Good afternoon. Thank you for standing by, ladies and gentlemen, and welcome to the Tsakos Energy Navigation Conference Call on the Q3 2018 Financial Results. We meet with Mr. Takis Arapoglou, Chairman of the Board Mr. Nicolas Tacos, President and CEO Mr.
Paul Garam, Chief Financial Officer and Mr. George Feuilloglou, Chief Operating Officer of the company. At this time, all participants are in 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 call to Mr. Nicolas Bonozis, President of Capital, Inc, Investor Relations Advisor of Tacos Energy Navigation. Please go ahead, sir.
Thank you very much, and good morning to all of our participants. This is Nicolas Bornozis of Capital Link, Investor Relations Advisor to Tsakos Energy Navigation. This morning, the company publicly released its financial results for the Q3 of 2018. In case we do not have a copy of today's earnings release, please call us at 212-661 7566 or email us at 10capitallink.com, and we will email a copy to you right away. Please note that parallel to this conference call today, 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.
I repeat, www.tenn.gr. The conference call will follow the presentation slides, so please urge you to access the presentation on the webcast. Please note that the slides of the webcast will be available as an archive on the company's website 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. Ladies and gentlemen, at this point, I would like to turn the call over to Mr. Takis Arapoglou, the Chairman of the Board of Tsakos Energy Navigation.
Mr. Rapopoglou, please go ahead, sir.
Thank you, Nicolas. Good morning and good afternoon to all, and thank you for joining our call today. In the longest ever weak market in recent history, which includes the Q1 of 2018, probably the worst quarter ever, then posted quality performance for the 1st 9 months of 2018. Positive operating income, healthy EBITDA and a strong cash position. We continue to pay dividends and cover all our financial obligations.
We keep steadily reducing our debt. We maintain operational excellence and world class cost control. And excluding extraordinary items that Nikos Tsakos and Paul Darren will explain, it produced an EPS for the 9 month period very close to market expectations. Most probably, the weak market is now well behind us and Penn is extremely well positioned to benefit from the positive market outlook. That's it from me.
Well done again to Nikos Tsakos and his team. And over to you Nikos.
Thank you, Chairman, and we hope to get some praise when we produce profits. I mean, we have outperformed the market and our peer group in our results, but our aim as major shareholders in this company is also to increase profits. But thank you anyway. And for those of you die hard conference call followers, I've been saying in the last calls that the market was showing signs of improvement. It finally has happened.
Well, again, even broken clock, it's like twice a day, so be it. But I have to be honest and say that I have been so tired by how strong the recovery has been so far. This period reminds me of 2,002, again, in the 4th quarter, which coincides with the birth of my son, so it's a good memory. And at that time was the beginning of the recovery that followed the Asian crisis. Again, the loan price, the Asian crisis topped by the nineeleven effects.
And that was the beginning of a recovery that lasted then 6 blessed years. Now 16 years later, older and wiser, we hope for at least a couple of good years of a similar market. And I think we are getting close to it. As we said in our last call, it has come to fruition. The supply and demand correlations are lining up.
Other than the VLCCs, which also are being absorbed, the remainder of the fleet is in the lowest new building for a very long period of time. And with scrapping happening, we are seeing actually fleet reduction for the first time in almost a decade. And on top of that, we have the 2020 saga. And of course, the disorder that we will create that will that means that we are in for an exciting ride from moving from the lows to a higher market. Our company, Tern, is well placed with 40 out of 64 vessels already taking advantage of earn rates that started during during in December.
And with this, I will ask George Saron, the COO, to guide you on what the future holds and give you a little bit of the history of the past. George? Thank you, Nicolas. The good news is that I do not talk about the past, but the future, which is much brighter. We navigated 9 months of very difficult face market conditions.
However, thanks to our commercial strategy, we managed to outperform both the market and our peer group. And now finally, happy market days are here to say. For those that are following the presentation, please look at the webcast that we have. Let's start with Slide number 1. Here what we see the market trends in the Q4 is presented in the first slide, where we compare the 9 month 2018 spot rates with the current spot rates for all the certain categories in which we operate.
As you can see, yields in fees are currently averaging in excess of $56,000 versus $12,000 for the 1st 9 months, U. S. Maxx in the case of $44,000 versus $8,000 after Maxx in excess of $28,000 versus 9, Panamax is 28 versus 7,400 AMRs in handys almost 16,000 versus 10,000 at the end of September. Main driver behind the market strength is strong global demand, higher OpEx and Russian production, strong crude export for the United States with up to ton miles and limited vessel supply as the global tanker fleet had very little growth during this year, thanks to the highest scrapping levels we have experienced since 2013. Although OPEC and France currently discuss moderate production costs to avoid another buildup of global oil inventories, the main market drivers that led of the recovery of freight rates will continue to influence the tanker market next year.
On the next slide, the left side of the slide, we see the breakeven cost of all the various vessel types that we currently operate in FEN. As you can see, the cost base is low. In addition to the low shipbuilding cost, we must highlight the purchasing power of Tsakos Volundia Ship Management, the technical manager of the company and the continuous cost control efforts by management to maintain the low OpEx average for the fleet, while keeping a very high fleet utilization quarter after quarter, again over 96% that we believe qualifies for full employment. CEM's diversified fleet with the optionality it offers combined with a flexible chartering strategy ensures that even in weak markets like the one we have experienced in the 1st 9 months of the year, the company continues to maintain an impeccable debt service record and meet all its obligations. In addition, thanks to the profit sharing element that is incorporated in most of the company's chartering arrangements, it tends to benefit when market conditions improve.
Based on the current market strength and the number of vessels operating in the spot market and in time charters with profit sharing, for every $1,000 in this spot market rates, we have a positive impact of $0.07 in the annual earnings per share. We see the full picture in Slide 3 of how the fleet is currently chartered. We have 30 vessels on fixed rate time charters, while 36 vessels for 35% of the fleet in the Q4 of 2018 has spot rate exposure in a combination of COAs, time charter refurbishing and min max volumes. Considering also the vessels that are opening for its charter in 2019, we are going to have 68% of the fleet that will earn higher rate in strong market environments next year. What we see in demand is in Slide number 4.
Global oil demand continues to be robust, growing above the 10 year average. This year, the International Energy Agency expects growth of 1,300,000 barrels per day and the forecast for next year is for growth of 1,400,000,000 barrels per day. In the Q4 of 2018, for the first time, global demand for oil is expected to be above 100,000,000 barrels a day, which is a big record. The next two slides a little bit about the supply on the fleet. What we have seen is fleet growth year to date is low, less than 1%, our scrubbing is high and with the new environmental regulations keeping the tanker industry for next year and the significant part of the tanker fleet approaching 20 years before 2020, the expectation is for fleet growth in the next 2, 3 years to remain below the long term average level of approximately 3%.
In the last slide, all tanker vessel categories currently enjoyed a strong 4th quarter. The company's diversified fleet has significant spot exposure in every asset class it operates as Slide 7 shows. 45 vessels out of the 66 vessel pro form a fleet of 68%, including the vessels that we've already opened in 2019 are expected to benefit from the stronger market. We believe that drivers are finally led to the recovery of freight rates will continue to influence positively the market next year, helping the company to return to profitability. That concludes the operational part of our presentation.
Paul will walk you through the financial highlights for the Q3
of 29 months. Paul? Thank you, George. Well, as Chief Bean Counter, I think, has on the 9 months are behind us and the next 9 months look very promising. In quarter 3, we saw the prolonged soft market continuing until it began to turn in late September, helping revenue climb 2% above quarter 3 2017 and rising more vigorously as we entered quarter 4.
Operating days on spot in quarter 3 increased, but a surge in fuel prices hit spot rates, especially the product carriers, 2 of which also lost days on repositioning, bringing net revenue $4,000,000 down from prior quarter 3. However, as the market strengthens within quarter 4, we are now seeing more consistent signs of recovery with crude carriers now obtaining rates not enjoyed for over a year. In addition, recently in quarter 4, LNG carrier Neo Energy saw an extension of this time charter at a considerably higher rate, well above breakeven. With nearly 40 vessels either on spot or on time charter with profit share and with several more tankers to come off time charter in forthcoming months, then is in an
excellent position to take advantage of a stronger market,
leaving remaining vessels to provide a secure cash flow. Last December, we sold Suezmax's Euroniki and Euro Champion in a sale on leaseback deal. And since then, we paid $2,700,000 quarterly to charter in the vessels. However, having repaid the debt on those vessels with the proceeds, the charter in payments are mostly offset by the end of associated quarterly loan and interest installments. Our portfolio fixed vessel remained has remained relatively stable for the quarter at about $7,600 and $7,700 for the 9 month period.
Average vessel overhead costs also remained stable at just over $1,000 a day. Finance costs increased by $2,400,000 mainly due to higher LIBOR, although average margins remain the same. Oncohedges generated $2,600,000 cash gains, but valuations fell by $1,000,000 Due to all these factors, including the costly repositioning of the 2 product areas, KEN had a net loss of $14,600,000 a loss per share of $0.28 $0.04 of which were due to the added preferred stock dividends in quarter 3. We believe 2018 losses are now behind us and we shall see more positive results in 2019. We continue to maintain a strong liquidity to meet our debt service and other operations.
Outstanding debt is fast declining with $190,000,000 repaid year on year. Looking at it another way, that's $2 per share extra value. In quarter 3, there was no new debt, only $49,000,000 in repayments, bringing total outstanding debt down to 1.6 $3,000,000,000 Quarter 4 will see a further net reduction of $33,000,000 At quarter end, net debt to capital was below 47%. The 2 Aframaxes being built for charter cost $103,000,000 of which $10,000,000 was paid in quarter term. Arrangements for financing the remainder are in place at very competitive terms.
And this concludes my comments. And now I hand the call back to Nicolas.
Thank you, Paul, and I'm not sure that Mexico will be more profitable. But I think it is very important to again explain that TEN's policy of running a very tight ship both operationally and commercially has allowed the company for the last 25 years to continuously pay its dividend and its service or its obligations and be left with a very healthy work just in case we need it. And having every year, we increase by more than $2 or $3 the company by repaying our debt. And with that, I would like to open the floor for any questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer question. Please go ahead. Your line is now open.
Yes. Hello. This is Fotis Giannakoulis from Morgan Stanley. Thank you. Nick, both you and the Chairman mentioned the improvement of the market.
I want to ask you, what do you think is different this time given the overhang of the potential cut from OPEC and Russia, what makes you sound that optimistic about any potential cut next year will not derail the recovery of the tanker market?
Thank you very much. Well, I think that the market right now has learned to live with Today, it's low prices and the wide difference between the W7C, and a brand is giving a lot of developing countries, even smart developing countries like India and China, to start their stockpiling. I do not expect a dramatic OPEC cut. We believe that having really the 3 major producers of oil outside of OPEC or independent of OPEC, that did the United States, Saudi Arabia and Russia, I mean, they are almost an extra 35% of well production in oil makes OpEx richer less. I think what would happen if we see a large daily cash of about a medium balance, the market will normalize.
I would rather have a longer term normalized market. And when I say normalized, if you look at the rates that Iqiyo talked about, I think I will be very happy to have a normalized market with Brazil in the 40s, 1st matches in the Middle Countries together with Astra Maxes and so on and so forth. So I think this is what we are looking at right now. We're looking at the at the top market that could be normalized if we have
some $1,000,000
cut the next year, which I'm not sure it will happen.
Thank you, Mick. I want to ask you about any changes in the trade flows given that
the U. S. Exports are ramping
up and the U. S. Crude and products. Have you reposition your vessels differently compared to, let's say, a year ago? Did you see the more delays, more vessels instead of concentrating in the usual areas moving to different directions.
How does this impact your trading activity and the positioning of your fleet?
Yes. I mean, that's a very valid point. We're seeing a lot of our crude carriers, which we expect to have in the Middle East or West Africa, just 5 years ago right now being in the United States, a lot of them in the U. S. Growth.
As we speak today, we have ships that are earning in excess of Suezmaxes of $50,000 or $60,000 depending which day the vessel was fixed. That are because of the backlog, there is a floating storage right now in the U. S. Gulf. And in some cases, it's a mixed blessing.
We have seen that we have to wait, therefore, 1 month earning $45,000 to $50,000 a day, but meeting on the next target that could be the same. But of course, so this shows that there's a leak of concentration of crude carriers in the U. S. Gulf. And then on the other hand, we see most of our products, including the Panamaxes, which were in a sense considered the blood useless size of ships.
Right now, we're trading a lot in the clean in the Far East. That market is starting to heat up, and that has to do a lot with people, as you said, moving cargoes to be ready for 2020. So we have more products, we're usually Mediterranean and North European traders have moved to the Far East. Suezmax in that view and in VLCC that used to be Middle East and West African traders have moved mainly to the United States and exporting from there. So and then our ice class vessels depending on what will happen with the weather, we have actually kept all of them open right now because we're expecting to have increased product coming out from the MERS market to pretty much there.
Thank you, Mick. Given of this positive outlook and the recovery of the rates, You hold a very strong liquidity position, a lot of cash in your balance sheet. Of course, you have to be prudent regarding the repayment of your debt. But it seems that the market helps to have more flexibility and then look for alternative uses of either acquisitions, buybacks. I was wondering if this is in your thoughts, you had recently your strategy meeting.
If you discuss any alternative uses of capital rather than sitting in your balance sheet And what prevents you from buying back your stock that seems to be trading at steep NAB discount?
Thank you. Well, the I would say the motto in this company, and I appreciate your point, the motto in this company is you only appreciate cash when you do not have it. And we have made for the last 25 years, and then we decided not to try this motto because having ample liquidity, of course, it puts us in a strong position and gives us the flexibility to move in acquisitions. I think one of the things that would make us would not make anybody more happy than myself and the management here that control more than 40% of the company is to be able to announce a significant increase in dividend rather than buyback when the time comes with the next result. So I think that would be the priority.
I would say, opportunistic acquisitions with good returns for shareholders and then dividend and I think a buyback that will have to be really, really in a spending spree to do that. But those 2, and I agree with you, are the next steps.
And one last question about your views on IMO 2020. I know that you were skeptical about the RAS of the industry and the regulatory authorities to move so quickly before the fuel situation, the new compliant fuel safety has been resolved. Do you feel more confident right now that the industry can safely transition to 2020 with safe fuels. Has your view on potentially installing scrubbers has changed? And where do you see the spread developing?
It seems that there are many conflicting views among ship owners. What is your view?
I will keep it simple. I think my views on scrubbers, please refer to Pappy Rogers from Euromotive. So I will not have to get into this, with whom we I think we share a lot of the same views. As you know, I am as you know, and perhaps you have read just this week, the Port of Singapore, among other major civilized ports, is burning scrubbers, open loop scrubbers. So I think this is a big victory.
What we have said all along, the issue of 2020 is a refining problem, not a shipping problem. And this is where we feel very strong with it. And I think that finally, the refineries and the oil companies, I think they saw that loaners have kept very strong. They did not fall in the trap. A minute number of ship owners have gone for scrubbers.
So I think we will have significant distillates in 'five and why not 'one, which is ample in the airbag to Georgia. So I think if I think the charter with a long charter who wants to pay for a scrubber, I mean, this is something we'll consider. We are client friendly. We don't have any reason against. But as a company, we feel very strongly that this is a refinery problem.
They should provide whether ships should burn safely and environmentally friendly. I believe that there is this reverse theory that I'll be listening to, as you know, with my position as in Santander, I've been spending more time at the IMO than I want to remember. There is this reverse theory that because a lot of the refineries are giving up fuel production, the fuel oil actually will be very expensive. So the difference between the Boeing profile and the fuel will be less. It's not here nor there, but I believe every day goes by, there is proof that more and more quality product will be put in the market.
Thank you very much, Mick. I appreciate your insights.
Thank you.
Thank you. We will now take our next question. Go ahead. Your line is now open.
It's Randy Giveans from Jefferies. How are you?
Good. Good. Fotis asked most of the
questions there, but I guess a few quick ones for me. So you mentioned tanker rates across the board have pretty much doubled or even tripled during 4Q 'eighteen. So can you give some guidance on your quarter to date spot rates earned on some of the open Aframaxes or the Handymaxes?
Sure. I think what we've done in our Suezmaxes, the brand, the open market, they're about the mid-40s. And the aftermath is in the high 20s.
And that took about 75% of days.
You're talking about 4th quarter for the ships that are on the open market or with 4th 39.
Right. So with that, about 75% or so of the day is already booked for 4Q?
Yes.
Okay. And then with the crude tanker rates still outperforming product tanker rates,
have you thought about switching more
of your product tankers over to the crude trade?
Yes. We're down, I think, to 13. I mean, we have a balance sheet of about 25 product carriers. But in the last year, I think we took the view that those that the dirty market portfolio, because it's crude and fuels, are outperforming the products. So we have turned them down to just 15 ships that are keeping a majority of those ships are on long term charters, which makes well combined people moving ship products.
And we have seen some signs of recovery from those ships in the Far East, I would say, in the last month. So we have the last of our Aframax LR1 LR2 coming up for renewal in February. I think the market continues, we will also turn it back.
Sure. Okay. And then I guess last question here. Can you kind of obviously a lot of news about OPEC meeting in Saudi Russia, whomever, cutting about 1,000,000 barrels a day. Can you quantify this impact
on the crude tanker trade?
Well, as we previously said, we are in an environment that demand is very, very strong and the expectation for next year is 1,400,000 barrels per day growth. Now we have some wildcards, I mean, Iran with the waivers being one of them. So we don't know what will happen when these waivers will come closer to their end. And we know that the discussion about the build of the inventories and the order supply may be a little bit overblown. And therefore, any cuts that OPEC and France might decide to do, we believe they are going to be moderate and therefore the effects on the tanker industry are not going to be significant.
Let me forget that usually the market focuses on 1 month production data for 1 month And the latest data that we have from OPEC, Saudi Arabia is producing the highest that they had in quite some time. And also trouble spots like where production has not been stable like Libya and Venezuela appear to be coming back in a small way. But I mean, if you compare their productions for 20 18 and you take out the last month, you should not be certain that these gains can be sustained. And we think all these things are under consideration for those people that will make the decision whether to cut and by how much.
Got it. Got it. All right. Well, hey, that's it for me. Thank you.
Thank you. We will now take our next question. Please go ahead. Your line is now open.
Hey, guys. This is Greg Wazikowski on for Mike Webber at Wells Fargo. Starting with the scrubbers, have your charters indicated any interest in installing the scrubbers? Or do you anticipate them expressing more interest in the next few months?
Yes, hi. Well, about
the year, no, I
would say about 9 months ago, there was almost everything in charter, one that is other option
for the contracts. And then
as you know, you may know we have a very one of our perhaps the largest charter is Equinor, whom we have 9 vessels for a long term business. And they had an option for scrubbers.
And I
think they are environmentally very responsible, we sell the Netherland Company and they decided they gave up the scrubbers. Some other of our clients for other reasons have requested for us to look into scrubbers, but it has it is winding down. The inclusion of scrubbers becoming less and less. We used to have banks running around trying to offer various ways of finance. A lot of those banks now are looking at it as not a very green approach and a lot of the shareholders are criticizing it.
So it has been winding down, I would say, from in a fleet of 66 vessels, less than 10% of our charter has some interest in doing that in scrubbers.
Okay. That makes sense.
And we are starting to ship out on that. We'll see a charter ships out in a case of 2 or 3 years, certainly take in the majority of the back half of 2020 and certainly are happy to charter ships without any calculation for that period.
Okay. And then from a modeling perspective, correct me if I'm wrong, but it looks like you may have changed your methodology for calculating adjusted EBITDA from this quarter from last quarter to exclude the effects of the preferred dividends. So why the change and what will you be using going forward?
I think we'll be using exactly the method that we have
Okay. And is it and why did you give me any color on why the change to exclude the preferred dividends this quarter as opposed to prior quarters?
Well, that was I mean, we will the actual EBITDA will be the end of the year EBITDA during the period that we had discussions with the auditors and they came up that this is the right way to calculate. I'm not so we'll follow what the calculation is.
Okay. That makes sense. And then just on the crude spot rates,
I
think I saw somewhere in the data kit, it says that the Q3 rates averaged lower than Q2 rates for your crude carriers when many of your peers reported higher Q3 rates than Q2. So can
you just can you give a little
bit more color around the rates that you were able to achieve in the Q3 and maybe compare it to the Q2 for your crude assets?
Yes, I think, this is a very good point. I think I said we have outperformed the spot market by 60%. What happened, because if you remember, I've always predicted this market will turn one day. But so what we had a lot of our we decided that in the Q3, a lot of the ships that were coming up from very long and profitable time charters, we keep them on the spot hoping that the market will turn. So that brought our comparison from what we have done in the previous quarter lower because we used repositioning in the spot market.
I think, to be honest, yes, the market changed 2 months later than I was expecting. So we have to absorb that period of between the reposition from the long time charters to the new deliveries.
We have no further questions at this time.
Well, thank you. Thank you very much. And we are looking forward and not so glad this will be at least in the beginning of a positive couple of years. In the meantime, we're always making sure that our company outperforms the peer group and the market regardless of the cycle. We have navigated 9 rough months without even keeping our liquidity and our dividend intact.
And we hope to be able to have more of that. Thank you very much.
That does conclude the conference for today. Thank you for participating. You may all disconnect.