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Edited Transcript of TNP earnings conference call or presentation 24-Mar-20 1:00pm GMT

Q4 2019 Tsakos Energy Navigation Ltd Earnings Call

Athens Mar 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Tsakos Energy Navigation Ltd earnings conference call or presentation Tuesday, March 24, 2020 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 - Independent 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 - VP,Senior Analyst & Group Head of Energy Maritime Shipping

* 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, and welcome to the Tsakos Energy Navigation Conference Call on the Fourth 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, this conference is being recorded today.

And now I pass the floor to Mr. Nicolas Bornozis, President of Capital Link, 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'm Nicolas Bornozis of Capital Link, Investor Relations Adviser to Tsakos Energy Navigation.

This morning, the company publicly released its financial results for the fourth quarter and the year ended 2019. In case we 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 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.

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

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

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Thank you, Nikolas. Good morning, everyone. 2019 was another year where TEN proved both its defensive qualities in difficult times and its ability to respond fast when markets improve. Today, we announced a profitable last quarter of last year and a profitable overall year as a whole, which allows us, of course, to take a very sizable impairment charge, allows us to maintain our dividends, announce a buyback and -- while -- at the same time -- we are renewing our fleet, expanding the relationships with blue chip customers, all stuff that we've been doing all along. And TEN has established a very sound base in its business throughout the years. Congratulations are in order for Niko Tsakos and the team. And let's hope that our markets continue to be as strong as they are today for the rest of the year. That's all for me. Over to you, Niko 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, Mr. Chairman. And first of all, I hope and we want to wish all of our locked-up friends that this ordeal will pass very fast with the least disruption to family happiness and health. And I think business comes second. But of course, for us here in Greece and with the 3,000 seafarers on board, we consider all of them family. So their wellbeing is very, very important to us, also the wellbeing of our vessels.

It has been -- as we spoke before, 2019, which was really a roller-coaster year with lots of ups and downs, with a very strong start, a very, very, I would say, depressed rate environment in the second and third quarter and then a sudden boom on the fourth, it looks very -- like a very normal year on what has happened since then. However, the company's fleet and utilization is working and taking advantage of circumstances. The dramatic drop in the price of oil actually enhances our business. So there is a lot of oil that has been moved around right now. There's a lot of inventory oil. There is a huge opportunity for the product carriers that finally, they can actually move low sulfur economically around the world. So all our ships are very much in demand.

So unlike, unfortunately -- or I mean, unlike other transportation -- in part of the transportation industries, the seaborne transportation right now, mainly the energy segment, and specifically crude and products is really booming. So we expect -- looking forward, we have the oil companies that know what they're doing there. The clients looking for ships for 1 or 2 years, pushing us very hard, paying very healthy accretive rates for these businesses. No one is building any supply. Right now, all the shipyards in the world are closed. The last thing someone has in mind is to add supply.

So we are looking -- when we get out, and as I said, our priority is to get everybody out safe from this ordeal. And as soon as we get out of that, I think we will continue to see a healthy return. I -- it is really mind-boggling to look at the performance of our shares, together with every other [share]. I think in our case, it is really -- it makes no sense, and that's why we have initiated a significant buyback program, and we maintained our dividend to give the signal to all that business as usual is there. And of course, the as usual has to do with business, but of course, health is more important.

And in this environment, as I said, things look very positive for the first quarter. It looks that the good market will go well within also in the second quarter and for the full year. And with that, I will ask George Saroglou, our very on-hand COO, to sanitize his hands and give us a little bit of what's happening. George?

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

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I just -- thank you very much, Nikos. And let me start also by wishing good health to everybody joining us for this call, to our seafarers and our onshore personnel and, of course, extend this to every human being out there, fighting to stay well and healthy during these difficult times.

We are pleased to report a profitable year as a result of a better freight market environment that started improving since the fourth quarter of 2018. Freight rates in 2019 started strong during the first quarter. We then had a softer middle and a very strong finish in the fourth quarter with freight rates hitting multiyear highs.

This year, 2020 started with a strong tailwind in January before the news of the virus outbreak initially coming out of China and then from the rest of the world changed the positive sentiment the market had for the year. The various containment measures that governments took to stop the virus from spreading globally affected significantly global economic activity and as a result, global oil demand. The collapse in the talks between OPEC and Russia on additional production cuts to counter the expected fall in Chinese and global oil demand and the ensuing price war between Saudi Arabia and Russia sent oil prices crashing to levels that we have not seen since 2003.

With oil prices hitting multiyear lows and the oil complex into contango, stockpiling at low level prices and oil storage in tankers helped freight rates hit again the multiyear high levels of last year, the strong market that started initially with VLCCs and the spillover effect on Suezmaxes, Aframaxes and the rest of the tank size and types.

If we move on the first slide of our presentation, Slide 3. In this strong freight market, TEN is well positioned to take advantage of the market's current strength. We have 37 vessels trading in the spot market under COAs and profit-sharing arrangements, and we have 16 more tankers that opened during the year. If we combine the 2, then up to 80% of the operating fleet would have their rate income related to the spot market. In this slide, in yellow, the vessels -- represent in yellow, the vessels currently trading in the spot market; and in red, the vessels that opened for charter during the course of the year.

Next slide, Slide 4, shows how many of the 16 vessels opened during each quarter, with the majority, as you see, 8 and 5 opening in the second and third quarter of the year.

Slide 5 presents the all-in breakeven costs for the various vessel types that we operate in TEN. As you can see, we have a very low-cost base. In addition to the low ship-building costs, we must highlight the purchasing power of Tsakos Columbia Shipmanagement, our technical managers; the continuous cost control efforts by management in order to maintain a low OpEx average for the fleet, low general and administrative expenses, while at the same time, we keep a very high fleet utilization rate quarter after quarter and year after year, again, in excess of 96% for the year. And thanks to the profit-sharing elements that the big portion of the fleet enjoys, TEN benefits further when market conditions improve like the period we have now. And based on current market conditions and the number of vessels operating in the spot market, for every $1,000 increase in the spot market rates, we have a positive $0.06 impact in annual EPS.

Debt reduction is an integral part of the company's strategy. And in Slide 6, you see that since the end of December 2017, we have reduced debt by $218 million. In the last 12 months, the company paid back $62 million, taking down the net debt-to-capital ratio at the end of 2019 to below 50%. In addition, at the end of July, TEN fully redeemed the highly successful 50 million Series B preferred shares.

Looking at the demand. As soon as the virus-related lockdowns for cities, states and countries globally end, oil demand is expected to rebound, hopefully quickly enough to pre-virus levels. Additional major support measures from governments and central banks remain highly likely to ensure consumer and small- to medium-sized businesses survive while the containment measures last and economic activities curtail.

China is slowly coming back as the latest news out of China suggests that the virus outbreak is slowing, if not almost over. Oil demand in China this month will rebound from the February lows. However, March 2020 year-over-year will be approximately 19% down or 2.5 million barrels per day, citing a report from China National Petroleum Corporation. The low oil price environment, as long as it lasts, is stimulating stockpiling, storage at sea, and reduces the procurement cost of bunker fuel for shipping company. So if you look -- the way to be looked, it's basically a blessing.

On the supply of tonnage, the order book at 7.5% is low compared to historical levels. A big part of the fleet is over 15 years, and environmental regulations could push more tankers approaching for above 20 years to go for scrapping. 2018 was one of the highest scrapping years of records. Last year, scrapping was lower as expected. But with more than 1,100 tankers older than 15 years, we could see a pickup in scrapping with more environmental regulations on the horizon, especially as we said for the vessels that approach or over 20 years.

The market prospects, generally speaking, are good, and we expect the trend to continue as soon as the virus is behind us. And with that, we conclude the operational part of our presentation. Paul will walk you through the financial highlights for the fourth quarter and the full year. Paul?

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

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Yes. Thank you, George. So at the end of what I thought was a difficult year -- but as Nikolas said, it wasn't so difficult after all compared to where we are in like a normal year. TEN achieved a quarter 4 net income close to $41 million before impairment charges of $28 million. TEN (inaudible) compared to $3 million net income before impairments in the prior quarter 4, so quite a change.

For 2019, net income before impairment charges was almost $43 million, a $76 million turnaround from the previous year. Quarter 4 revenue totaled $175 million, a $22 million increase, much due to profit share as the tanker market was blessed with a long overdue recovery, allowing our fleet to achieve a 98% utilization.

In 2019, revenue amounted to $597 million, a $68 million increase, 1/3 of which came from profit share. Also, accretive charter renewals were secured including a significant increase in our LNG carrier rates. Quarter 4 daily TCE per vessel approached $26,000, a 20% increase. Quarter 4 costs per category remained at similar levels to the prior quarter 4, except for voyage expenses, which fell 17%, due mainly to lower bunker costs.

Total quarter 4 operating costs remained at about $46 million with the same average number of vessels, while daily average OpEx per vessel remained at about $7,800, helped by a stronger dollar. Also, G&A expenses were at exactly the same number as in the previous quarter 4. Quarter 4 finance costs were halved to $13.7 million mainly due to improved bunker hedge gains.

We aim to sell 8 vessels in 2020, one of which, Silia T, was sold this February, releasing $5 million cash after paying down $11 million debt. Two Suezmaxes were sold this January as part of a sale and leaseback deal, resulting in reduction of debt by $27 million and release of $22 million cash. As a result of these proposed disposals, the impairment charges were incurred.

We took delivery of the new Aframax in January, with $26 million paid from debt and $5 million in cash, which will take delivery of a Suezmax with charter in quarter 3 and another in quarter 4, with payments of $110 million, financed mostly with arranged bank finance. Payments of $46 million will also be made this year relating to our LNG carrier under construction and $135 million next year.

Despite new debt relating to the delivery of new vessels and refinancing of older debt in 2019 at better terms, which actually released $29 million in cash, debt was reduced by $62 million in the year, bringing total debt down to $1.54 billion and net debt-to-capital to 48%. Quarter 4 EBITDA was $90 million, a 36% increase. For the year, EBITDA was $257 million, a $66 million increase over 2018, allowing TEN to maintain a healthy cash position at year-end.

We enjoyed a spectacular recovery in the tanker market in quarter 4, which lasted well into quarter 1, apart from a brief dip in February. However, with many vessels still operating on a healthy time charters and with good profit share and with our spot vessels again attracting lucrative rates, we expect a strong cash flow plus freed-up cash from vessel sales to cover all obligations in quarter 1, including loan repayments and prepayments totaling $100 -- I wish, $100 million.

This concludes my comments, so I'll pass 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. I like the way you think, you're reducing the expenses and increasing the earnings. That's really good.

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Paul Durham, Tsakos Energy Navigation Limited - CFO & CAO [8]

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Thanks a lot.

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [9]

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Well, thank you very much, Paul. And with that, we would like to to open the floor for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question from Randy Giveans from Jeffries.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [2]

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All right. Well, a few quick questions from me. I guess looking at your newbuildings, on order, have we seen many delays for those? I know the delivery now is for 3Q and 4Q of this year. Have there been kind of force majeure declarations at the shipyards that are likely going to push those? Or do you still expect to receive those on time later this year?

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

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I believe that we will be -- and I think Mr. Papageorgiou is in the -- is in our meeting here. And we believe that the first vessel is going to be delivered on schedule in the first week of September and then the second one in the last week of October. So, so far, on schedule from what we understand. Vasil, are you -- is Vasil there?

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Operator [4]

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He's not here.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [5]

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What was that last part, sorry?

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George V. Saroglou, Tsakos Energy Navigation Limited - COO & Executive Director [6]

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His line was cutoff, yes.

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

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Okay. Very good. Go ahead. So yes, so on schedule so far.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [8]

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Got it. Okay. And then quickly looking at the refined products. I know you said, obviously, the crude market has been robust, floating storage. You have all these stems coming out of Saudi Arabia. Have you seen a lot of activity on the refined product side? Any for storage or on the floating storage for refined products? Or is that purely just gasoline, diesel, jet fuel, arb opportunities on the product tankers?

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [9]

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Well, I think what we are seeing right now is a lot of product movement, which we'd not expect. I mean from our LR1 and sometimes, LR2s, the Med-Japan clean market, the products market, is at all-time record high because prices in Europe are so low, understandably. So people are replenishing -- the '05's, you remember that there was a lot of talk that was getting very expensive to meet the '05 regulation and -- the 0.5 regulation, that's what I mean. And now at these prices, which are lower than heavy fuel used to be last year -- much lower, people are -- we have a lot of demand between the Med and Japan for clean. And I think another thing that we have -- we are experiencing is that although the complete stoppage of movement in China has created a lot of available products from the local refineries -- so we have seen an increase of more than 30% in -- also on exports of products from China to the region. So in general, there is a lot of movement. And that -- when movement is there, that's what we are there. We are the truck drivers of this issue. We need to pick it up.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [10]

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Got it. Okay, that's fair. And then 2 quick modeling questions. Obviously, your interest expense fell dramatically. I think you said that was mainly due to bunker hedging or trades. What is your expected interest expense in the first quarter and the second quarter...

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [11]

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I think, Paul, please take that one. You are the one who reduces that.

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Paul Durham, Tsakos Energy Navigation Limited - CFO & CAO [12]

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Yes. I think we're looking at around $13 million a quarter.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [13]

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So is that the new run rate now?

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Paul Durham, Tsakos Energy Navigation Limited - CFO & CAO [14]

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(inaudible) quarter 1, we're looking at -- yes, about $15 million, $15 million a quarter.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [15]

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And the OpEx reversal in Q2, just continuing with the -- as the bunkers are less profitable, the bunker hedging? Or what's the Q2 guidance?

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Paul Durham, Tsakos Energy Navigation Limited - CFO & CAO [16]

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It's very possible. It probably got a hit in the middle of the year. So we're probably going to go up to -- who knows, but potentially $20 million each quarter.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [17]

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Okay. That's fair. And while we're discussing first quarter for all intents and purposes, the first quarter is also over, right? So how are you looking at 1Q numbers? Is it safe to assume that 1Q could be even better or should be better than the fourth quarter? Can you give some kind of guidance on -- now that the first quarter is done?

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [18]

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I think that we will see, of course, a very profitable quarter. We might have some noncash items as Paul said. I think we have made a hedging of a small -- of about 30% of our needs for '05, basically, going forward. So I think we have 30% over the next 4 years. Is that right, George Saroglou?

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George V. Saroglou, Tsakos Energy Navigation Limited - COO & Executive Director [19]

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Yes, that's right.

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [20]

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So the $20 million Paul mentioned, it's not a reoccurring figure. It's a figure that -- it does not compound. It's the same figure that, in some quarters, depending on the price of oil, it might be higher or lower. So it's not -- when we say up to $20 million per quarter, it doesn't mean -- it does not mean $80 million a year. It means that 1 quarter might be $20 million, 1 quarter might be $15 million. That's understandably a noncash item. But at the same time, with the 2/3 of our bunker needs making a killing because we are paying bunkers on the spot market much, much, much, cheaper.

So if you exclude those noncash items, I think we will have a very similar quarter. And believe it or not, I think the second quarter will also be very strong because a lot of our vessels -- to give you an example, on the fourth quarter, our VLCC, the Ulysses, earned up to February, $125,000 a day. Then we have [next voyage], which is finishing in the middle of April, is having only $40,000 a day. We are negotiating the next voyage back to close to $100,000 a day. So -- which will carry -- very much within the second and third quarter. And of course, another factor that we should not forget is that from April's Fools Day, April 1, the new rate, a huge escalation rates are happening on LNG carriers going up to close to $75,000. So in general, I think we will have a similar quarter, excluding the unrealized losses on bunker hedges.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [21]

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Yes. Yes, that's understandable. All right. Last question for me. Obviously, the $50 million repurchase authorization is very encouraging to see here. You mentioned in the press release that there's been panic selling. You mentioned on the prepared remarks that obviously, the sell-off has been mind-boggling, quoting you. So how quickly can you implement and use that $50 million? Can we do it all tomorrow, right?

And then secondly, is it going to be geared toward the common units at a 50% discount to NAV? Or is it going to be the preferreds, which are also trading at $13, $14 for some of the Series E, F, even the D? So how do you kind of balance those two?

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [22]

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Yes. I think we will do it mixed. We might keep priority to the common to -- and when I said mind-boggling, it's for the whole tanker industry. It's not -- I mean, in our case, it's because we know and I mean, we -- the company, right now, we are valued almost as much as the cash that we have in the banks, which is very, very cheap. So I think it's a very good investment for us to make.

Also, we have our coupons. We have 1 coupon. But we have one of our obligations that is due, and we will be buying it out in October -- that by October. And then our other obligations, the coupons, as you said, which are close to 9% that we are paying. People are having a double on them right now, which is really a huge -- it's racketeering returns. So we will mix it up, starting with the -- starting on the common and then doing something more organized on the preferreds.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [23]

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Got it. And then just the first part of that question, how quickly can you implement that? Can we do $50 million pretty soon? Or is it like having the...

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [24]

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I think you have to follow a part of liquidity. So it has to be done in an organized manner, but we will start it as soon as possible.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [25]

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Excellent. All right. Well, I'm looking forward to the next results with some huge preferreds and (inaudible)

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [26]

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Very good.

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Operator [27]

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(Operator Instructions) And we have no further questions at this time. So I'd like to hand the floor back to Mr. Tsakos.

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [28]

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Thank you. No, it is -- again, it's encouraging that -- to have you listening to us and listening to our story. We are in very -- we are in uncharted territory, and -- but we are experts in navigating things. So I think we will find the right source going forward.

As we speak right now, we expect the way we run the business that we have a model. We have our clients. Our clients are the biggest oil companies out there, and we expect a good next 1 or 2 quarters. But more importantly, for us, it's to have all of you and your families, our national families and our seafarers, healthy. So thank you very much for that. And please, will ask our Chairman, Mr. Arapoglou, to close the call. Hello?

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Efstratios-Georgios A. Arapoglou, Tsakos Energy Navigation Limited - Independent Chairman of the Board [29]

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Hello. Thank you, Niko. Just to close by saying, look after yourselves, stay healthy. And let's hope that the markets continue the way they are today. All the best. Thank you.

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [30]

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Thank you.

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Operator [31]

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Thank you. That does conclude our conference.

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Nikolas P. Tsakos, Tsakos Energy Navigation Limited - Founder, CEO, President & Executive Director [32]

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Thank you. Well done, guys. Thank you.