Tsakos Energy Navigation Limited (TEN) Earnings Call Transcript & Summary

Good morning to everybody or good afternoon, depending on where you are joining us from. Thank you very much for joining us today, and I would like to welcome you to Capital Link's webinar series. We are delighted to have with us today Dr. Nikolas Tsakos, the Founder and CEO of Tsakos Energy Navigation; and Randy Giveans, the Head of Maritime Research at Jefferies. I'm Nicolas Bornozis, President of Capital Link, organizer of the webinar, and also, we are the Investor Relations adviser for Tsakos Energy Navigation. And we have the great privilege to work very closely with Jefferies and Randy. So thank you, both of you, for being with us. I will make a very brief introduction. As you know, TEN is one of the largest energy transporters in the world, one of the largest independent tanker owners and a partner of choice for all the major participants in the global energy market. It has a pro forma fleet of 71 vessels; it founded in 1993. It is one of the oldest publicly listed companies, and the company has been listed on the New York Stock Exchange since 2002. TEN is known for its prudent growth and for a fleet development strategy that provides cash flow, sustainability and visibility throughout the market cycles, while at the same time being able to capture the market upside. And the company has rewarded its shareholders with a steady stream of dividends -- uninterrupted stream of dividends throughout the years, irrespective of the market cycle. TEN announced the first quarter 2020 results, very strong results, coupled with a 50% increase in special dividend. And recently, TEN announced the contract for the building of up to 3 Suezmax shuttle tankers under long-term employment. I will mention that the discussion today will focus essentially on 3 topics: on the tanker markets; on TEN itself; and also, I would like to remind everybody that Nikos Tsakos has been the Chairman of INTERTANKO, 2014 to 2018, and therefore he has unique insight in the overall industry direction, challenges, opportunities and so on. So with no more delay, I will turn it over to Randy and Nikos. [Operator Instructions] So thank you, Randy. Thank you, Nikos. Please go ahead. Randy, you have to unmute yourself.

Yes. Hey, thanks for having us, Nicolas. It should be a good conversation here. Nikos, thank you for joining us.

So with that, I know some people are maybe new to the Tsakos story. Some people are obviously interested in your background and how you got to kind of where you are today. So if you can just open us up with maybe a 2-minute run-through of how you got to where you are today and a quick backdrop of Tsakos Energy Navigation.

Thank you, Randy, and good morning to all of you from sunny Athens. If things were a bit more normal, we would all be here enjoying the after-Posidonia events, the Greek big exhibition -- seafaring and shipbuilding exhibition. But I think that will only do, and hopefully, we will have a chance very soon to see all of you face-to-face without having to wear a mask. Let's hope that these days will come soon. Well, TEN is perhaps the longest-running public company. It's a company that was established as part of the Tsakos Group, which is -- Tsakos family group going strong for 150 years in seafaring. And you can see one of our oldest ships in the background. I'm glad to say that in the middle, we have some of the newer ships. So we have renewed the fleet over the years. TEN started in 1993 after -- as a result of the OPA 90, the double-double design that, for those of you old enough to remember, was a huge environmental change in the shipping industry. And that's why we took the company public. We've been going on for, as Nic Bornozis said, for 4 decades. We have been continuously paying a dividend. The company uses the crisis periods to acquire distressed, cheap assets that we resell or trade very profitably in the future. Actually, this is our fourth crisis. For those of you that remember, between '96 and '98, we had the Far East crisis. That actually depressed freight rates but also collapsed newbuilding prices. And that was the time that TEN started its very vast newbuilding program at very low cost. We enjoyed a little bit of a better market after that. And I think we have a slide, for those of you, it's on Page 4, where you can see. Then, we had the unfortunate events of 9/11 that really stalled world trade for quite a period of time, and again, created opportunities. In TEN, in every crisis, we see also an opportunity. Of course, then we enjoyed the good markets between 2002 and 2008. And I think that was -- the bubble burst some time in 2010 for tankers. And really, from 2010 up -- I mean the last 10 years have not been a great period for tankers rates, basically because the market has been absorbing the overcapacity, creating -- created between 2004 and 2008. As soon -- in 2019, we started enjoying a strong market. The unfortunate events over the virus in February-March really have created another opportunity. We show rates really going to very high levels in the first part of the 6 months of this year to more normal rates now. But in that period of time, again, because of the crisis, as you heard last week, we signed the contract for 3 shuttle tankers at prices 25% to 30% lower than what we could have done at the peak of the market. So what we try to do is a model that we employ our ships long-term. We try to buy our ships during the crisis and low-cost periods and then employ them when the market becomes firm. So that's a little bit of TEN. We've been going strong for all this period of time. However, I have to say that we have in the last year, like most of the tanker companies, but especially ourselves, we are disappointed by the performing -- performance of our share because we are valued as a distressed company, where TEN actually is a company going from strength to strength.

Great. And thanks for that. We certainly have a lot of questions on Tsakos specifically. But before we get to those, let's just look at the market a little bit, right? So crude tanker rates started the year above $100,000 a day for VLCCs, above $50,000 a day for Suezmaxes. Those came off in February, a lot of that was seasonal, and then they ripped to just like all-time highs in March and April, floating storage, contango, all of these things. However, over the last, let's call it, 2 months, rates have pretty much fallen on a weekly basis. Can you give us a little bit of context about that, about the big rally in March and April and then the subsequent reduction in May and June?

Well, yes. I think everybody was caught completely by surprise. First of all, I think we all have to run and make sure that our families and our closest to kin were doing good, our associates. So I think that was the first concern during the lockdown. And then slowly and slowly, it took an effect where the price of oil, I mean, had unprecedented ups and down. So I think we were somewhere -- we started the year at about $60, if I remember well, and would collapse to, what, supposedly negative figures sometime in April. And we're normalizing back in the $40s again. So I think with all these changes, you can imagine that a lot of storage, as you're very aware, the contango and a lot of storage came out. What we did in TEN during those times, when people were coming and offering us $100,000 for a 6- or a 3-month contract, we chartered the number of our assets for a year at $30,000 or $40,000 or $50,000. So today, where the market has -- is taking the effect of the overcapacity out there -- but it's changing again to more positive. As we saw with the OPEC announcement yesterday, things are starting to normalize. And knock on wood, if we do not have a second wave, which we hope not, things look to be back to where we ended the last year in the middle of 2021. We had -- we were touching 100 million barrels of demand starting 2020. So we all said it's very [ comfortable ]. Everybody thought that 2020 would be a very nice positive year. Supply of tonnage is less -- on average, less than 10%, lowest in decades. Demand seemed to be going well. And all of a sudden, we had this setback by the virus. But as I said, we will -- after -- in every crisis, we look at them as an opportunity. I think the worst is behind us. We were expecting that the market absorbed so much oil that now is enjoying the cheap oil, both in products and in crude, but we are seeing that from the third, but at most, the fourth quarter, things will be normalizing. And I expect rates will not go back to $100,000. But if we can see VLCCs in $50,000 and $60,000, it will to be a very comfortable year for us.

Sure. And kind of currently, we're seeing these in the mid- to high $30,000s. Maybe Suezmaxes are $15,000 or so. Aframax is under $10,000, I guess. So what is your reasoning for kind of the divergence there, where the larger tonnage is holding in pretty good, well above cash breakeven, whereas the smaller asset classes are a little weaker? What's going on there?

Well, as I said -- as you said, the size is important. A lot of the VLCCs -- there's a bigger concentration still in storage on VLCCs. So the demand -- the supply of those ships, the demand is not equal to the Suezmaxes. The second category on storage is Suezmax. So I think it has to do with the ships that are not -- that are participating in the spot market, and that's why the larger ships are enjoying. Of course, the shorter voyages -- the Aframaxes might have a voyage of 15 to 20 days. So the market turns. The larger ships have voyages of 35 to 60 days. So it's a much longer process before the new rates. And I mean, we have seen them, as you said, from $60,000 to $200,000, down to $30,000, up to $60,000 again, back to $30,000 now. I think the next one will be closer to $50,000, I hope, in September.

Yes. It's certainly all over the place. If we switch over to products tankers. Obviously, you have a very diverse fleet here. What's going on there? There was a record spike again in April and May, also contango in diesel and jet fuel and gasoline and those things. But now currently, rates are in the doldrums, right? You're seeing LR2s at $15,000, LR1s at $10,000. MRs, some brokers are saying $5,000 a day. So let's talk about that market. What's going on there? And where do you see that going rest of the summer?

Well, I think quite similar. And I think all of us, we forget when we were approaching January 1, it was very similar to the millennium back. We were expecting the 2020 new IMO legislation to be a real game changer for the market for 2020. It seems all this confusion, which has to do a lot with products being transported, has been forgotten. It is true that we had a huge spike in products because we saw most of them at very, very historically low prices. So people were out there, or buyers of products, at very low levels. I think right now there is a lot of product all over the place which is being consumed because of the low cost. It will -- I think by September, October, the trade will start reerecting itself.

Sure. And then how would you say --

I mean, in our case, I mean, if you -- for those of you that have seen our presentation on Page 3, you see the company is a very diversified fleet. And you see that the majority of our product is trading in crude, so -- actually we have 50, as they call them, dirty carriers and 13 products right now, many of them on long-term contracts.

Perfect segue. As you mentioned, long-term contracts, how liquid is that 1-year time charter market? And what kind of rates are you seeing for a Suezmax, LR all the way down to an MR, for a 1-year fixed charter?

Right now, the 1-year charter is significantly higher than the spot market, which gives the expectation that everybody expects a very good end of the year. So I would say today, we could charter 1 of our Aframaxes in the mid-$20,000s for a year, $23,000 to $25,000, depending on share size and ice-class capacities. I think $27,500 or $30,000 for a Suezmax and low teens for the smaller ships. That's where 1 year is. We are not taking cover for 1 year. We expect the 1 year to be an exciting year. We have significantly -- a significant cover of our vessels. We have right now 30 vessels on fixed-time charters exceeding the 1 year, in addition to the 15 vessels on time charters with profit share. So 45 out of 70 vessels are on some sort of steady income, and the remaining 25 vessels are on the spot market. What we try to do -- and this is our CFO's strategy that has served us well, Mr. Paul Durham -- is to make sure that our 45 vessels cover all our expenses, our bank debt and all the requirements for the whole fleet. And the remaining 25 ships work for the dividend to our shareholders.

Sure. And then one more kind of demand question. We're hearing already reports around OPEC and how they are going to stick with that kind of production cut -- curtailment, I guess, going from 9.7 million, 7.7 million barrels per day in terms of cuts next month. So basically you're going to see more production next month. How do you see that impact on the tanker rates, tanker market? Will we see more fixtures coming out of the Middle East? How do you view that headline?

It is a very timely and very welcome, I think, development. And we see it happening at the right time. We already, I think, experienced more and more questions and phone calls in our charter department for business in August and mainly for September. So I think that will start giving life to the market. I mean, we had a big shock. We, as a company, we enjoyed the shock and we tried to actually make it last longer by chartering our ships at lower than the peak rates, but for 18 to 2-year period. So we're enjoying a very positive cash flow now, and the market seems to be coming back again.

Okay. And then switching over to the supply side, right? The order book is very low. You still have a lot of vessels over 20 years of age. Scrapping was very high in 2018, pretty weak in 2019 because rates were very good and because of all the scrapping that took place in '18. Year-to-date, there hasn't been much scrapping. Obviously, rates were phenomenal, right? But also some of the scrapyards were closed, COVID and other things. How do you see those 2 sides of the coin for supply side in terms of scrapping in subsequent months and into 2021 as well as newbuild ordering over the next few quarters?

Well, I think this is a very, very -- I mean, we actually debate this point on a daily basis. We do not expect -- and I think we have a slide on page -- for those that are following, on Page 11 and 12 and 13 on the scrapping. What we are experiencing right now is not so much a newbuilding -- a slow newbuilding because of financial-only reasons; it does make sense economic, is for technical reasons. And I think this is a game changer. We are seeing right now -- it's like being in 19 -- and you were barely born on that time, but it's like being in 1990 or '92 at the time that you had the unfortunate Exxon Valdez accident. Without any knowledge of legislation, what would be the new ship to be built, which ended up being the double-double design. So right now, no one knows what engine to put from their ships. And that's why people are not ordering ships. I mean, you hear a lot of noises of people taking options on duals here on LNG. I have been, through my INTERTANKO tenure, very much, I would say, negative on something that we have all by now forgotten, the scrubber issue. If you remember a year ago, if we were having this conversation, we would spend more time talking about scrubbers than anything else, which now it seems like, you know, its... And I have been -- and I mean, we did it in our company. We have not installed any scrubbers on our ships, thank God, because it would have been throwing money out of the window. And I am not sure that all these discussions about dual LNG engines will be the answer. I have a feeling that the actual main engine technology of existing ships will develop soon. So we will have -- before the hydrogen design, we will have the existing vessels -- or not existing -- existing design ships that will be bearing better fuels, which would not require more newbuildings. That's what I'm getting.

Sure. And yes, to your comment, I was certainly following the tanker market in 1990. I was only about 5 years old, so very, very interested in the market. A few quick industry questions for you, right? As you mentioned, IMO 2020, not doing much scrubbers there. How has that changed? What has happened over the last, let's call it, 7 months? Is IMO as big of a deal as it was measured to be even in 20 -- or hyped to be in 2018, 2019? Why did you basically decide against installing scrubbers? Was it the cost? Was it the technology? Was it a bearish view on fuel spreads? So if you can discuss IMO a little more, both from your Tsakos hat as well as your INTERTANKO hat.

You know what, I think from my -- on a personal and company note, it had to do with environmental issues. And I have been the Chairman of HELMEPA, which is the Hellenic Marine Protection Association, many, many years ago, an association way before its time. And I could not accept the fact that we are -- instead of polluting the skies, we were going to throw in the sea questionable residuals from the scrubbers. So I mean, our decision was purely based on a gut feeling that it's not good to throw all this rubbish in the sea. So that's -- for us as a company, that has been how -- it has nothing to do -- we did not even actually sit down to calculate. My colleagues know that when anybody mentioned the scrubber word, even if it made a lot of sense by finance, et cetera, I did not pay attention to it because I was completely opposite to it environmentally. And that was the decision. Now 2020, as I said, it would have been a great game changer, but we had COVID-19 to compete with in the meantime. So it has been completely forgotten. However, our ships are still suffering huge expenses and losses from the quality of the new generation cocktail of bunkers provided. So in a sense, I mean, this is in the background, but I have -- when I see my technical -- our Chief Operating Officer in the technical department, they are always very, very mad with what is happening and very upset with the damages. When I was discussing today on the operations meeting, we have 4 ships that are facing serious engine problems, and this is one of the companies, because of poor quality. So it's out there, but it has been completely forgotten because of the virus. And that creates delays. I mean, it will create, I think, better utilization on the market because of the delays. Not a good reason, but it is there.

Yes, yes. All right. Two more industry questions before we get to a handful of kind of Tsakos-specific company questions. First, there's a lot of discussion about the regulation for targets for carbon emissions and other things. The EU recently announced it wants to include shipping in its ETS, the emissions trading scheme. So as a major shipowner, as former Chairman of INTERTANKO, what do you think about this development? And what are your thoughts maybe on IMO 2030 or IMO 2050?

Well, I believe that the industry is -- the shipping industry, although very few people are really appreciate it, it has a bad, I would say, name to it, which is not correct. It has always been proactive to changes. And I brought before the example of the OPA -- when you were 5 years old -- of the OPA 90. That was -- the industry, without any subsidies, completely, within half a generation, changed the whole structure of the ship. I mean, this double-double design is the biggest design change on in ships since the sails -- you came out from sails to something like that. And it was done without any big -- I mean, without any governmental participations, any subsidies from everybody. So the industry always moves correct. I mean, I think we are a clean industry. We are the most efficient, economic and environmentally friendly way to move large quantities of products, big, wet or dry products around the world, and we are going to carry our obligations to the limit. So if we -- I do not really have a problem. As long as it is a level playing field, I don't have a problem of [indiscernible] participating in the new schemes that will be required.

Sure. And then in terms of kind of engines, fuel types, availability, all of these things, do you think the fleet will be able to renew itself, let's call it, in the next 20 years? And is there enough visibility right now for what kind of ships to order? Or is there still pretty much uncertainty and people waiting on the sideline?

Well, I believe right now that there's so much uncertainty that, for the next 5 years, we will be seeing a diminishing newbuildings coming out until a new design or vessel is accepted. I do not see people taking a huge chance on LNG as a fuel. I believe LNG is a good interim solution. But what happened to the interim? It used to be -- the interim would have been something like 30 more years. And that gives you -- that covers the life of at least 1 asset and a little bit more. By bringing things down to 2030, you are changing -- the golf course has become so narrow right now that I think LNG is not -- I mean, we have all -- we like LNG. We invest in LNG vessels. We believe it can be an interim solution. But it's becoming more and more a question mark than it was a year ago.

Okay. All right. So we have about 10 questions for kind of Tsakos company-specific. And we already have a handful of questions in the Q&A, so I certainly want to leave some time for that. So we'll go through these pretty quickly. But just looking at Tsakos, obviously, a very diversified company, unlike pretty much any of its peers in that you have the crude tankers, the shuttle tankers, the products tankers, the LNG carriers, all of these things. So can you discuss that strategy a little bit? And what kind of advantages or maybe disadvantages that that kind of fleet diversification provides Tsakos?

Well, just to give the background, the Tsakos Group is a ship-owning company of 150 years. And actually, if you really want it to be diversified, it would include containers, dry cargo ships and all sorts, which the group operates separately. So I would say we are a diversified energy company. Our model has to do with client-driven operators. We believe that we are, I would say, a good operator. That's what our charters believe or a big number of our charters. And I believe we have a very good cooperation with them. So let's say, when a big charter -- mention anyone, perhaps the old name behind here in my screen, everybody would come, they might require an LNG. They might require a shuttle tanker. They like that they talk to the same people on the chartering side. They know the operators. I mean, I have -- we have clients that actually would wait and would pay a little bit more -- not a lot, because of course charters are not -- they're not charities. But they will pay a little bit more to get one of our ships because they believe they will get a better service. So that's how we operate. And I think it is working well because we are going after long-term contracts that are accretive. We are not selling ourselves cheap. We have our CFO and our Deputy CFOs here who will continue with the nitty-gritty situation. They do not allow us. I mean, I get inclined when our charter comes to do more business, but then I get told off by my finance department that I'm selling very, very low. So I have to up my price. And as long as we can get a cash-on-cash return of just of 15% in today's very low interest rate, I mean that's our target. And we --

What is that cash-on-cash percentage? Sorry.

15%.

15%.

15%. So that's -- we do not do contracts for under -- okay, maybe 14%, 16%, 17%, but 15% is what we do. And we do not look at business which does not give us back 20% of the equity invested. So I think this is -- these are the deals that we are doing now and we're bringing in the market. We do not do lower deals. Because otherwise, we're subsidizing the big oil companies, and I think they have much, much deeper pockets than we have.

Yes. That's fair. And then looking at fleet employment, you are, again, unlike a lot of your peers in terms of your chartering strategy. That kind of lets you ride through different cycles. That kind of evens out your cash flow visibility and stability, right? So can you touch on that, kind of your chartering strategy? Do you think that's best in terms of adding shareholder value or in terms of your cash flow? If you look back, would you have been better suited just to operate in the spot market? So what are your kind of reasonings behind that chartering strategy?

Well, as I said -- you are very correct. I think it's a different model. Right now, we have a significant spot exposure with 25 vessels in the spot and 15 contracts with profit sharing. And I would say if we were only chartering the spot -- we've done this exercise -- if we had chartered only in the spot for the last 28 years that we've been going public, we would have filed for bankruptcy 4 times so far if we were only doing the spot business. But to be fair, we would have been able to achieve a lot of -- very much higher market for short periods of time, but then we have to protect ourselves. So we are a long term -- and as we said, we believe that shipping is more like a marathon race rather than a sprint. So you have to keep your ammunition really there for the difficult days.

Yes. All right. And then on the fleet expansion, as you mentioned, you have been a proponent of kind of using restraint when it comes to newbuildings and doing so prudently, responsibly. You are also remembered for a phrase you said at Capital Link that -- I want to get the phase right... [Technical Difficulty] for newbuildings, right? That said, you've also ordered several newbuildings for Tsakos, most of which, obviously, with long-term charters. But how do you account for this and kind of your fleet acquisition strategy?

Well, yes. I think we all miss the Capital Link days. Those days, we tended to meet each other on -- off Fifth Avenue. And it's been -- it looks like ages, and we hope that we will have a chance very soon to see everybody there again. And I know everybody wants to go back to Capital Link basically for the coffee breaks and the gossip in the alleyway and the nice introductions and presentations. As we said there, we have some segments like the VLCCs, that I think we will be investing because we're VLCC-light. We only have 2 VLCCs. I think the size of our group should have at least 5 or 6 VLCCs when the time is right. So this is something that we will do even without employment. For the other segments, I think we are covered. I mean, we just did a very accretive deal on shuttle tankers, again, 3 vessels against long-term employment. These are the business that we will do in long -- in newbuildings.

Okay. Yes. Let's talk about that real quick. Recently, you did the 3 vessels, long-term employment. The CLO stated accretive growth. Renewal remains a cornerstone of the strategy. Give us a little more details around that, around the counterparty, the term of them. I think you mentioned it was like $250 million in backlog. But I didn't see anything in terms of is that 5 years, 10 years, what kind of options there are. So that's also some questions in the Q&A. A lot of people are kind of wondering about that acquisition that you recently announced for the 3 Suezmax shuttle tankers.

Well, yes, as you know, the Suezmax or the shuttle segment of the business is a very specialized, very hard operating business. Quite a small number of players because it's really very demanding. And it has become even more demanding with the COVID-19 situation, where actually, when you have -- I'm going to digress a little bit, because one of the biggest problems we are facing right now is not being able to change our crew from the ship, the shuttle tankers, which is a very, very demanding operation. So you might operate for 3 months on a continuous basis. We had the 4 months-on, 4 months-off for our seafarers. Now most of our seafarers cannot leave the ship because of the COVID situation. But anyway, this is an issue very important for shipping, and we are working to try and solve it on a separate basis. We like the shuttle tanker business. We have invested heavily in the infrastructure in the past. So we're very happy to have this business. It's a minimum of 5 years with options that take it up to 15 years.

Okay. So 5-year fixed and then 5-year options thereafter?

Yes.

Okay. Sorry, I had some technical difficulties there. And then on the debt. According to your latest published figures, your net debt-to-cap is about 46%, I believe. Is there a level you feel comfortable with that you kind of want to maintain on the debt side?

Well, I think we would even consider, if we have long-term employments, go as high as the mid-60%s. But I think 50% is where we feel comfortable with. But we still have some breathing space if we need to expand without having to -- using our cash and conservative debt.

Okay. Makes sense. And I'm looking at dividend, many years of quarterly dividends. Now you're paying -- [Technical Difficulty]

Randy, we lost you, I think, physically and now also your voice. We could hear a little bit of you, but now we hear no evil, see no evil right now, Randy.