Thank you for standing by, ladies and gentlemen, and welcome to the Tsakos Energy Navigation Conference Call on the Q3 2019 Financial Results. We have with us Chairman of the Board Mr. Nicholas 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. Mr. Vijay, the conference is being recorded today. I now pass the floor to Mr.
Nicholas Bornozis, President of Capsiolink Investor Relations advisory of Tsakos Energy Navigation. Please go ahead, sir.
Thank you very much, and good morning to all of our participants. I'm Nicolas Bornoils of Capital Link, Investor Relations Advisor to Tsakos Energy Navigation. This morning, the company publicly released its financial results for the Q3 9 month period of 2019. In case you do not have a copy of today's earnings release, please call us at 21266175 66 or email us at 10dencapitallink.com, and we will have a copy for you emailed 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 tenants' business prospects and results of operations. And at this moment at this time, I would like to pass the floor to Mr. Nicolas Tsakos, the President and Chief Executive Officer of Tsakos Energy Navigation. Please go ahead, sir.
Thank you. Thank you, Nick, and good morning, ladies and gentlemen. It is again a pleasure to report the company's growth, developments and results. And it's even more a pleasure because we are able to finally do this in a much better long term positive environment, I would say after a very long period of time. The year so far has been really a roller coaster, started with a market that was positive and started giving us indications of things that were there to come.
We got a cold shower very quickly in the second and third quarter with the market dropping to significantly. And then of course we have had this significant freight strengthening eruption that is gaining strength to strength day to day. So overall an interesting year and 'ten always has been for 26 years now navigating harsh conditions and always able to be successful through them. We took advantage of the harsh conditions of the 2nd and third quarter to do our housekeeping, which means take out ships preemptively out of service and prepare them from the for the change in legislations of water ballast tank and of course 2020. And I think looking back it was a wise move.
It has of course affected the 3rd quarter results, but it has kept us profitable for the year and for sure the Q4 we're going to be rewarded for these actions. In the meantime, we still grow the business. Our LNG footprint is growing. It's a business that we believe there is a future into it. However, we are not willing to sacrifice shareholders' equity in participating in this market accepting very low rates.
And that's why we're very choosy when we look at these transactions. However, we have doubled our footprint in this at the right time when the value of those assets were at the lowest in the middle of the soft period in around June July. Also our long term strategic conventional relationships go from strength to strength. 4 more ships are being built, one delivered already to a major end user for a very long period of employment, very accretive transactions that are the base of the company's growth. The company maintains strong liquidity.
However, not only we pay a dividend which we announced today, but we reduced debt by another $144,000,000 year to date. In the middle of July we repaid our first preferred and of course we have outperformed the market by 20% for the 1st 9 months. But more importantly or as importantly for us that we are on hands operators is that we maintain good control of operating expenses. So we want to thank our technical managements and everybody on the ships basically and around that are when we're knocking on wood, keep our ships running at very, very attractive low operating expenses that allows us to be able to navigate through the harsh waters. Talking about harsh waters, we can see the environment is much calmer out there.
We have 23 ships which will be starting to I know you will see this in the presentation on top of our existing 20 7 vessels on the spot market that take full advantage of that. 23 vessels are going to be opening up. I think 7 already in the Q1 and so on going forward for re chartering and today is much, much higher rates. So with this in mind, we believe that we will have a very strong year for 2019 and hopefully this will be continued in 2020. And we will be able to enhance even our dividend when we have our full year results in March.
And with this, I will ask George Sarod, our COO to give us a more analytical a more analytical description of what has happened in the 9 months and in the last quarter. And then we will be available for questions. Thank you very much. [SPEAKER MOHAMMAD ABU
GHAZALEH:] Thank you, Nikos, and good morning to you all. We are very pleased to report a profitable 9 months for 2019 operations as a result of a better freight market environment that started gradually improving since the end of Q4 in 2018. Both long term and short term market fundamentals are favorable for tankers. We have a low order book, an aging fleet, growing of global oil demand and short term effects created by sanctions, geopolitical events, delays in retrofits, vessel storage ahead of the new IMO regulations, stronger to second half twenty nineteen demand for oil due to seasonality and the return of refineries from longer maintenance than typical. This combination created from the end of September a freight markets that initially broke records for the VLCC class before eventually spreading down to the rest of the tanker asset classes.
In this strong freighter, Mach 10 is well positioned to take advantage of the market's current upside as today we have 36 vessels out of pro form a fleet of 70 that have their freight income related to the spot market. Next year, with 23 vessels during 2020 up for its charter in a rising market, the number of 10 vessels whose revenue will be related to the spot market increases to 50 or about 75% of the pro form a fleet. In the last 3 years, the company built 21 vessels and this number includes the option we have for 1 LNG carrier, mostly against long term industrial business. 10 is in the final stages of the current expansion undertaken at competitive levels during the low levels of the cycle. 16 ships have already been successfully delivered, financed and employed on long term accretive charters to 1st class end users.
During 2020, the remaining 3 vessels, all fully financed and chartered to major oil concerns for a minimum of 5 years will complete the company's current expansion on conventional tankers and will secure revenues going forward. On the LNG newbuilding front, we announced the order for 1 more 174,000 cubic meter cubic vessel for delivery during the second half of twenty twenty one and have the option for one more for delivery during the first half of twenty twenty two. With this order and option, the company's LNG pro form a fleet rises to 4 vessels. We expect for these vessels to follow the same employment path as the other two vessels and be employed on time charter with major natural gas and trading companies. Moving to the presentation, to the online presentation on Slide 3, we see the company's versatile and modern fleet spanning across all vessel types and sizes in crude, product tankers and specialized categories like LNG and shuttle tankers.
Thanks to the company's employment strategy that has a bias towards medium to long term time charters with a combination of fixed rates, profit sharing and minmax rates, TEN is able to outperform the average spot market indices. You see here all vessels in red are spot rating vessels and with in yellow shade are all the vessels that are due for recharter in 2020. So if you look again at the slide, 32 vessels are on fixed rate time charter, while 36 vessels or 52 percent of the combined pro form a fleet has spot market exposure in a combination of fuel spot COAs and time charter with profit sharing and minmax formulas. On average, on the vessel with forward secured employment, we have approximately 2 years of employment and a backlog of just over $1,000,000,000 in minimum contracted revenue. The next slide, we have the 23 vessels that open for its charter during 2020.
In addition to the 16 tankers trading in the spot market and COAs today and 11 tankers with profit sharing arrangements whose charters expire after 2020, TEN has 50 vessels or approximately 75% of the pro form a fleet that is expected to take advantage of the strong freight market of next year. On slide 5, the left side of the equation, we see here the breakeven cost for the various vessel types that we operate in the company. As you can see, the cost base is low. In addition to the low building cost, we must highlight the purchasing power of Tacos Colombia Ship Management, the continuous cost control efforts by management to maintain a low OpEx average for the fleet and the low general and administrative expenses, while keeping at the same time a very high fleet utilization rate quarter after quarter. Penn's flexible chartering strategy ensures that most of the times the company outperforms the spot market and this helps the company maintain an impeccable debt record.
On the next slide, we see the debt reduction since the end of December 2017. We have reduced debt by $234,000,000 In the last 12 months, the company paid back 9 $4,000,000 taking down the net debt to capital ratio at the end of the Q3 2019 at below 50%. In addition, at the end of July, TEN fully redeemed the highly successful 50,000,000 Series B Preferred Shares. If we look at the market on Slide 7, despite the headwinds from the U. S.-China trade war and its potential spillover effect to the rest of the world, dropper oil demand continues to grow.
The latest forecast from the International Energy Agency calls for 1,000,000 barrels per day oil demand growth in 2019 and 1,200,000 barrels per day growth in 2020. The United States of America is now the biggest crude oil producers and U. S. Crude oil exports continue to grow. This combined with geopolitical tensions, supply disruptions, the U.
S. Led sanctions and OPEC production cuts are positive for ton miles and global fleet utilization as substitute barrels travel longer distances to reach importers, refiners, consumers. We had a longer than usual refinery maintenance period in the first half of twenty nineteen as global refineries were preparing for the IMO 2020 low fuel switch. We see global refinery throughputs are picking up now and we expect to acquire on average 2,000,000 barrels per day more crude oil in the second half of the year than the first half of the year. Crude oil demand is currently in excess of 101,000,000 barrels per day versus on average 99,000,000 during the first half of twenty nineteen.
On the supply of tonnage, we see here the order book standing at 7.7%, which is low compared to historical levels. A big part of the fleet is over 15 years and environmental regulation starting with retrofitting of water ballast treatment systems could push more tankers approaching or above 20 years to scrapping. Last year, of course, was one of the highest scrapping years of record. This year, scrapping is expected to be lower, but with more than 1,000 tanker older than 15 years, we could see a pickup in scrapping with more environmental regulations on the horizon, especially for those vessels approaching or being above 20 years. On Slide 10, we see the forecast from Fearnleys, a well known ship broker from Norway.
In past calls, we made reference to Fearnleys forecast for VLCC spot rates rising significantly from the second half of twenty nineteen. They have been proven right and rates not just for VLCCs but for all tanker classes are currently enjoying multiyear highs. With strong market fundamentals and 50 vessels expected to capture a strong freight market in 2020, TEN is very well positioned to take advantage of the market sub cycle that just started. That concludes the operational part of our presentation. Paul will walk you through the financial highlights for the 9th month and the Q3.
Paul?
Yes. Thank you, George. Well, having enjoyed a strong first half, a weaker seasonal market followed in quarter 3, affecting all tanker companies. For the 9 months, TEN achieved a profit of $2,000,000 but in the quarter incurred a loss of 9,500,000 dollars Thanks to our charter strategy that was $5,000,000 better than in the prior quarter 3 And we avoided the heavy losses suffered by those operators mainly in the spot market. We had 5 vessels in drydock in quarter 3 as Nikos has mentioned, mostly brought forward in preparation of 2020 and to take advantage of the slow market.
The fleet still achieving 93% utilization, 96% in the 9 months. Quarter 3 revenue was up 4% constrained by the market and drydockings, but up 12% in the 9 months due to the good half year and accretive renewal of charters notably for the LNG carriers. Operating income was over $58,000,000 for the 9 months and $12,000,000 in quarter 3, a sixfold improvement. Later in quarter 3, we saw strong rates that continued in quarter 4 and may even continue through 2020, which will let our vessels on spot and with profit share enjoy significant earnings. Daily TCE per vessel in quarter 3 was $19,000 $20,000 in the 9 months, above average market rates, generating strong EBITDA of $47,000,000 in quarter 3, a 17% increase and over 167,000,000 in the 9 months.
Average daily OpEx per vessel remained at $7,600 and drydock costs being partly offset by a strengthening of the dollar, while other expenses were stable or fell from prior quarter 3. However, finance costs increased by $4,000,000 in quarter 3, mainly relating to bunker hedges. But loan interest remained stable with increased interest rates offset by the impact of a $94,000,000 reduction in outstanding debt since the prior quarter 3 and reduced margins. Net debt was reduced to 1,540,000,000 dollars by the end of quarter 3 with net debt to capital at 48% and is scheduled to be reduced further in quarter 4. We believe the crude tanker spot market will remain strong through 2020 as George has mentioned with product carriers also likely to do well.
With 40 vessels on spot and profit share and with other tankers freeing up in the next months, we will benefit from what appears to be sustainable recovery for the near future. We have 4 vessels on order, an Aframax, 2 Suezmaxes and an LNG carrier. The total cost is $380,000,000 $60,000,000 has been paid to date, dollars 187,000,000 will be paid in 2020 $135,000,000 in 20 21. Most will be paid through bank finance largely already arranged at competitive terms. And finally, we emphasize that we are a growth company with a long term vision, but also have an eye to selling our older vessels as opportunities arise, which is very possible in the current voyage market.
And now I'll hand the call back to Nicolas. Thank you, Paul, and thank you, George.
While looking at the presentation, as I said, if we about a year ago when Fearnleys came out with the report, I have to say I was of the opinion that it's a typical Norwegians are usually never in doubt, but very often wrong. But I'm very, very happy to announce at this time to our old surprise they have been very right. So I hope they will continue with this positive news. You will see in our presentation that the market expectations is there. We have positioned the company in order to be able to take advantage right now of this and we have been enjoying the fruits of our hard labor I would say for the last for the Q4 and looking forward to continue in the Q1 and for the majority of 2020.
What is also very important which we very often do not talk is that the reduction of debt, a significant reduction of debt more than a $250,000,000 in the last 2 years on average. On top of that another $50,000,000 of preferred repayment and still maintaining close to $180,000,000 and hopefully more by the end of the year of cash once we're paying a dividend. So I think we are preparing the company for hopefully finally a very exciting super cycle going forward which we hope to be able to see also in our share price and our dividend yields. And with that, I would like to open the floor for any questions. Thank you.
Hello. This is George Brown calling from Capital Large Securities. How are you today?
Very well. Thank you, George.
Good. Got a couple of quick questions for you. How big is your profit share in the current season of your tankers? I understand that a lot of them are being renewed in the upcoming year. But what kind of profit sharing?
Do you usually have fifty-fifty at a certain level? Or how exactly does that work?
Yes, I think that's a good point. Although we do not want to spill all the beans in case any of our competitors are listening, but I think if you go to Page, I would say in the presentation, which is Page 1 to Page 3 of the presentations where we have you see our time charter income and our expense income Yes. So you see what we try to do is cover all our expenses by the minimum rate on a profit share and usually then go fifty-fifty above that. Many times we have been able to secure depending on the time of negotiations an additional $5,000 all coming to us based on the index and then fifty-fifty. But I would say on average it's I would say it's 55 to us 45 overall.
Okay. Next question, how many of these preferred series do you have outstanding and at what interest rates at this point in time? I know you paid off completely one series earlier this year, right?
Yes, yes. I mean, we have 4. One is coming due in October this year, what next year 2020, which most probably again we will be repaying out of our cash. And then we will be down to 3% with I think with an average yield of issue yield of just under 9%.
Yes. In today's environment and with your low leverage as a company, I would consider that pretty high. And being a company based in Europe, with the interest rates currently at many times negative, it would seem to me that there would be opportunities for you to somehow refinance these preferred series because if you take the dividends that you have to pay on top of your loss generated, the numbers don't look too strong. And I think they're single handedly the reason for the somewhat very disappointing performance of your common shares. And I'm wondering if that is something that you might look at into the future?
I think, George, you are very correct and we feel the same way. As I said, you have of course to look at the environment when we were we had to raise the we had to raise finance for our growth. As you know in shipping in order to make a good return you have to be countercyclical, which means that you have to go out order and buy ship at the time that no one wants to talk about tankers or ships at all. And of course that's the time that you will have to be able to finance this growth at a higher rate. I agree with you and that's why we have paid the one, we're paying the next one in less than a year.
And in the meantime, we are looking to refinance at least 1 or 2 of the remaining ones, although they are perpetuals at much, much more competitive levels. But if you go back to the I would call it the dark ages of 2013 when those when we were issuing our preferreds, we were using of course the proceeds to order ships that today have gone up to value by more than 30% or 40%. Great. And if you
were to sell some of the older vessels at today's elevated prices due to the rates, you might be able to use the proceeds there also to reduce or buy back some of those preferred shares?
Yes. And this is we are in the process of perhaps announcing transactions even this side of the year.
Right. How many dry docks do you have scheduled for the Q4 and into next year?
We don't have any more for this year as I finish.
As we said, we did a lot of preemptive ones in order to be able to take advantage of the 4th year and most of sorry, Paul.
And we're looking for in quarter 1, 2 more. So I'll do it by quarter. Quarter 1, we've got 2 vessels scheduled. Quarter 2, we have 3 vessels scheduled. Quarter 3, looks like another difficult quarter because we've got 4 scheduled and then 1 at the end of the year.
But all this of course might change during the course of the year when we might have to take advantage of given situations.
Howdy, gentlemen. It's Randy Giveans from Jefferies. How's it going?
Hi. Hi, Randy.
You mentioned the kind of upside exposure, obviously, with current spot rates well above your profit sharing splits, Plus you have, I don't know, dollars 177,000,000 in cash on hand, your share price obviously trading at a pretty steep discount to NAV. So kind of use of cash going forward with the expected kind of uplift here in the Q4, looking at share repurchases, possibly increasing the dividend, what are your thoughts on those two options for returning capital to shareholders?
Yes. Well, as I said, our first increasing the dividend is our first priority. I mean we believe that's the best way to reward the existing shareholders that have stuck with us over long years. So this is something that we will we come up as you know with our results in the middle of March for the end of the year and that's when we will be looking to hopefully significantly top up the existing dividend in this new era. So that would be and the second one would be reduce further reducing debt.
We're putting aside money to purchase in October our 8.5 8.7, 8 8 yielding preferred which is due to be paid at the end of October. So I think in this line at the same time of course we are looking at opportunities.
Okay. And then what about your kind of quarter to date rate? Can you give any guidance on what you've booked now that we're kind of at the end of November?
Yes. I think if you say that the 9 months, if the 9 months were in the average 2020, I think we might be able to the average across the board for the fleet be in the high 20s or start to the 3. And that which is a significant and if the market maintains then with 23 ships coming open within 2020 on top of the 27 purely spot vessels. I think you have a graph in there that shows that we are looking and I think a crude calculation we have is that for every $1,000 increase of the spot market, we get $0.06 to the bottom line.
Got it. Okay. And then I guess lastly, you mentioned there was still some in scrubbers outstanding by your charterers. Has that kind of increased or kind of remained the same in the past few months? And then any clarity or maybe details you can provide on the scrubber premiums you're getting where the charters are increasing the daily charter rates?
Yes. I have seen I think for two reasons. We have seen actually charters of existing vessels are reluctant to take ships out of the market in order to retrofit the scrubbers. Because of course if you are making $50,000 $60,000 $70,000 a day, you don't want to take a ship out for 2 months at that time. So that's one of the reasons.
On the other side, which means that you have more the more the biggest delay, the more time works because the oil companies can provide 0.5. I think today you have a premium on every category of ship on average of about 10% for scrubber fitted vessels. But really there is no we have not seen any charter refusing to charter long term non scrubber ships.
Got it. All right. Well, hey, that's it for me. Thank you so much for the time. Thank
you.
There are no more questions coming through on the line. I'd now pass the floor back. Just bear with me, please. One second. No questions coming through on the line,
sir. Well, thank you very much. And again, looking to wish everybody a very, very happy, peaceful and Thanksgiving coming up and looking forward to end this quarter with very good results and looking for a very exciting 2020. Thanks to our shareholders that have stuck with us for all these years. Thank you for our technical managers, Chaco Shipping and Trading, the crew on our ships.
It's been a long period of 10 years without a lot of significant positive news that seems to have turned and looking for a much more exciting 2020. We have prepared the company right now and we are ready to take advantage of it all most than any other of our peer group out there. And with us, again, Happy Thanksgiving and thank you very much.
Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.