Thank you for standing by, ladies and gentlemen, and welcome to TACOS Energy Navigation Conference Call on the Second Quarter 2019 Financial Results. We have with us Mr. Takis Arapoglou, Chairman of the Board Mr. Nicolas 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. I must advise you that this conference is being recorded today. And now I pass the floor to Mr.
Nicholas Bornozis, President of Capital Link, Investor Relations Advisor of Tsakos Energy Navigation. Please go ahead, sir.
Thank you very much, and good morning to all of our participants. I'm Nicholas Bornoz of Capital Link, Investor Relations Advisor to Tsakos Energy Navigation. This morning, the company publicly released its financial results for the Q2 6 month period of 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 10 capititalink.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 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 the floor over to Mr. Takis Arapoglou, the Chairman of the Board of Tsakos Energy and Aviation.
Mr. Arapoglou, please go ahead, sir.
Thank you, Nicolas. Good morning, everyone. Thank you for joining our call today. I'd say a very positive performance, one of perhaps only 2 positive performances in the sector, if I'm not mistaken, with over 40% increase in EBITDA year on year to 120,000,000 At the same time, TEN reduced debt by EUR 140,000,000, repaid the EUR 50,000,000 pref, continued paid dividends of all kinds and maintained a very healthy cash position while continuously improving operational excellence. 10 continues to invest in growing the fleet in a measured way as per our stated strategy, both in the conventional tanker sector as well as in LNG, the latter being in the core of our strategy going forward, as we've said many times.
On behalf of the Board of TEN, once again, congratulations to Mikko Tsakos and the team, not only for the results, but also for positioning the company so well for an upturn in the market as expected. So thanks again, Nico, and over to you.
Thank you, Chairman.
We are glad that we are able to maintain our profitability in a challenging environment. I think we're very glad that our as you kindly said, I think TEN is consistency one of the very few companies in our peer group that maintains profitability regardless of the cycles. We are looking at an environment that it's promising, and we are preparing the company with that in mind. However, we continue to maintain our policy of chartering our vessels and building vessels against long term accretive employments that ensure a very strong utilization. We are at 97% utilization in a challenging market for the 1st 6 months, and this has not changed even last year when the market was even poorer than it is today.
The future looks promising. A lot of disruptions will be happening in the next couple of quarters and seasonality will help. Already, the futures market also indicates that we're going to be seeing a much healthier 2020 and the remaining of 2019. As we speak today, we are mainly we have 32 of our vessels on fixed employments, 20 percent 20 of our vessels in fixed and profit sharing arrangements, including contracts of affreightment and 16 vessels in the spot market. I think this mix has enabled us for the 1st 6 months to outperform the market by about 10% on the 6 monthly basis, but even stronger in the last quarter where the market was weaker, about 38%.
And this gives us confidence that when the market will be growing and going further, the company will be able to profit and increase the bottom line even further, which hopefully at some stage will have to be reflected on our share price. What we are doing right now, we are in the final concluding a very large one of the largest newbuild programs with 1st class long term employment on every city vessel that any tanker company had. We have already taken $1,000,000,000 of 16 vessels. We have reduced debt by more than $250,000,000 in the last 18 months, which means that the company throws a lot of cash flow to maintain, repaying a dividend and also reducing our debt and allows us income for and allows us liquidity for growth. In the last month, we have, as we stated before, increased exposure on the LNG sector, and again, talking about state of the art vessels with long term employments.
So we are positioning the company in a situation ready to take advantage of the market that we expect to be much stronger in the second half of the year and twenty twenty. And I think with this, I will ask Mr. Saroglou to give us a much more detailed analysis of where we've been in the last 6 months. Thank you very much, Nikos, and good morning to you all.
We are very pleased to report a profitable Q2 and 1st 6 months of 2019 operations as a result of a better freight market environment that started during Q4 of 2018. As we said, we are one of the very few companies in the peer group, if not the only one that reported profitable operations in the 1st 6 months of the year. The recovery in both the tanker and LNG markets helped the company to re charter the 2 LNG vessels in the fleet at much higher accretive rates above the average all in breakeven for both vessels. We continue to charter and recharter 13 vessels so far since the start of the year, taking advantage of the appetite by oil majors and the company's clients to fix vessels forward. The last 3 years, the company built 20 vessels, including the 1 option, 1 LNG order we announced today against long term industrial business.
10 is in the final stages of this 19 vessel growth program undertaken at competitive levels during the low levels of previous cycles. Of these 15 ships have been successfully delivered, financed and employed on long term accretive charters to 1st class end users. Within this year 2020, the remaining 4 vessels are fully financed and chartered to an oil major concern for a minimum of 5 years, we will complete the company's current expansion and secure revenues going forward. On the LNG newbuilding front, we have ordered 1 Option 1, 174,000 cubic meter vessels for delivery in 2021. With this order, the company's LNG pro form a fleet rises to 4 vessels.
We expect for this including the option, We expect for this vessel to follow the same employment path as the other 2 vessels and be employed on time charters with major international natural gas and trading companies. Already, discussions have started to be in place and we hope and expect to announce as time progresses similar charters like the ones that we have on our other 2 LNG vessels. During the first half of the year, we had we concluded a deal with a major end user for 4 vessels and we have expanded a strategic relationship with the National Oil Concern by selling them 2 vessels. Moving to the online presentation in Slide 3, we see the company's versatile and modern fleet spanning across all vessel types and sizes includes product tankers and specialized categories like LNG and shuttle tankers. Thanks to the company's employment strategy that has a buyer towards medium to long term term charters with a combination of fixed rates, profit sharing and min max rate, Penn is able to outperform the aspirate spot market indices.
Slide
4.
The left side presents the all in 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 shipbuilding cost, we highlight the purchasing power of TCM and the continuous cost control efforts by management to maintain a low OpEx for the fleet. In the first half of the year, OpEx is down 3%, low general and administrative expenses while keeping a very high fleet utilization quarter after quarter, again almost 97% for both the second quarter and the first half of the year, which we believe qualifies as full employment. TEN'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 service record 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 further as we expect the market to do going forward. Based on the current conditions and the number of vessels operating in the spot market and in time charter with profit sharing, for every $1,000 increase in spot market rates, we have a positive $0.06 impact on annual EPS. Debt reduction is an integral part of the company's strategy. Debt fixed at around 1 point $7,000,000,000 at the end of 2017. And in the last 18 months, we have reduced the company's debt by 221,000,000 dollars taking down the net debt to capital ratio at the end of the Q2 of 2019 at below 50%.
At the end of July, the company fully redeemed the highly successful 50,000,000 Series B Preferred Shares. Despite the headwinds from the U. S.-China trade war and its potential spillover effect to the rest of the world, global oil demand continues to grow. The latest forecast from the International Energy Agency calls for 1,100,000 barrels per day oil demand growth this year and 1.3 next year. The USA is now the biggest crude oil producer and U.
S. Crude oil exports continue to grow. This combined with geopolitical tensions, supply disruptions, the U. S.-led sanctions against Venezuela and Iran and OPEC production cuts are positive for ton miles and global fleet utilization as substitute barrels travel longer distances to reach importers, refiners and consumers. We had a longer than usual refinery maintenance season in the first half of twenty nineteen as global refineries were preparing for IMO 2020 low sulfur fuel oil switch.
However, global refinery throughputs are picking up and expected to require on average 1,000,000 barrels per day of more crude oil than they did in the first half of the year. On the supply of tonnage, the order book is at 7.7%, and this is a low number compared to historical levels. The big part of the fleet is over 15 years and environmental regulations starting with retrofitting water ballast treatment systems and scrubbers to comply with IMO 2020 create delays as scrubber retrofitting takes longer than initially forecasted, while shipyard works at full capacity to meet retrofitting requirements, which could keep longer a big part of the global fleet in shipyard scrubbers and trading, and this could push more tankers approaching for about 20 years to go for scrapping. Last year was one of the highest scrapping years of records. This year, scrapping as expected is lower, but with more than 1,000 tankers older than 15 years and post environmental regulations, we could see a pickup in scrapping especially for those vessels approaching for above 20 years.
The graph on the right side of the slide is a forecast from Fearnley, the well known ship broker from Norway. As you can see, VLCC rates are expected to trend higher and reach multiyear highs going forward. We are also very positive about the market prospects and expect a strong market for all vessel categories. This environment, we believe that the company's fleet is well positioned to capture any market opportunity that will be presented. That concludes the operational part of our presentation.
Paul will walk you through the financial highlights for the Q2 and first half. Paul?
Thank you, George. Well, after a profitable quarter 1, Ken continued on a profitable path in quarter 2, despite difficulties arising from refinery disruptions, fleet overcapacity, OpEx cuts and of course seasonal factors. Nevertheless, Penn was able to generate a net income of $300,000 a considerably better result from that loss of over $9,000,000 in the prior quarter, too. For the half year, there was net income of $11,500,000 compared to $21,500,000 loss in the 1st 6 months of 2018, a $33,000,000 positive reversal. The profit was mainly due to an increased revenue by 16% in quarter 2 and half year over the prior periods, partly due to new accretive time charters, including those of the LNG carriers.
Increased long haul voyages helped our spot vessels to earn freight at an average 30% more than in the prior quarter 2. Daily TCE per vessel in quarter 2 6 months averaged over $20,000 well above average market rates due to our time charters, but again generated enough to pay operating overhead and finance cash costs. Operating income increased 5 fold from the prior quarter to reach $19,000,000 despite some increase in OpEx due to timing and higher maintenance and sales offset by a stronger dollar. Otherwise, average daily OpEx per vessel stayed well under $8,000 while other expenses remained stable or fell from those of the prior quarter too. Finance costs were up by $6,500,000 in quarter 2, mainly due to bunker hedge losses and negative non cash movements in valuations.
However, loan interest remained stable with interest rate increases being offset by a substantial $142,000,000 reduction in outstanding debt in the past year. In quarter 2 itself, net debt was reduced by $52,000,000 leaving cash balances of $193,000,000 at the end of the half year, where
our net debt to capital at 48%.
EBITDA in quarter 2 amounted to $56,000,000 33 percent higher than in the prior quarter 2 and $120,000,000 for the 6 months, a 43% increase. On top of the significant reduction in outstanding loans, we also redeemed the Series B preferred stock in July with $50,000,000 returned to stockholders. So all in all, we are pleased with the results for the 1st 6 months given the difficult market, and we remain optimistic for the rest of 2019 and beyond based on low inventories, completed refinery maintenance, high U. S. Oil exports and reduced tanker deliveries, recognizing that we are approaching a period of probable disruption that may reduce the availability of tankers that in turn will have a positive effect on returns.
And now I'll hand the call back to Nikolas.
Thank you, Paul, for another quarter of positive news. And as I said, Glad being one of the very few in our peer group, if not the only one that is positive this quarter and for the 1st 6 months. We are able to achieve this by tight control on the actual assets, maintaining operating expenses and utilization at very high rates. And our chartering strategy gives us the ability to outperform the spot market significantly. This the 1st 6 months, we have a 36% outperformance of the spot market that has enabled the company to be profitable.
Our VLCCs performed significantly better than the spot market in the 1st 6 months. The same with our Suezmaxes, Aframaxes, Panamaxes, in every single sector that we participate, we have outperformed the market significantly with a total average of 36 percent in that growth. Also, a very important part of our business has to do with reducing debt. And I think as Mr. Sarodos, as George said, reducing debt and repaying our initial dividend preferred was one of the highlights over the 1st 6 months and hence still realizing a very strong liquidity.
But also interest rates reduction is very positive for our business. Just to put it in perspective, every 1% reduction in interest rate is almost $15,000,000 straight down to our bottom line. So that's a very significant number going forward. On the growth side, our long term strategic relationships are maintained. Our operational excellence is appreciated by the end users that they would rather do business with companies with a long term solid profile like ourselves.
4 vessels with a strategic relationship to a U. S. Major oil company with very long employments starting this quarter and going starting next Q4 and one vessel every quarter following. And of course, then the expansion on the LNG sector continues and a lot of accretive business in the backlog as we speak, which gives us a very positive feeling that the market is expected to go from strength to strength at least in the medium to near future. And with this, I would like to open the floor for any questions that you may have.
Okay. Our first question for today is from James Mintz Meyer from Value Investors.
Hi, good morning, gentlemen. Congratulations on the LNG order.
Thank you.
Yes. I'm looking at the timing of your installment payments for you have 2 Aframaxes, 2 Suezmaxes and one option, 1 LNG. Is that correct? And then also what is the timing of those installments both for the rest of 2019, 2020 and then 2021?
Well, to date, we've paid for all vessels, dollars 25,000,000 we paid already out of our pocket. We expect to pay another $55,000,000 from our pocket in the remainder of the year. I beg your pardon, dollars 5,000,000 in the remainder of the year. And drawdowns, we shall have from our banks. They're providing refinancing.
We did a refinancing. Drawdowns will amount to $45,000,000 at the end of the year. And future drawdowns within the year, we had $26,000,000 Going into 2020, we have a further $122,000,000
and that's being provided by the delivery debt.
I mean, actually, from equity, it's another $5,000,000 for the assets.
In addition to the $25,000,000 already paid.
In addition to the $25,000,000 already paid.
Okay. So I'm hearing $5,000,000 additional equity for the rest of the year. And what's the amount you anticipate? I know all the finance is probably not wrapped up yet, especially for the LNG carriers. But what's the amount of equity that you anticipate spending in 2020 and then 2021 for those vessels?
I think the only the finances wrap up for all the other vessels, there's a queue of financiers for the LNGs. So we expect perhaps another $40,000,000 of equity within between 2020 2021 for the LNG carrier.
So what's the kind of wrapping up on that, what's the target leverage for those vessels? It sounds to me like it's in the 70%, 80% range. Is that about right?
We try to be conservative. As you know, we have a conservative balance sheet, and we'd rather keep it closer to 70% rather than the 80%.
Excellent. Thank you. And then the other question I have similar is on your debt facilities. I know you've targeted refinancing the balloons, but you plan to pay down your regular amortization payments. Can you remind me what the remaining amortization payments are for the rest of 2019 also for 2020 and scheduled for 2021?
The results are better than expected.
Our scheduled repayment for the remainder of 2019 are $84,000,000 Going into 2020, we're going do you want for a
few, 2 years as well?
Okay. So for the remainder of this year, we have scheduled $84,000,000 to pay.
And then do you have the numbers available for 2020 or 2021 yet?
Yes, yes. 2020, we have $166,000,000 These are scheduled payments, not balloons. Going into 2021, we have $141,000,000 And if we're going into 20 Q, we got another $128,000,000
Excellent. Thanks for the color on that. And then final question for me. We talked a little bit about scrubbers in the call and how those are adding some delays. I know previous calls you mentioned that there might be some customers that would pay for the scrubbers as part of their charters.
Has there been any deals made on that? Like how many of your fleets are tied up on scrubbers?
Well, as I said, we have we will have about 8 vessels, including the new builds with scrubbers, all of them paid by the charterers for the time that we will retrofit them and of course.
Fantastic. So no CapEx expected for the scrubbers, is that correct?
The opposite, we will be earning money sitting at the yard while this is happening. So actually, it will be more profitable because we will not have any OpEx also.
Excellent. Thank you very much, gentlemen.
You
too. The next one is from Randy Giveans from Jefferies. Please go ahead.
Good morning, gentlemen. This is Chris Robertson on for Randy. Thanks for taking our questions. Hi. So Nicholas mentioned operating expense control and the utilization rate that was strong in the quarter.
So it looks like you're able to achieve close to a 97% utilization rate. Do you expect similar results for the remainder of the year? And will any IMO 2020 preparations cut into that? Any disruptions there regarding the changeover in fuels?
Well, if you go back to, I would say, even to the last 5 or 10 years history, you see we average well above the 95%. 85% is the industry average. So 97% we expect to be a very constant number. If you will and as I said in the previous answer, the reason we will maintain this is because our the time we will be taking it for the scrubber installations are going to be paid, so there will be no downtime. It will be paid by the charters.
So yes, we expect to maintain because of the chartering profile, we have to maintain high utilization going forward.
Got you. And can you talk a little bit about the operational plans to make changeover in fuels?
Yes. We have a big team that can say much more things than I do, but I'm away from the speaker right now. Yes, I think we are preparing and please intervene. We are preparing the ships during the passage in order to cleaning the tanks. So we do not have any of hire.
If we have any scheduled delays, if we have any scheduled repairs, these repairs are going to be used at the same time to clean the tanks for the low sulfur. So we do not really expect any major delays in what we will be doing in the preparation. And having 70% of the fleet with long term employment, it helps very, very, very much because we have the cooperation of the charters because they are actually the owners of the products that we burn.
Got you. And then with regards to the reduction in the vessel OpEx, was that fairly low hanging fruit? And what additional steps could the technical managers take in coming quarters to maybe drive that down further?
Well, I think for us, we are first of all, we are running a fleet at utilization of 97%. And at the same time, we are, we have, on average the lowest, at least from the tanker owners, OpEx and G and A expenses in the industry. We have a vertical operation. So we actually whatever happens on a ship, it does not happen in India or somewhere else. It happens within the premises that we all operate with the company in headquarters.
So we are able to have very quick reaction and on hand control. And that's why we would like to also appreciate the efforts of our seafarers and our ship managers and that are cooperating so close with the commercial department to try and keep operating expenses even lower. And I think what will help a little bit more will be a stronger dollar, which we should not exclude.
Got you. And last question for me. Regarding the Aframax tankers, are any of the crude tankers operating in the product tanker trade? What trade do you think will benefit more in the lead up to IMO implementation? And any update on the lightering activity in the U.
S. Or Latin American markets with your Aframax tankers?
Well, that's a very good question. And I think if we can go if you go to Page of our fleet, you will see that we have right now the 3 of our vessels, which are, for the proteas from Healthpro Pontis, but Aframax is trading clean right now. And which is, I would say, it's a market which is getting a lot of positive news because of the different dislocations of high and low sulfur crudes. So we have 3 of those ships trading on the Aframaxes in the clean trade. And it's a very good question, which we believe that initially perhaps the product market might get a nearly start in the positive environment because of the dislocations of the virus refinery.
However, in order for refineries to produce the right product, they would have to find the right crudes. So I think the crude market then will fall off. And I want to give you very quick examples because I'm sure you're all. The U. S.
Refineries because you are used to actually crack heavier crudes are better preferred for producing low sulfur than, let's call them, the Western European Refinery. So we might see projects coming to coming from the United States to Europe, a low sulfur product. Then, of course, in order to and also, we might see lighter crudes. We also like lighter crudes that will have to be used to mix with the heavier crudes than we have with the Russian crudes, which are heavier. So the crude market will also take, I think, will have an advantage of longer term miles.
So I think the whole segment will have dislocation and disruption that will be positive for supply.
Got you. Appreciate the time.
Thank you very much. Gentlemen, there are no further questions waiting. I'll hand the call back to you for closing remarks. Thank you.
Thank you, Chairman. Well, as Nico Stacos said earlier, we remain optimistic going forward, totally focused on strategy, which has been paying off the weight has been executed. In October, we have new strategy meetings. We will review as appropriate and of course, let you know of any changes in the next results call. So thank you very much from me.
Over to you, Nico.
Well, thank you, Chairman, and I
think looking forward to meet face to face with our shareholders. We have a big week in London next week with London Marathon Week and I think Capital Link, the Capital Link event will do a lot of returns to see our European investors or whoever from the United States is in London. And then in October, we have the LNG conference in Houston, which coincides with, again, the various events, capital linked event in New York where the team will be there. And in the meantime, we hope to be able to maintain and be able to give you good news in November when we report our 9 months results and hopefully come up with even better results going forward. And again, thank you for your support and looking forward to a healthy second half
of the year. Thank you.
Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may now disconnect your lines.