Good afternoon. Thank you for standing by, ladies and gentlemen, and welcome to the Tsakos Energy Navigation conference call on the third quarter 2018 financial results. We have with us Mr. Takis Arapoglou, Chairman of the Board, Mr. Nikolas 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 listen-only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, please press star one on your telephone keypad and wait for the automated message stating your line is open. I must advise you that this conference is being recorded today. Now I pass the call to Mr. Nicolas 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. This is Nicolas Bornozis of Capital Link, the Investor Relations Advisor to Tsakos Energy Navigation. This morning, the company publicly released its financial results for the third quarter of 2018. In case you do not have a copy of today's earnings release, please call us at 212-661-7566 or email us at ten@capitalink.com. 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. Please, we 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, 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. Arapoglou, 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 first quarter of 2018, probably the worst quarter ever, TEN posted quality performance for the first nine 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. Excluding extraordinary items that Nikolas Tsakos and Paul Durham will explain, it produced an EPS for the nine-month period very close to market expectations. Most probably, the weak market is now well behind us, and TEN is extremely well positioned to benefit from the positive market outlook. That's it from me. Over time, again to Nikolas Tsakos and his team.
Over to you, Nikolas.
Thank you, Chairman. We hope to get some praise when we produce profits. 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. Thank you anyway. For those of you diehard 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 a broken clock is right twice a day, so be it. I have to be honest and say that I have been surprised by how strong the recovery has been so far. This period reminds me of 2002. Again, in the fourth quarter, which coincides with the birth of my son. So it's a good memory. At that time, it was the beginning of the recovery that followed the Asian crisis.
Again, a long crisis, Asian crisis, topped by 9/11 effects. That was the beginning of the recovery that lasted then six blessed years. Now, 16 years later, older and wiser, we hope for at least a couple of good years of a similar market. 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 remaining of the fleet is in the lowest new building for a very long period of time. With scrapping happening, we are seeing actually fleet reduction for the first time in almost a decade. On top of that, we have the 2020 saga.
Of course, the disorder that will create, that means that we are in for an exciting ride from moving from the lows to a higher market. Our company, TEN, is well-placed with 40 out of 64 vessels already taking advantage of firmer rates that started procuring in September. With this, I will ask George Saroglou, the COO, to guide you for what the future holds and give you a little bit of the history of the past. George?
Thank you, Nikolas. The good news is that I will not talk about the past, but the future, which is much brighter. We navigated nine months of very difficult freight market conditions. However, thanks to our commercial strategy, we managed to outperform both the market and our peer groups. Now, finally, happy market days are here to stay.
For those that are following the presentation, please look at the webcast that we have. Let's start with slide number one. Here what we see, the market strength in the fourth quarter is presented in the first slide, where we compare the nine-month 2018 spot rates with the current spot rates for all vessel categories in which we operate. As you can see, VLCCs are currently averaging in excess of $56,000 versus $12,000 for the first nine months. Suezmaxes in excess of $44,000 versus $8,000. Aframaxes in excess of $28,000 versus $9,000. Panamax is $28,000 versus $7,400. MR and Handys almost $16,000 versus $10,000 at the end of September.
Main drivers behind the market strength is strong global oil demand, higher OPEC and Russian production, strong crude exports from the United States, which add to tonne-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 2012. Although OPEC and friends currently discuss moderate production cuts to avoid another buildup of global oil inventories, the main market drivers that led to the recovery of freight rates will continue to influence the tanker market next year. On the next slide, the left-hand side of the slide, we see the break-even cost of all the various vessel types that we currently operate in TEN. As you can see, the cost base is low.
In addition to the low shipbuilding cost, we must highlight the purchasing power of Tsakos Columbia Shipmanagement, 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 as full employment. TEN'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 first nine 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 stands 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 increase in spot market rates, we have a positive impact of $0.07 in the annual earnings per share. You see the full picture in slide three of how the fleet is currently chartered. We have 30 vessels on fixed- rate time charters, while 36 vessels or 55% of the fleet, in the fourth quarter of 2018 have spot rate exposure in a combination of COAs, time charters with profit sharing, and min-max formulas. Considering also the vessels that are opening for recharter in 2019, we are going to have 68% of the fleet that will earn higher freight in strong market environments next year. What we see in demand is in slide number four.
Global oil demand continues to be robust, growing above the 10-year average. This year, the International Energy Agency expects growth of 1.3 billion barrels per day, and the forecast for next year is for growth of 1.4 billion barrels per day. In the fourth quarter of 2018, for the first time, global demand for oil is expected to be above 100 million barrels per 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%, as scrapping is high, and with the new environmental regulations hitting the tanker industry for next year and a significant part of the tanker fleet approaching 20 years before 2020, the expectation is for fleet growth in the next two, three years to remain below the long-term average level of approximately 3%. In the last slide. All tanker vessel categories currently enjoy a strong fourth quarter. The company's diversified fleet has significant spot exposure in every asset class it operates, as slide seven shows. 45 vessels out of the 66 vessel pro forma fleet, or 68%, including the vessels that we hope to open in 2019, are expected to benefit from the stronger market.
We believe the drivers that 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 third quarter and nine months. Paul?
Thank you, George. Well, as chief bean counter, I thank heaven the nine months are behind us and the next nine months look very promising. In quarter three, we saw the prolonged soft market continuing until it began to turn in late September, helping revenue climb 2% above quarter three 2017, and rising more vigorously as we entered quarter four. Operating days on spot in quarter three increased, but a surge in fuel prices hit spot rates, especially the product carriers, two of which also lost days on repositioning, bringing net revenue $4 million down from the prior quarter three. However, as the market strengthens within quarter four, 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 four, LNG carrier Maria Energy saw an extension of its 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, TEN 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 Suezmaxes Euronike and Eurochampion in a sale and leaseback deal, and since then, we paid $2.7 million 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. Average OpEx per vessel has remained relatively stable for the quarter, at about $7,600 and $7,700 for the nine-month period.
Average vessel overhead costs also remained stable at just over $1,000 per day. Finance costs increased by $2.4 million, mainly due to higher liabilities, although average margins remain the same. Tanker hedges generated $2.6 million cash gains, but valuations fell by $1 million. Due to all these factors, including the costly repositioning of the two product carriers, TEN had a net loss of $14.6 million, a loss per share of $0.28, $0.04 of which were due to the added preferred stock dividends in quarter three. 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 obligations. Outstanding debt is fast declining, with $190 million repaid year-over-year. Looking at it another way, that's $2 per share extra value.
In quarter three, there was no new debt, only $49 million in repayments, bringing total outstanding debt down to $1.63 billion. Quarter four will see a further net reduction of $33 million. At quarter end, the net debt to capital was below 47%. The two Aframaxes being built for charter cost $103 million, of which $10 million was paid in quarter two. Arrangements for financing the remainder are in place at very competitive terms. This concludes my comments. Now I'll hand the call back to Nikolas.
Thank you, Paul. Let's hope that the next call will be more profitable. 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 dividends and its in service all its obligations and be left with a very healthy war chest in case we need it. Having every year, we increase by more than $2 or $3 the company by repaying our debt. 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 session. If you wish to ask a question, please press star one on your telephone keypad and wait for the automated message advising your line is open. Please state your first and last name before you ask your question. If you wish to cancel your request, please press star two. Once again, please press star one if you wish to ask a question and star two to cancel that request. We will now take our first question. Please go ahead. Your line is now open.
Yes. Hello, this is Fotis Giannakoulis from Morgan Stanley. Thank you. Nik, 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 that 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 cuts. Today's low prices and the wide difference between the WTI and Brent is giving a lot of developing countries, even large developing countries like India and China, to start their stockpiling. I do not expect a dramatic OPEC cut. We believe that having a realist, the three major producers of oil outside of OPEC or independent of OPEC, that be the United States, Saudi Arabia and Russia, they are almost in the region of 35% of world production in oil makes OPEC's reach less. I think what could happen if we see a large daily cut of about a million barrels, the market will normalize. I would rather have a longer-term normalized market.
When I say normalized, if you look at the rates that our COO talked about, I think I would be very happy to have a normalized market with VLCCs in the $40,000s, Suezmaxes in the mid-$20,000s, together with Aframaxes and so on and so forth. I think this is what we are looking at right now. We're looking at a difficult market that could be normalized if we have a million cut the next year, which I'm not sure it will happen.
Thank you, Nik. I want to ask you about any changes in the trade flows, given the U.S. exports ramping up and U.S. becoming increasingly a net exporter of crude and products. Have you repositioned your vessels differently compared to, let's say, a year ago? Did you see 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 think that's a very valid point. We're seeing a lot of our crude carriers, which we would have expected to have in the Middle East or West Africa just five years ago, right now being in the United States, a lot of them in the U.S. Gulf. As we speak today, we have ships that are earning in excess of Suezmaxes of $40,000, $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. In some cases, it's a mixed blessing. We have ships that we have to wait there for one month, earning $45,000 to $50,000 a day, but missing on the next cargoes that would be the same. Of course, this shows that there's a bit of concentration of crude carriers in the U.S. Gulf.
On the other hand, we see most of our products, including the panamax, which were in a sense considered the dead, the useless size of ships, right now 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. We have more products where usually Mediterranean and North European traders have moved to the Far East. Suezmaxes and VLCCs that used to be Middle East and West African traders have now moved mainly to the United States and exporting from there.
Our ice class vessels, depending 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 up from the Middle East and pretty much the area.
Thank you, Nik. Given all 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 look for alternative uses of capital, either acquisitions, buybacks. I was wondering if this is in your thoughts. You had recently your strategy meeting, if you discussed any alternative uses of capital rather than sitting in your balance sheet. What prevents you from buying back your stock that seems to be trading at steep NAV discount?
Thank you. I would say the motto in this company, I accept your point, the motto in this company is you only appreciate cash when you do not have it. We have made for the last 25 years, internally 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 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 results. I think that would be the priority. I would say, opportunistic acquisitions with good returns for shareholders and then dividend.
I think a buyback, that we would have to be really in a spending spree to do that. Those two, and I agree with you, are the next steps.
One last question about your views on IMO 2020. I know that you were skeptical about the rush 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? 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 Paddy Rodgers of Euronav, I will not have to get into this, with whom I think we share a lot of the same views. As you know, perhaps you have read just this week, the Port of Singapore, among other major civilized ports, is banning scrubbers, open-loop scrubbers. 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. We feel very strong with it. I think that finally the refineries and the oil companies, I think they saw that the owners have kept very strong. They did not fall in the trap. A minute number of ship owners have gone for scrubbers.
I think we will have significant distillates and for 0.5%, and why not 0.1%, which is ample in the [audio distortion] to do our job. I think if a charterer with a long charter wants to pay for a scrubber, 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 refiners’ problem. They should provide what our ships should burn safely and environmentally friendly. I believe that there is this perverse theory that I've been listening to. As you know, with my position here in Tsakos, I've been spending more time at the IMO than I want to remember. There's this perverse theory that because a lot of refineries are giving up fuel production, the fuel oil actually will be really expensive.
The difference between the point of the 0.5% and the fuel will be less. It's not here nor there, but I believe every day that goes by, there is proof that more and more quality product will be put in the market.
Thank you very much, Nik. I appreciate your insights.
Thank you.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for the automated message advising your line is open. If you wish to cancel your request, please press star two. We will now take our next question. Go ahead, your line is now open.
Hey, guys. It's Randy Giveans from Jefferies. How are you?
Hello.
Good, good. Fotis asked most of the questions there. I guess a few quick ones for me. You mentioned tanker rates across the board have pretty much doubled or even tripled during 4Q 2018. 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 that are on the open market or with forward charters, they're about the mid-40s. The Aframax is in the high 20s.
That's with about 75% of days booked?
We're talking about fourth quarter for the ships that are on the open market or with forward trading agents.
Right. With that, about 75% or so of the day is already booked for 4Q?
Yeah.
Okay. 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?
We are down, I think, to 13. We have a balance sheet of about 25 product carriers. In the last year, I think we took the view that those with the dirty market, let's call it, because it's crude and fuels, are outperforming the products. We have turned them way down to just 13 ships that are clean. A majority of those ships are on long-term charters with major oil companies moving clean products. We have seen some signs of recovery from those ships in the Far East, I would say, in the last month. We have the last of our Aframax LR1, LR2s coming up for renewal in February. I think that if the market continues, we will also turn them back. We will have one less product carrier in the water.
Sure. Okay. I guess last question here, obviously, a lot of news about OPEC meeting and Saudi, Russia, whomever, cutting about a million 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 strong and the expectation for next year is 1.4 million barrels per day drop. We have some wild cards. Iran, with the waivers being one of them. We don't know what will happen when these waivers will come closer to their end. We know that the discussion about the build of the inventories and the oversupply may be a little bit overblown, and therefore, any cuts that OPEC and friends 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's not forget that usually the market focuses on one month production data for one month, the latest data that we have from OPEC, Saudi Arabia is producing the highest that they had in quite some time. Also, trouble spots where production has not been stable, like Libya and Venezuela, appear to be coming back in a small way. If you compare their productions for 2018 and you take out the last month, you should not be certain that these gains can be sustained. 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. 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 Wasikowski 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. About nine months ago, there was almost every single charterer wanted a scrubber option for the contracts. Then, as you may know, perhaps the largest charterer is Equinor, with whom we have nine vessels for a long-term business. They had an option for scrubbers. I think they are environmentally very responsible. It's a Scandinavian company, and they gave up the scrubber. Some other of our clients for other reasons have requested for us to look into scrubbers; it is winding down. The enthusiasm of scrubbers is 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. It has been winding down.
I would say in a fleet of 66 vessels, less than 10% of our charterers have shown interest in doing the scrubbers.
Okay. That makes sense.
We are chartering ships out. Previously, I chartered ships out in excess of two or three years, but we take in the majority of the half of 2020, and charterers are happy to charter ships without any scrubber mentioned for that period of time.
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. Why the change, and what will you be using going forward?
I think we will be using exactly the method that [audio distortion] does actually use in this case.
Can you give me any color on why the change to exclude the preferred dividends this quarter, as opposed to prior quarters?
No, the actual EBITDA will be the end of the year EBITDA during the quarter period. We had discussions with the auditors, they came up that this is the right way to calculate them. We're following what the calculation is.
Okay, that makes sense. 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. Can you give a little bit more color around the rates that you were able to achieve in the third quarter, and maybe compare to the second quarter for your crude assets?
I think that this is a very good point. I think, as I said, we have outperformed the spot market by 60%. What happened, because if you remember, I've always predicted that this market will turn one day. We decided that in the third quarter, a lot of the ships that were coming up from very long and profitable time charters, to keep them on the spot, hoping that the market would turn. That brought our comparison from what we have done in the previous quarter lower because we used the repositioning and the spot market. I think, to be honest, the market changed two months later than I was expecting. We had to absorb that period between the reposition from the long time charters to the new deliveries.
Okay. That's helpful. That's it for me. I'll turn it over. Thanks for your time.
Thank you.
We have no further questions at this time.
Well, thank you very much. We're looking forward, and let's hope that this will be at least 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 cycling. We have navigated nine rough months while 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.