You for standing by, ladies and gentlemen, and welcome to the Tsakos Energy Navigation Conference Call on the Q1 2019 Financial Results. We have with us Mr. Takis Arapoglou, Chairman of the Board Mr. Nikolaos 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, the 6th June, 2019. And now I would like to pass the floor to Mr.
Nicholas Ornozis, President of Capital Link, Investment Relations Advisor of Tsakos Energy Navigation. Please go ahead, sir.
Thank you very much and good morning to all of our participants. I am Nicolas Bornodges of Capital Link, Investor Relations Advisor to Tsakos Energy Navigation. This morning, the company publicly released its financial results for the Q1 of 2019. In case we do not have a copy of today's earnings release, please call us at 21266175 66 or e mail us at 10capitallink.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. Such risks are more fully disclosed in TEN's filings with the Securities and Exchange Commission. And now I will turn over the call Mr. Takis Arapoglou, the Chairman of the Board of Tsakos Energy Navigation. Mr.
Arapoglou, please go ahead, sir.
Thank you, Nicholas. Good morning and good afternoon, everyone. Thank you for joining us today. Well, our results this quarter speak for themselves. They fully justify our business model once again, allowing us to outperform for yet another quarter in the spot market, generating ample revenues for payment of all fleet expenses, operating under 97% utilization.
It allows us to reduce debt at a very fast pace, while enabling us to continue our dividend payments and most importantly maintain a solid cash position. With hands on cost control and well structured profit sharing agreements, Penn is perfectly positioned now to benefit further from improving market conditions. I have nothing else to say and I'd like to pass the floor to Nikos Tsakos. Thank you.
Thank you, Chairman and good afternoon to all of you. Good morning. We are very happy to report a substantially profitable quarter as we had forecasted at the closing parts of the last one. It's very good to have a follow on good quarter to a strong performance at the end of the year, which means that we are starting the year on a good foot. And on top of this, we are looking at positive long term environment for our business.
The lowest new building orders in a decade, disruptions arising, supply disruptions arising from new legislation, which we're all very familiar in 2020. And in this environment, TEN has not only been able to outperform the spot market with our operational and employment strategy, but also to reduce expenses. So we have a 9% reduction of operating expenses. We should not forget that sometimes when things are very rosy on the income side, people tend to forget the defense part of the business, which is we always have to keep operating expenses on watch. We have the luxury to run an organization with on hands management and we are able to follow our expenses budgets very closely and sometimes also beat the budget by reducing expenses even further.
On top of this, something that we do not, I would say, talk about enough is that we are reducing debt by almost $2 a share year after year, which means that although we are right now very close to the completion of our new building program of $1,400,000,000 with $250,000,000 left and all of it financed, fully financed with a very small portion of CapEx remaining. We are able to be reducing debt. If you look back in 2017 early 'eighteen, now debt was approaching the $2,000,000,000 mark. According to right now, we are at close to 1.6 and going down very quickly to 1.4 and in the next couple of years breaking the 1,000,000,000 debt level. So I think this is another additional positive for the company that we do not tend to discuss as much.
It has been a very productive period. We were able to take advantage of the low market over the last 3 years and decide trying to be countercyclical as our CEO is going to talk about and purchase vessels at low cycle levels. We are almost done with that with our program. And on top of that, we have not left out the DNA of TEN, which is long term relationships and strategic alliances. And we are very happy and proud to increase our strategic alliance with a major end user by adding 2 more vessels to that.
And I mean this will bring the relationship to 7 vessels with long term employments, with 3 years of employment with significant profit sharing arrangements. In this environment, I think the only thing that we are not satisfied with or the opposite is the share price, but we hope that our results are going to make this happen at the end. And with this, I would ask our COO, Mr. Saroglou, to give us a brief update of what has happened in the last 6 months. Thank you, Nikos, and good morning to all of you.
We are very pleased to report a profitable Q1 as a result of a strong freight market environment that started during the Q4 of last year. In comparison with the Q1 of 2018, the improvement is 200%. The recovery in both the tanker and LNG markets helped the company recharter the 2 LNG vessels in the fleet at much higher accretive rates and continue to charter and recharter 10 vessels so far since the start of the year by taking advantage of the appetite by oil majors and the company's clients to fix vessels forward. In the last 3 years, the company built 19 tankers against long term industrial business. 10 is in the final stages of this 19 vessel growth program undertaken at competitive levels during the low parts of the cycle.
Of this, 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, all fully financed and chartered to major oil concerns for a minimum of 5 years will complete the company's current expansion and secure revenues going forward. The main driver behind the market strength since the start of Q4 of last year are strong global oil demand growing year over year in excess of 1,300,000 barrels per day A growing global oil economy despite headwinds and fears of slowdown from tariffs and trade wars. From crude oil exports from the United States of America currently in excess of 3,000,000 barrels per day in the last 3 out of 4 weeks reported by the agency of the United States, which is almost double from last year exports. All this adds to both ton miles and global fleet utilization.
Geopolitical tensions, supply disruptions and the U. S.-led sanctions against Venezuela and Iran has created the need to for substitute barrels and these substitute barrels travel longer distances to reach importers, refiners, consumers adding again to ton miles and global fleet utilization. We have limited vessel supply as the global tanker fleet has little growth in 2018, thanks to the highest scrapping levels since 2012. The upcoming IMO 2020 regulations should further reduce vessel capacity as we have up to 5% of the global fleet that has elected to retrofit scrubbers. We have the practice of flow spinning for everybody, gaining support and could be mandated and also the possibility of phasing out of all the tunnels in order to avoid compliance with both water ballast treatment system installation and 2020 compliance, which could keep scrapping at high levels.
The company started to fix most of the vessels in the fleet in a combination of medium to long term fixed and variable rate time charters that serve the company well as Slide 3 in our presentation shows and help tend vastly outperform the spot rate market during low to mid cycle periods while maintaining healthy returns during peak cycles as we share a significant part of the upside with charters when the market goes through an extended rally. In Slide 3, in our online presentation, we see the actual performance of the different type of vessels we operate against the spot market during the Q1 of this year and last year. We have outperformed the spot market by over 5% this year and over 40% during last year. Slide 4, we have the left side, which presents the all in breakeven cost for the various vessel types that we operate in 10. As you can see, the cost base of the fleet is low.
In addition to the low shipbuilding force, we must highlight the purchasing power of the company's technical manager, Tsakos Columbia Ship Management and the continuous cost control efforts by management to maintain a low OpEx average for the fleet. This quarter fleet OpEx is down almost 9%, low general and administrative expenses, while at the same time we keep a very high fleet utilization rate quarter after quarter, again over the Q1 of 2019, we report 97%, which we believe qualified as full employment. As we mentioned in Slide 3, TEN's flexible chartering strategy ensures that most of the time, the company outperforms the top market and thus helps the company maintain an impeccable debt service record. We currently base down debt at an average rate of $12,000,000 per month and meet all our obligations irrespective of where we are in the market cycle. Thanks to the profit sharing element that is a big portion of the fleet, TEN benefits further when market conditions improve like in the last two quarters.
Based on the current market conditions and the number of vessels operating in the spot market and in time charters with profit sharings, for every $1,000 increase in spot market rates, we have a positive $0.06 impact in annual per share impact in annual EPS. Slide 5, we have the pro form a fleet as it's currently employed. We have 31 vessels on fixed rate type charters, while 37 vessels, plus 4, 41 in total and these 4 are opening vessels during the year or 60% of the combined pro form a fleet has spot market exposure in a combination of pure spot, COAs and time charters with profit sharings and minmax formulas. On average, we have 2.2 years of employment already fixed and a backlog of $1,200,000,000 in minimum contracted revenue. Global oil demand continues to be strong.
Last year, it grew by 1,200,000 barrels per day and the forecast for this year is to grow another 1,300,000 barrels per day. Despite the softness we currently experience as we move from Q1 to the Q2 as a result of seasonal refinery maintenance in order for refineries to switch from winter production of heating oil to shallow production of gasoline and their preparation for IMO 2020 compliance, the oil price currently appears to be in a comfortable price zone good for both consumer demand and stockpiling. The market expects OpEx and their allies to gradually increase production sometimes in the second half of the year in an effort to keep the oil market balanced against further disruptions from supply outages, sanctions and or geopolitical tensions. On the supply of tonnage, the order book is currently at 3.3 percent which is low compared to historical levels. A big part of the global fleet is over 15 years and incoming regulations starting with retrofitting water ballast treatment systems from this year and compliance with IMO 2020 would withdraw vessels from the global fleet and push more tankers that are currently approaching or are above 20 years to global traffic.
This is reinforced in Slide 8, which presents the scrapping over the last few years. Again, we must highlight that last year was the highest scrapping year since 2012. The overall tanker fleet growth in the next 2 to 3 years is expected to remain in check, below 3% and hopefully decline. The graph 9, we see here on the right side of the slide a forecast from Fearnleys, a well known ship broker from Norway. As you can see, VLCC rates are expected to trend higher from the second half of twenty nineteen and reach multiyear highs going forward.
We are also positive about the market process and expect a strong market for all vessel categories. In this environment, we believe that the company's fleet is well positioned to capture market opportunities, any market opportunity that will be present. That concludes the operational part of our presentation. Paul will walk you through the financial highlights for Q1. Paul?
Thank you, George. Well, following a strong quarter 4, we were pleased to enjoy an even stronger quarter 1 with revenue of $147,000,000 a 17% increase leading to operating income 5 times higher than in the prior quarter 1 and resulting in a net income of $11,200,000 Port vessels accounted for a quarter of the fleet, the crude vessels especially well positioned to capture rates on average double those earned in the prior quarter 1. Total time charter hire amounted to over $87,000,000 again enough to cover all fleet operating costs, overhead, chartering costs and cash finance expenses, leading a surplus of $15,000,000 Hub revenue provided a further $31,000,000 despite higher fuel prices. Our product carriers, while not taking off to the same extent, were still better than average market rates. The average daily TCE rate per vessel achieved by the fleet was $21,000 a 19% increase.
The 2 LNG carriers together generated over $3,000,000 more than in the prior quarter 1 as a result of new more lucrative time charters. Total OpEx fell by 9% due to tight cost control and a stronger dollar. Daily OpEx per vessel fell 7% to almost $7,500 while daily overhead per vessel fell by 4%. Finance costs were down 2% with rising interest rates being offset by the effect of lower average outstanding loans. Our balance sheet remains strong with over $190,000,000 cash at March 31st And cash flow from time charters remains secure with quarter 1 EBITDA at $64,000,000 over 50% higher than in the prior quarter one.
This comfortably allows us to redeem our B Series of preferred shares and to pay our remaining dividend for the year and of course, as George has mentioned, to continue our perfect debt service. Debt continues to fall rapidly with $150,000,000 repaid over the past year, bringing net debt to capital to 48%, another $37,000,000 will be repaid in quarter 2. We believe our strength in quarter 1 results bodes well for our 2019 performance, although there may be refinery disruptions as preparations begin meeting IMO requirements. Ultimately, we expect such disruptions in preparations to lead to a still more promising market for both crude and product carriers later in the year. So good news all around with increased revenue and profits, decreasing costs, rapidly declining debt and positive prospects going forward.
And on this happy note, I'll hand the call back to Nikolas. Thank you, Paul. And I
think it's always very important to remember that there's not much we can do about the market. But from our side, there's a lot we can do on our operating expenses. And I think this organization with the help of the Tsakos Group is focusing on not forgetting that even in a good market, in a positive market, operating expenses are very, very important for our bottom line. And I think we need to again congratulate the team for reducing by 9% our operating expenses. And also on our chartering policy where last year we were able to outperform the spot market by 40% and already this year we are doing the same by 5% in the Q1 and actually growing as we go on since we are seeing that our chartering rates are well above the spot markets today.
However, the expectations and all our charters are looking forward for a very, as George said, for a very strong second half of the year. And we want to thank our Chairman for your good words and we will continue trying to produce better results. And with that, Nick, I would like to open the floor to any questions. Thank you.
Thank you. We will now take your first question. Please go ahead. Your line is open.
Hey, guys. This is Randy Giveans with Jefferies. How are you?
Hi, Randy.
Good, good. Few quick questions here. So first, I noticed the reintroduction of semiannual dividend payments. So if you can talk about the reasoning behind that. Will the payment be, I guess, now $0.10 per share twice per year?
And any guidance to possible increases to that number?
Yes, I think, well, as you know, because you're one of the you and Jeffers have been with us for many, many years, we have always been paying a semi annual dividend until about 5 years ago when we decided to go to quarterly. Then on top of that, we have not seen any real improvement helping our share price or the operation. And as you know, having a couple of preferred out there that are paying quarterly, we have to do, I think, a very good housekeeping. And it fits a shipping corporation much more to look at the results. Our aim is of course to maintain, as we said in the press release, the same payout.
So hopefully, we can do at least $0.10 payments, but twice a year. But hopefully, the market, these were supposed to go, we can increase that also.
Sure. Okay. And then you mentioned you reduced debt by $150,000,000 since the Q1 of last year. What is your expected kind of debt reduction for 2019 2020?
Overall, in 2019, we expect a reduction of $122,000,000 And going into 2020, it will be about $170,000,000
21.70, dollars Excellent. And then one more question just on kind of the market. Slide 9, you show a very bullish expectation for VLCC spot rates, which we concur with, especially for the back half of this year. However, you have no VLCC spot exposure until the very end of this year when 1 year VLCC comes off its time charter, I think it's in November. So how do you plan on taking advantage of this market strength?
Is it possibly acquiring some secondhand vessels or maybe even time chartering in some VLCCs for 1, 2, 3 years?
Yes. I think our retention and perhaps you know that our contracts with the RBLs are on profit sharing.
I
think that will help at least get a significant part of that upside. And we are also looking to re charter the vessel, which is opening up in, as you rightly said, in September. And so it will be a very good timing for that ship. And we are looking for at some resales or secondhand VLCCs as we currently speak. So and also the VLCC, this is an indicator of the remaining of the market.
Usually, as you know, when the VLCC market moves, then it brings up with it the Suezmax and the Aframax and the other categories, mainly on the crude.
Sure,
sure. Okay. Well, hey, I'll turn
it over. Thanks again and congrats on the possible quarter.
Thank you.
Thank you. There are no further questions at this time. Please continue.
Okay. Well, again, thank you very much for following the company. We are looking for the remaining of the 6 months to be able within the summer to announce another profitable quarter and profitable 6 months. We are preparing the company. As we said, we have complete we are almost at the end of 19 vessel newbuilding program.
Those 19 vessels we have taken delivery already and fully financed and fully employed, 15 of them. 4 of them are coming, the first one in October of this year and then one every quarter in 2020. We expect just from those ships an EBITDA of about $150,000,000 on an investment of about 1.3 $1,000,000,000 So we have positioned the company in the digital market ready to take advantage of what we hope will be a significant super cycle going forward. And having achieved a good employment results, operating expenses are going down. As Paul said, our debt has been reducing significantly.
The only thing now we need to increase is the share price and of course this will be the result of that. And with that, I will ask our Chairman to say some final words. Well,
thank you all. As I said, results speak for themselves. And I'd like to congratulate Nikos and his team and looking forward to better performance going forward into 2019.
Well done. Thank you.
Thank you. That does conclude the conference for today. Thank you for participating. You may now disconnect.