I must advise you that this conference is being recorded today, the 6th of June, 2019. And now I would like to pass the floor to Mr. Nicolas Bornozis, President of Capital Link, Investor Relation Adviser of Tsakos Energy Navigation. Please go ahead, sir.
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 first quarter of 2019. In case you do not have a copy of today's earnings release, please call us at 212-661-7566 or e-mail us at firstname.lastname@example.org, and we will have a copy for you e-mailed right away.
Please note that parallel to today's conference call, there is also a live audio and slide webcast, which can be accessed on the company's website on the front page at www.tenn.gr. The conference call will follow the presentation slides, so please, we urge you to access the presentation slides on the company's website. Please note that the slides of the webcast presentation will be available and archived on the website of the company after the conference call. Also, please note that the slides 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.
And now, I will turn over the call to Mr. Takis Arapoglou, the Chairman of the Board of Tsakos Energy Navigation. Mr. Arapoglou, please go ahead, sir.
Thank you Nicolas. Good morning and good afternoon everyone. Thank you for joining us today. Well, our results this quarter speak for themselves. They fully justify our business model once again allowing us to outperform for yet another quarter in the spot market generating ample revenues for payment of fleet expenses operating under 97% utilization. It allows us to reduce debt at a very fast pace while enabling us to continue our dividend payments and most importantly maintain a solid cash position. With hands on cost control and well structured profit sharing agreements TEN is perfectly positioned now to benefit further from improving market conditions. I have nothing else to say and I would like to pass the floor to Nikolas Tsakos. Thank you.
Nikolas P. Tsakos
Thank you Chairman good afternoon to all of you and good morning. We are very happy to report substantially profitable quarter as we had forecasted at the closing parts of the last one. It's very good to have a follow-on good quarter to a strong performance at the end of the year which means that we are starting the year on a good foot. And on top of this we are looking at positive long-term environment for our business, the lowest new building orders in a decade, disruptions arising -- supply disruptions arising from new legislation which we are all welcoming in 2020. And in this environment TEN has not only be able to outperform the spot market with our operational end employment strategy but also to reduce expenses. So we have a 9% reduction of operating expenses, we should not forget that sometimes when things are very rosy on the income side people tend to forget the defense part of the business which is we always have to keep operating expenses on watch. We have the luxury to run an organization with on hands management and we're able to follow our expenses budgets very closely and sometimes also beat the budget by reducing expenses even further.
On top of this we do not I would say talk about enough is that we are reducing debt by almost $2 per share year-after-year which means that although we are right very close to the completion of our new building programs of $1.4 billion which is $250 million less. And all of it financed -- fully financed with a very small portion of CAPEX remaining. We are able to be reducing debt. If you look back in 2017 and early 2018 now debt was approaching the 2 billion mark according to right now we are close to 1.6 and going down very quickly to 1.4. And in the next couple of years breaking either 1 billion debt level. So I think this is another additional positive from the company that we do not tend to discuss as much.
It has been a very productive period. We were able to take advantage of the low markets over the last three years and besides trying to be counter cyclical as our COO is going to talk about and purchased vessels at low cycle levels. We are almost done with our program and on top of that we have not left out the D&A of TEN which is longstanding relationship and strategic alliances and we are very happy and proud to increase our strategic alliance with a major and using it by adding two more vessels to that. And I mean this will bring the relationship to seven vessels with long-term employments with three years of employment with significant profit sharing arrangement.
In this environment I think the only thing that we are not satisfied with the opposite is a share price but we hope with our attempt are going to make it happen at the end. And with this I would ask our COO, Mr. Saroglou to give us a brief update of what has happened in the last six months.
George V. Saroglou
Thank you Nikolas and good morning to all of you. We are very pleased to report the profit in the first quarter as a result of a strong freight market environment that started during the fourth quarter of last year. In comparison with the first quarter of 2018 the improvement is 200%. The recovery in both the tanker and LNG markets helped the company to recharter the two LNG vessels in the fleet at much higher accretive rates and continued to charter and recharter ten vessels so far since the start of the year by taking advantage of the appetite by oil majors and the company's clients to fix vessels forward.
In the last three years the company built 19 tankers against long-term industrial business. TEN is in the final stages of this 19 vessel growth program undertaken at competitive levels during the low parts of the cycle. Of this 15 ships have been successfully delivered, financed, and employed on long-term accretive charters to first class end users. Within this years in 2020 the remaining four vessels all fully financed and chartered to major concerns for a minimum of five years will complete the company's current expansion and secure revenues going forward. The main driver behind the market trends since the top of the fourth quarter of last year are strong global oil demand, growing year-over-year in excess of 1.3 million barrels per day, a growing global oil economy despite headwinds and fears of slow down from tariffs and trade wars, strong crude oil exports from the United States of America currently in excess of 3 million barrels per day in the last three out of four weeks reported by the agents of the United States which is almost double from last year exports. All these adds to both tonne miles and global fleet utilization.
Their political tensions supply disruptions and the U.S. led sanctions against Venezuela and Iran has created the need for substitute barrels and this substitute barrels travel longer distances to reach importers, refiners, consumers adding again to tonne miles and global fleet utilization. We have limited vessel supply as the global tankers fleet has little growth in 2018 thanks to the highest topping levels since 2012. The upcoming IMO 2020 regulations should further reduce vessel capacity as we have up to 5% of the global fleet that has elected to retrofit. We have the practice of slow spinning for everybody gaining support and could be mandated and also the possibility of phasing out of all the tunnels in orders to avoid compliance with both water ballast system installation and 2020 compliance which could keep scrapping at high levels
The company started to fix most of the vessels in the fleet in a combination of medium to long-term fixed and variable rate charters that served the company well as slide three in our presentation shows and helps TEN vastly outperform the spot market doing low to mid-cycle split while maintaining healthy returns during six cycles as we share a significant part of the offsite with charterers when the market go through an extended rise. In slide three in our online presentation we see the actual performance of the different type of vessels we operate against the spot market during the first quarter of this year and last year. We have outperformed the spot market by over 5% this year and over 40% during last year.
Slide 4 we have the left side which presents the all in breakeven course for the various vessel types that we operate in TEN. As you can see the core base of the fleet is low. In addition to the low ship building we must highlight the purchasing power of the company's technical manager Tsakos Columbia Shipmanagement and the continued forced control effort by management to maintain a low OPEX average for the fleet. This quarter fleet OPEX is down almost 9%, low general and administrative expenses while at the same time we keep a very high fleet utilization rate throughout the quarter again over the first quarter of 2019 we report 97% which we believe qualifies as full employment
As we mentioned in Slide 3, TEN's flexible chartering strategy ensures that most of the time the company outperformances in those markets and thus helps the company maintain an impeccable debt service record. We have currently based down debt as an average rate of 12 million per month and meet all our obligations irrespective of where we are in the market cycle. Thanks to the profit sharing element that is a big portion of the fleet TEN benefits further when market conditions improve like in the last two quarters. Based on the current market conditions and the number of vessels operating in the spot market and in time charters with profit sharings for every $1000 increase in spot market rates we have a positive $0.06 impact in annual per share impact in annual EPS.
Slide 5 we have the pro forma fleet as it is currently employed. We have 31 vessels on fixed rate by charter while 37 vessels plus four, 41 in total and this were our opening vessels during the year or 60% of the combined pro forma fleet has spot market exposure in a combination of few spots, few [indiscernible] and time charters with profit sharing and mean math formula. On average we have 2.2 years of employment already fixed and a backlog of 1.2 million in minimum contracted revenue.
Global oil demand continues to be strong. Last year it grew by 1.2 million barrels per day and the forecast for this year is to grow another 1.3 million barrels per day. Despite the softness we currently experience as we move from the first quarter to the second quarter as a result of seasonal refinery maintenance in order for refineries to switch from winter production of heating oil to summer production of gasoline and the preparation for IMO 2020 compliance. Fuel price currently appears to be in a comfortable price zone, good for both consumer demand and stockpiling. The market expects OPEX and the allies to gradually increase production sometime in the second half of the year and that's what keeps the oil markets balance against further disruptions from supply outages, sanctions, and/or their political tension.
On that supply of tonnage the order book is currently 3.2% which is low compared to historical levels. A big part of the global fleet is over 15 years and incoming regulations starting with retrofitting water ballast treatment system from this year and compliance with IMO 2020 with -- vessels from the global fleet and push more tankers that are currently approaching for both 20 years growth of traffic.
This is moving forward in Slide 8 which presents the scrapping over the last few years. Again we must highlight that last year was the highest scrapping year since 2012. The overall tanker fleet growth in the next two to three years is expected to remain check, below 3% and hopefully decline. The graph 9 we see here on the right side of the slide a forecast from Fearnleys a ship broker from Norway. As you can see VLCC rates are expected to trend higher from the second half of 2019 and reach multi-year highs going forward. We are also positive about the market prospects and expect a strong market for all vessel capitals. In this environment we believe that the company's fleet is well positioned to capture market opportunities, any market opportunities that will be present.
That concludes the operational part of our presentation. Paul will walk you through the financial highlights for the first quarter. Paul.
Thank you George. Well following a strong quarter four we were pleased to enjoy an even stronger quarter one with revenue of $147 million, a 17% increase leading to operating income five times higher than in the prior quarter on and resulting in a net income of $11.2 million. Both vessels accounted for a quarter of the fleet with crude vessels especially well positioned to capture rates on average double those in the prior quarter one.
In terms of time charter hire amounted to over $87 million again enough to cover all fleet operating costs, overheads, chartering costs, and cash finance expenses hitting a surplus of $15 million. Spot revenue provided a further $31 million despite higher fuel prices. Our product carriers while not taking off to the same extent were still better than average market rates. The average daily TTE rate per vessel achieved by the fleet was $21,000, a 19% increase.
The two LNG carriers together generated over $3 million more than in the prior quarter one as a result of new more lucrative primetime. Total OPEX fell by 9% due to freight cost control and a stronger dollar. Daily OPEX per vessel fell 7% to over $7,500 while daily overhead per vessel fell by 4%. Finance costs were down 2% with rising interest rates being offset by the effects of lower average outstanding loans.
Our balance sheet remains strong with over $119 million cash at March 31st. And cash flow from time charters remains secure with quarter one EBITDA at $64 million over 50% higher than in the prior quarter one. This comfortably allows us to redeem our BCOs of preferred shares and to pay our remaining dividend for the year and of course as George has mentioned to continue our perfect debt service. Debt continues to fall rapidly with $150 million repaid over the past year bringing net debt to capital to 48%, another $37 million will be repaid in quarter two.
We believe our strength in quarter one results bodes well for our 2019 performance although there maybe refinery disruptions as preparations begin for meeting IMO requirements. Ultimately we expect such disruptions and preparations to lead to a still more promising market for both crude and product carriers later in the year. So, good news all around with increased revenue and profits, decreasing cost, rapidly declining debt, and positive prospects going forward. And on this happy note I will hand the call back to Nikolas.
Nikolas P. Tsakos
Thank you Paul and I think it is always ready -- to remember that there is not much we can do about the market. But from our side there's a lot we can do on our operating expenses and I think this organization with the help of the Tsakos Group is focusing on not forgetting that even in a good market, in a positive market operating expenses are very, very important for our bottom line. And I think we need to again congratulate the team for reducing by 9% in our operating expenses and also on our chartering policy where last year we were able to outperform the spot market by 40% and already this year we are doing the same by 5% in the first quarter and actually growing as we go on. Since we are seeing that our chartering rates are well above the spot markets today, however, the expectations in all our charters are looking forward. As George said we have a very strong second half of the year and we want to thank the Chairman for your good words and we will continue trying to produce better results. And with that Nick I would like to open the floor to any questions. Thank you.
Thank you, we will now take your first question from the phone lines. Your line is open.
Hey guys this is Randy Giveans with Jefferies. How are you?
Nikolas P. Tsakos
Hi Randy, good.
Good, good. Few quick questions here, so first noticed the reintroduction of semiannual dividend payments so if you can talk about the reasoning behind that, will the payment be I guess now $0.10 per share twice per year, any guidance to possible increases to that number?
Yes, I think as you know because you're one of the -- you and Jefferies have been with us for many, many years, we have always been paying a semiannual dividend until about five years ago when we decided to quarterly. Then on top of that we have not seen any real improvements helping our share price or the operation as having a capital of preferred out in the past paying quarterly we have to do I think very good housekeeping. And it fits shipping corporation much more to look at the results. Our aim is of course to maintain as we said in the press release the same payout so hopefully we can do at least $0.10 payment but twice a year but hopefully the market these were supposed to go we can increase that option.
Sure, okay. And then you mentioned you reduced debt by $150 million since the first quarter last year, what is your expected kind of debt reduction for 2019 and 2020?
Nikolas P. Tsakos
Overall in 2019 we expect a reduction of $122 million. And going into 2020 it will be about $170 million.
2020, 170, excellent. And then one more question just on the market Slide 9, you show a very bullish expectation for VLCC spot rates which we concur with especially for the back half of this year. However you have no VLCC spot exposure until the very end of this year when VLCCs comes off its time charter, I think it is in November. So, how do you plan on taking advantage of this market strength, is it possibly acquiring some second hand vessels or maybe even time chartering in some VLCC's for one, two, three years?
Nikolas P. Tsakos
I think our intention and perhaps our contracts with [indiscernible] are on profit sharing. I think that will help at least get a significant part of that upside. And we are also looking to recharter the vessel which is opening up and as you rightly said in September. So it will be a very good timing for the trip. And we are looking for some very famous or secondhand VLCCs as we currently speak. And also the VLCC, this is an indicator where remaining of the markets usually as you know when the VLCC market moves then it brings up with it the Suezmax and the Aframax and the other categories mainly in the calling.
Sure, sure. Okay, I will turn over. Thanks again and congrats on a profitable quarter.
Nikolas P. Tsakos
[Operator Instructions]. Thank you there were no further questions at this time please continue.
Nikolas P. Tsakos
Okay, well again thank you, thank you very much for following the company. We are looking forward to the remaining of the six months to be able within the summer to announce another profitable quarter and profitable six months. We are preparing the company as we said we have complete, we are almost at the end of a 19 vessel new building program. Those 19 vessels we have taken delivery already of fully financed and fully employed 15. Four of them are coming, the first one in October of this year and then one every quarter in 2020. We expect that from those ships and maybe of about $150 million on an investment of about $1.3 billion. So we have positioned the company in a difficult market but I think to take advantage of what we hope would be a significant super cycle going forward and having achieved the good employment results, operating expenses going down, a portion of debt has been reducing significantly. The only thing now we need to increase is the share price and we hope this will be the result of that and with that I will ask our Chairman to share some final words.
Well, thank you all. As I said the results speak for themselves. And I'd like to congratulate Nikolas and his team and looking forward to a better performance going forward into 2019. Well done.
Nikolas P. Tsakos
Thank you, that does conclude the conference for today. Thank you for participating. You may now disconnect.