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Edited Transcript of TNP earnings conference call or presentation 6-Jun-19 1:00pm GMT

Q1 2019 Tsakos Energy Navigation Ltd Earnings Call

Athens Jun 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Tsakos Energy Navigation Ltd earnings conference call or presentation Thursday, June 6, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Efstratios-Georgios A. Arapoglou

Tsakos Energy Navigation Limited - Chairman of the Board

* George V. Saroglou

Tsakos Energy Navigation Limited - COO & Executive Director

* Nikolas P. Tsakos

Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director

* Paul Durham

Tsakos Energy Navigation Limited - CFO & CAO

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Conference Call Participants

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* Randall Giveans

Jefferies LLC, Research Division - Equity Analyst

* Nicolas Bornozis

Capital Link Inc. - President

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Presentation

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Operator [1]

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Thank you for standing by. Ladies and gentlemen, welcome to the 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. (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, Investment (sic) [Investor] Relation adviser of Tsakos Energy Navigation. Please go ahead, sir.

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Nicolas Bornozis, Capital Link Inc. - President [2]

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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 ten@capitallink.com, and we will have a copy for you e-mailed 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 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. 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.

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Efstratios-Georgios A. Arapoglou, Tsakos Energy Navigation Limited - Chairman of the Board [3]

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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 of the spot market, generating ample revenues for payment of whole 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'd like to pass the floor to Nikolas Tsakos. Thank you.

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [4]

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Thank you, Chairman, and good afternoon to all of you. Good morning. We're very happy to report a substantially profitable quarter as we had forecasted at the closing part 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 newbuilding orders in a decade, disruptions arising -- supply disruptions arising from new legislation, which we are all very familiar, in 2020. And in this environment, TEN has not only been able to outperform the spot market with our operational and 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 are able to follow our expenses budgets very closely and sometimes also beat the budget by reducing expenses even further.

On top of this, something that we do not, I would say, talk about enough is that we are reducing debt by almost $2 a share year after year, which means that although we are right now very close to the completion of our newbuilding program of $1.4 billion, which $250 million left 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 '18, our debt was approaching the $2 billion mark. According to -- right now, we are at -- close to $1.6 billion and going down very quickly to $1.4 billion. And in the next couple of years, breaking the $1 billion debt level. So I think this is another additional positive for 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 3 years and decide trying to be countercyclical as our COO is going to talk about and the purchase vessels at low cycle levels. We are almost done with our program. And on top of that, we have not left out the DNA of TEN, which is long-term relationships and strategic alliances. And we are very happy and proud to increase our strategic alliance with a major end user by adding 2 more vessels to that. And I mean, this will bring the relationship to 7 vessels with long-term employments, with 3 years of employment with significant profit-sharing arrangement. In this environment, I think the only thing that we are not satisfied with or the opposite is the share price, but we hope that our results are going to make this happen at the end.

And with this, I will ask our COO, Mr. Saroglou, to give us a brief update of what has happened in the last 6 months.

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George V. Saroglou, Tsakos Energy Navigation Limited - COO & Executive Director [5]

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Thank you, Nikolas, and good morning to all of you. We are very pleased to report a profitable 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 recharter the 2 LNG vessels in the fleet at much higher accretive rates and continue to charter and recharter 10 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 3 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 these, 15 ships have been successfully delivered, financed and employed on long-term accretive charters to first class end users. Within this year and 2020, the remaining 4 vessels, all fully financed and chartered to major oil concerns for a minimum of 5 years, will complete the company's current expansion and secure revenues going forward.

The main driver behind the market strength since the start 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 slowdown 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 3 out of 4 weeks reported by the agency of the United States, which is almost double from last year exports. All this adds to both tonne miles and global fleet utilization. Geopolitical tensions, supply disruptions and the U.S.-led sanctions against Venezuela and Iran have created the need to -- for substitute barrels, and these 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 tanker fleet has little growth in 2018, thanks to the highest scrapping level since 2012. The upcoming IMO 2020 regulation should further reduce vessel capacity as we have up to 5% of the global fleet that has elected to retrofit scrubbers. We have the practice of slow steaming for everybody gaining support and could be mandated and also the possibility of phasing out of older tonners in order to avoid compliance with both water ballast treatment system installation and 2020 compliance, which could keep scrapping at high levels. The company's strategy to fix most of the vessels in the fleet in a combination of medium- to long-term fixed and variable-rate time charters has served the company well, as Slide 3 in our presentation shows, and helped TEN vastly outperform the spot freight market during low to mid-cycle period, while maintaining healthy returns during peak cycles as we serve a significant part of the upside with charterers when the market goes through an extended rally. In Slide 3 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 costs for the various vessel types that we operate in TEN. As you can see, the cost base of the fleet is low. In addition to the low shipbuilding cost, we must highlight the purchasing power of the company's technical manager, Tsakos Columbia Shipmanagement and the continuous cost-control efforts by management to maintain a low OpEx power for the fleet. This quarter, fleet OpEx was down almost 9%, low general and administrative expenses, while at the same time, we keep a very high fleet utilization rate quarter after 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 outperforms the spot market, and that helps the company maintain an impeccable debt service record. We currently pay down debt at 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 2 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 $1,000 increase in spot market rate, 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's currently employed. We have 31 vessels on fixed-rate time charters while 37 vessels plus 4, 41 in total, and these 4 are opening vessels during the year, or 60% of the combined pro forma fleet has spot market exposure in a combination of pure spot COAs and time charters with profit sharings and min/max formulas. On average, we have 2.2 years of employment already fixed and a backlog of $1.2 billion 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 shortness we currently experience as we move from the first quarter to the second quarter, as a result of seasonal refinery maintenance in order for refiners to switch from winter production of heating oil to summer production of gasoline and their preparation for IMO 2020 compliance, the oil price currently appears to be in a comfortable price zone, good for both consumer demand and stockpiling. The market expects OPEC and their allies to gradually increase production some times in the second half of the year in an effort to keep the oil market balanced against further disruptions from supply outages, sanctions and/or geopolitical tensions.

On the supply of tonners, the order book is currently at 8.3%, 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 would withdraw vessels from the global fleet and push more tankers that are currently approaching or are above 20 years to go for scrapping.

This is reinforced 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 2 to 3 years is expected to remain in check, below 3% and hopefully decline. The Graph 9, we see here on the right side of the slide a forecast from Fearnleys, a well-known shipbroker from Norway. As you can see, VLCC rates are expected to trend higher from the second half of 2019 and reach multiyear highs going forward. We are also positive about the market prospects and expect a strong market for all vessel categories. In this environment, we believe that the company's fleet is well positioned to capture market opportunities -- any market opportunity that will be present. That concludes the operational part of our representation.

Paul will walk you through the financial highlights for the first quarter. Paul?

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Paul Durham, Tsakos Energy Navigation Limited - CFO & CAO [6]

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Thank you, George. So following a strong quarter 4, we were pleased to enjoy an even stronger quarter 1 with revenue of $147 million, a 17% increase, leading to operating income 5x higher than in the prior quarter 1 and resulting in a net income of $11.2 million. Spot vessels accounted for 1/4 of the fleet with crude vessels especially well positioned to capture rates on average double those earned in the prior quarter 1. Total time charter hire amounted to over $87 million, again, enough to cover all fleet operating costs, overheads, chartering cost and cash finance expenses, leaving 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 TCE rate for vessels achieved by the fleet was $21,000, a 19% increase. The 2 LNG carriers together generated over $3 million, more than in the prior quarter 1 as a result of new, more lucrative time charters. Total OpEx fell by 9% due to tight cost control and a stronger dollar. Daily OpEx per vessel fell 7% to almost $7,500 while daily overhead per vessel fell by 4%. Finance costs were down 2%, with rising interest rates being offset by the effect of lower average outstanding loans.

Our balance sheet remained strong with over $190 million cash at March 31 and cash flow from time charters remained secure with quarter 1 EBITDA at $64 million, over 50% higher than in the prior quarter 1. This comfortably allows us to redeem our B series of preferred shares and to pay our remaining dividend for the year and, of course, as George had 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 2.

We believe our strength in quarter 1 results bodes well for our 2019 performance, although there may be refinery disruptions as preparations begin for meeting IMO requirements. Ultimately, we expect such disruptions in preparations to lead to a still more promising market for both crude and product carriers later in the year. So good news all around. We've increased revenue and profit, decreasing costs, rapidly declining debt and positive prospects going forward.

And on this happy note, I'll hand the call back to Nikolas.

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [7]

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Thank you, Paul. And I think it's always very important to remember that there's 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% 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 market today. However, the expectations and all our charterers are looking forward for a very -- as George said, for a very strong second half of the year. And we want to thank our Chairman for his good words, and we'll continue trying to produce better results.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take your first question.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [2]

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This is Randy Giveans of Jefferies. Two quick questions here. So first, I noticed the reinspection of semiannual dividend payments. So if you can talk about the reasoning behind that, would the payment be, I guess, now $0.10 per share twice per year and any guidance to possible increases to that number?

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [3]

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Yes. I think, well, 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 5 years ago when we decided to go to quarterly. Then on top of that, we have not seen any real improvement helping our share price or the operation and as you know, having a couple of preferreds out there that are paying quarterly, we have to do, I think, very good housekeeping. And it fits a 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 10 -- at least $0.10 payment but -- twice a year. But hopefully the market that these were supposed to go, we can increase that also.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [4]

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Sure. Okay. And as you mentioned, you reduced debt by $150 million dollars since the first quarter of last year. What is your expected kind of debt reduction for 2019 and 2020?

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [5]

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Paul?

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Paul Durham, Tsakos Energy Navigation Limited - CFO & CAO [6]

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Overall, in 2019, we expect a reduction of $122 million. And going into 2020, it would be about $170 million.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [7]

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$120 million, $170 million. Excellent. And then one more question just on kind of 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 one of your VLCCs comes off its time charter, I think it's in November. So how do you plan on taking advantage of this market strength? Is it possibly acquiring some secondhand vessels or maybe even time chartering in some VLCCs for 1, 2, 3 years?

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [8]

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Yes. I think our redemption and perhaps you know that our contracts with our vessel 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 in, as you rightly said, in September. And so it will be a very good timing for that ship. And we are looking for some resales or secondhand VLCCs as we currently speak. So -- and also the VLCC, this is an indicator of the remaining of the market. 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 on the crude.

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Operator [9]

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(Operator Instructions) There are no further questions at this time. Please continue.

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [10]

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Okay. Well, again, thank you very much for following the company. We are looking for the remaining -- or for the 6 months to be able -- within the summer to announce another profitable quarter and profitable 6 months. We are preparing the company. As we said, we have complete -- we are almost at the end of a 19-vessel newbuilding program. Those 19 vessels, we have taken delivery already and fully financed and fully employed 15 of them. 4 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 an EBITDA of about $150 million on an investment of about $1.3 billion. So we have positioned the company in a difficult market ready to take advantage of what we hope will be a significant super-cycle going forward. And having achieved the good employment results, operating expenses are going down, as Paul said, our debt has been reducing significantly. The only thing now we need to increase is the share price, and we hope this will be a result of that. And with that, I will ask our Chairman to say some final words.

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Efstratios-Georgios A. Arapoglou, Tsakos Energy Navigation Limited - Chairman of the Board [11]

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Thank you all. As I said, results speak for themselves, and I'd like to congratulate Nikolas and his team and looking forward to best performance going forward into 2019. I'm done.

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Operator [12]

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Thank you. That concludes the conference today. Thank you for participating. You may now disconnect.