Thank you for standing by, ladies and gentlemen, welcome to the Tsakos Energy Navigation conference call on the fourth quarter 2017 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, 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. At which time, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. I must advise you that this conference is being recorded today. Now I pass the floor to Mr. Nicolas Bornozis, President of Capital Link Investor Relations Advisor of Tsakos Energy. Please go ahead, sir.
Thank you very much, 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 fourth quarter of 2017. In case you do not have a copy of today's earnings release, please call us at 212-661-7566, email us at ten@capitalink.com we will email a copy to you 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 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. Before turning the floor over to the company, I would like to mention two things.
First of all, the conference call today is being held from the Metropolitan Club in New York, where we are hosting the 12th Annual Capital Link International Shipping & Offshore Forum. The management of the company is in New York. It is at the conference, they will have a full day of meetings with investors and analysts. So they will have the chance to interact with a lot of our conference call participants live today. Second, I would like to mention that on Wednesday, March-
14th.
14th, the management of TEN will open the New York Stock Exchange, ringing the opening bell, celebrating 25 years of life as a public company. A major landmark in the company's history. Please watch for the opening bell on Wednesday, March 14th. Now I will turn over the call to Mr. Takis Arapoglou, the Chairman of the Board of Tsakos Energy Navigation. Mr. Arapoglou, please go ahead, sir.
Thank you, Nikolas. Good morning and good afternoon to everyone. Thank you for joining us today for the announcement of our fourth quarter and full year results. As you heard, we're celebrating 25 years as a public company, and we're doing this in great style. Despite the difficult market throughout 2017, we recorded another profitable year. We maintained our dividends and successfully completed the most ambitious state-of-the-art new building program in our history. These are all achievements we're very proud of, as they clearly distinguish us from our peers. Our strategy to lock in more than 70% of our fleet in long-term charters early enough in the previous cycle with a big portion of profit-sharing agreements has created an invaluable buffer of income in poor markets and plenty of upside going forward.
As a second equally valuable achievement, our team continues to drive, as the CEO will explain, operating excellence by steadily reducing costs and securing record fleet utilization. Congratulations once again to Nikolas Tsakos and his team for this great performance and for placing us in an ideal position to greatly benefit from a market improvement going forward in 2018 and beyond. Thanks for listening. Over to you, Nikolas Tsakos.
Thank you, Chairman, and good morning from sunny New York. We were hoping it would be a bit colder to help our rates move, but it's nice to be here. It's nice celebrating 25 years as a publicly traded company with a continuous record of profitability and dividend payments. Looking around the tanker environment, the spot rates are still on the good side in a negative mode. We see more and more life happening on the clean, and we believe that the tanker rate darkest hour might be close to the bottom right now, hoping to see better rates in the second part of 2018. The strategy we have implemented with the help of the board is able to maintain the company's profitability, even in a very negative market environment, and allows us to be able to continue our dividend payment policy.
Looking forward to a better market and hopefully much higher profits and higher dividend going forward. With this, I will ask George to give us the details of a very exciting 2017, where we completed a huge new building program. I was looking at our presentations this week. It's the first time we're not reporting new building deliveries coming forward, all of the ships being fully charted for a very long period of time. With that, George, please go ahead.
Thank you very much, Nikos. The company reported today another profitable quarter and profitable year. 2017 has been a profitable year for TEN, despite the weakest spot market for winter months that we can remember. Lower OPEC production, supply outages, and lack of weather delays prevented the spot market from stepping up to seasonally expected winter trading freight levels. In this environment, TEN's proven commercial strategy of fixing most of the vessels on medium to long-term time charters paid dividends again, as it helped the company to outperform the 2017 average freight indices in all vessel classes the company operates, helped pay for all operating and finance expenses, and guaranteed profitability. We believe that the tanker rates have reached the low point of the current cycle, with recovery expected in mid to late 2018.
In TEN, having completed in the fourth quarter of 2017 the biggest fleet expansion program of our corporate history after following the delivery of the last vessel in a 15 series new building vessel order, we are well-positioned to take advantage of the market's expected recovery and new upcycle. 2018 will mark the first year that these 15 new building vessels that had medium to long-term employment attached to first-class charterers ranging from minimum two to maximum 12 years, will make full impact on the company's financial results with an expected 30% increase in revenues, assuming only their minimum rates for 2018. For those of you who are connected to the internet and our website, there is an online slide presentation whose format we will follow during the call. Turning to slide three with the key corporate highlights.
We have 65 vessels as an operating fleet, 25 vessels have ice-class capabilities. The whole fleet is ready to take advantage of the stronger freight market expected ahead of us. Average age of the fleet, 7.7 years versus 10.3 years for the world tanker fleet. A balanced employment strategy that takes advantage of market peaks with profit-sharing arrangements. Out of the 65 vessel fleet, we have 50 vessels on secured employment contracts with an average duration of 2.6 years. The emphasis is on charters with profit-sharing arrangements that enable TEN to take advantage of spikes and stronger freight markets. Minimum contracted secured revenue of $1.3 billion with potential additional revenues from profit-sharing arrangements. Modern, diversified fleet covering client transportation requirements in crude products, shuttle tankers, and LNG, and being the carrier of choice for many of the top oil majors, commodity traders, and refineries.
Highly efficient operator with consistent high fleet utilization at 98% for 2017. The next slide has the main financial highlights of our press release, which Paul Durham will present in more detail. I would like to just highlight the profitability, the company's strong financial position, and continuous cost control that reduced daily operating expenses with the help of the company's technical manager. Slide 5 has a breakdown of the current fleet of 65 vessels. We have 47 vessels that are engaged in crude trading, 13 vessels are doing product trades. We have three shuttle tankers and two LNGs. Slide 6 lists all of TEN's clients. As you can see, all of them are blue-chip names with whom the company is doing repeat business over the years, thanks to the modern fleet, the quality of service, and safety record of the whole enterprise fleet.
You see 10 names there that generated 72% of the 2017 revenue. Strong, secure coverage with upside potential. We have already announced during 2018 the charter extension of seven Panamaxes and one Handysize tanker in direct continuation to existing long charters. Four Panamaxes have their charters with min-max profit sharing extended until 2021, and three Panamaxes plus the one Handysize tanker until 2019. We also had one more Suezmax being fixed to an existing client on a three-year charter with profit-sharing arrangement. Currently, we have 50 vessels out of the 65 vessel fleet fixed under secured revenue contracts via combination of time charters and time charters with profit sharing and COAs. 38 vessels are on the market-related charters, including the vessels currently trading in the spot, securing the company's ability to immediately capture the market's upside.
In the slide, these vessels are colored red and colored half red and half blue. The revenues expected from the vessels in the fleet with secure employment cover the company's annual operating and financial obligations. The new building program, which we just concluded, is on slide 8. These are the 15 new building vessels that we took delivery since 2016. All vessels are currently tied on medium to long-term time charters. All vessels are fully integrated in the fleet and expect to contribute at least a 30% increase in revenues in 2018, considering only the minimum base rate that some of these vessels have. Slide 9 presents at all the break-even cost for the various vessel types that we 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 TCM and the stringent cost control by management in order to maintain a low OpEx average for the fleet while keeping a very high fleet utilization rate quarter after quarter that we believe qualifies as full employment. 77% of the fleet is tied to secure revenue contracts that cover the company's annual obligations. In addition, the combination of time charters with profit sharing, COAs, and spot charters guarantees the company a share of the market's upside every time we have a spike or a sustained strong freight market. Based on the current number of vessels operating in the spot market and in time charter with profit sharing, for every $1,000 increase in the spot market, this has a positive $0.15 impact in annual earnings per share. The market in slide 10.
Global oil demand continues to grow above historical growth levels. This trend is expected to continue in 2018, as demand is forecasted to grow by 1.5 million barrels per day. Global oil inventories are falling towards the 5-year average, which could lead to a change in OPEC and non-OPEC current policy of production cuts once the goal is achieved. Improving economic conditions in OECD countries and the low oil price environment continue to support strong demand in the USA, in Europe, in China, and in India.
We should also note that with U.S. crude oil production rising above 10 million barrels per day for the first time since 1970, and U.S. exports of 1.4 million barrels per day and growing, new trading groups are developing, which increase ton miles and improve the utilization of the global fleet, thanks to the longer distance nature of these voyages. On the supply of tankers, tanker fleet growth is expected to fall this year and next on lower deliveries and higher scrapping. A big part of the existing tanker fleet, as you see in this slide, is over 15 years. The implementation of new environmental regulations with high compliance cost and charter discrimination against older tonnage should lead to an increase in scrapping. 2017 has been the highest scrapping year since 2013. We see the scrapping pace continuing in the early part of 2018.
In view of all that, we announced today another dividend of $0.05 per share to be paid on May 10th, to the shareholders of record on May 3rd. In total, since 2002, TEN has paid $10.66 in cash dividends or in excess of $461 million. This compares with a listing price in our IPO of $7.50. The average yield since the New York Stock Exchange listing in 2002 is 5.25% per annum. That concludes the operational part of our presentation. Paul will walk you through the financial highlights for the quarter and the year. Paul?
Thank you, George, and welcome from a relatively sunny Athens. Despite a very difficult 2017, TEN achieved a net income of $20.4 million in the year before a loss of $3.9 million on the sale of two vessels and impairment charges of $8.9 million. Quarter four ended with net income of $2.7 million before the non-cash non-recurring items. Revenue after voyage expenses amounted to nearly $107 million and near 8% increase over the previous year, due mainly to the addition of seven new vessels. The quarter four and annual average daily TCE rate was about $1,000 lower than 2016. A modest drop because three-quarters of the fleet was on time charter. This strategy allowed time charter revenue alone to cover all OpEx, commissions, overhead, and finance costs for the whole fleet and still leave a net surplus of $19 million.
A further $21 million of net revenue from spot vessels resulted in total net cash generation of $40 million, enough to cover much of the scheduled debt repayments in quarter four. Our Aframaxes achieved good overall rates in quarter four in a bad market. With an average daily TCE rate of over $19,000. Our Suezmax has achieved an average of nearly $17,000. Product carrier rates were similar to the prior quarter four, but have improved going into quarter one. Higher total OPEX and depreciation were due to increased fleet size. However, the daily average OPEX per vessel remained low at $7,800 in quarter four and $7,700 for the year, despite a 9% weakening of the dollar, which affected crew and repair costs. Average daily G&A costs remained low and actually fell 13% year-on-year.
Increases in finance costs in quarter four and in the year were mainly due to increases in loans and in LIBOR, partly offset by bunker hedge cash receipts and positive valuation. In quarter four, scheduled loan repayments were $48 million and $36 million was repaid on selling two older Suezmaxes, Eurochampion and Euronike, in a sale and leaseback deal which freed $16 million. There was new debt in quarter four of $23 million on our last new building delivery, bringing total debt to $1.76 billion at year-end, exactly the same as at the start of 2017. Net debt to capital fell to below 51%, even after 7 new vessels. We have strong liquidity. We had $200 million cash at year-end. We have secure cash flow from time charters, and we aim to sell more of the elderly vessels in the near future.
This concludes my comments, and now I'll pass the call back to Nikolas.
Thank you, Paul, and looking forward to bigger numbers next time. Well, 2017 has been a very pivotal year for our company. We were able to accomplish the largest growth in the 25-year history of the company. I think what is important to leave you with is what Paul mentioned, that we increased the size of our fleet by 30% and we kept our debt exactly the same as it was a year ago. I think this is very important for this company. It is paying about $15 million of debt reduction a month, and at the same time has able cash to continue paying a dividend to its shareholders. I think this is at the lowest part of the market.
We hope that the way 2017 was operationally a very important year, 2018 to be a very important year for the turning around of our share price and the company's earnings. What we have done is we have positioned the company to be able to take advantage of this by maintaining our base. As Paul said, we cover all our operating expenses and a very big part of our financial cost just from the ships on time charter, and then we let the ships on the spot market hopefully enjoy a significant net income and dividend distribution. On that, I would like to open the floor for any questions. Thank you.
Thank you very much, sir. Ladies and gentlemen, if you have a question, please press star one on your telephone keypad. Our first question is from James Jang from Maxim Group. Please go ahead.
Hey, good afternoon, guys. There's news about possible fleet expansion. Are you guys looking to acquire any additional tonnage in this year?
Well, I think we are looking right now to digest. I think George described it very well that we just had a very big bite last year of 15 vessels, so we're digesting it. I think so far the digestion is working well. As soon as we digest, then of course our appetite will start again. Again, only for vessels with employment or secondhand ships. I think one of the segments that we are looking to increase our presence, and we got a very firm decision from our board, is on the gas side, on the LNG. We believe that LNG is a very good complementary feature to our existing fleet, and I think this is a priority. After 15 vessels in majority crude carriers last year, I think this is gas time according to our plans.
Okay, great. Any updates on, I guess, plans for the Millennium? Are there any renewal plans for that or are you guys still operate? What's your plan? Just trying to up their age, you took their charge this quarter. Is this something that you're looking to possibly divest this year?
Yes. I think being Greek, we tend to be naturally sentimental with our ships. I think the Millennium has served us very well since approaching her 20th year anniversary this summer. From her delivery, 15 of those years on a long time charter, very lucrative time charter, then three of them continued, again, as a storage project. Still doing very well. I think you are right, we will be divesting. As chairman of INTERTANKO, I try to encourage the majority of my members to scrap vessels. If I did not scrap the Millennium, I think they will shoot me. I think this is something we will be looking to divest from the ship, perhaps within this or next quarter.
Okay, great. Thank you. Just moving on to the age of the vessels. With LDT prices kind of moving up, would you look to divest more older tonnage, some of the vessels moving into, I guess, 15, 16 years, or is-
Yeah
the Millennium the only vessel so far?
Well, the Millennium, the Silja are our first candidates. With the Millennium, we expect a sale at around $20 million, which is going to reduce debt by $12 million and increase also, we have another $8 million in cash to our bank. I think, the same with the Silja. We'll be looking to divest from the older ships.
Okay, great. The sale and leaseback transaction, can you give some color on that deal? When are the purchase options, if there are purchase options?
Yeah. This is a pure sales and leaseback, which does not contain options. If you have options, it stops being an operating lease and it becomes a financial lease, this is something you do not want to do. There are no options in this. It's a five-year straight transaction, and if everything goes well, after five years, we're going to receive another $13 million of cash for the two vessels.
Okay. It seems like you had enough cash. What was the rationale behind the transaction?
Excuse me?
What was the rationale behind the sale and leaseback?
This is a very good point. We have been working on sales and leaseback transactions for the company back in the '90s and the years 2000s. I think this is actually our fifth sales and leaseback transaction. All of them have proven to be very, very profitable for the company. We looked at it as another way to finance growth. As you know, we always like to look in the market. I think this has been a vehicle, and it has given us the ability to sell two of our, call it, first generation Suezmax at what looks to be a very positive price.
Okay. That's fair. I just have two more. One is with the Panamax charter extensions, can we assume those are just extensions at the prior terms, with the prior profit-sharing agreements in place?
They have profit-sharing agreements, and I would say that there has been a reduction because of the market to the minimum.
Okay.
However, everything else is up for a 50/50 profit share with no cap.
Okay. With no cap. Okay, got you. The final question is, I know you mentioned the LNG carriers. What are the shipyards like in terms of LNG carriers? Are they aggressively marketing these vessels, or what's the outlook right now?
I would not say aggressively marketing because there are not that many clients. In order to aggressively market, it's easier to do dry cargo ships or even conventional tankers where you have a big clientele base. Yeah, I would say there's about a dozen companies that look in gas and, of course, there is marketing. Right now, we believe the values are on the lower side because of the situation in the Far East. It could be a good opportunity to have a couple of new vessels.
Okay. Would you place those orders at this point in the cycle speculatively, or would you still stick to having a project tied to it?
We keep our hands tied behind our back. We only release them when we have a project. We do not sign anything without a project.
Got you. Okay. Thank you, guys. I'll drop off now.
Thank you. Thank you. See you soon.
Thank you very much, ladies and gentlemen. As a reminder, it's star one for questions. Our next question is from Michael Webber from Wells Fargo. Please go ahead.
Hey, good morning, guys. How are you?
Hi. How are you, Mike?
Good. Hey, Nick, I wanted to touch base on your LNG comment. It's obviously pretty pointed and certainly seems like it's something you guys are going to be focusing on once you're done digesting and right-sizing the balance sheet. I'm just curious, you mentioned not doing something on spec, and if my memory serves, I believe one of your carriers was on spec from several years ago. I'm just curious how you approach becoming a bigger presence in that market. It seems like the companies that have nibbled around LNG have had a hard time really making money in that business. The spot returns have actually been pretty horrible for the past four or five years, and the asset value's never cleared to a point where a counter-cyclical investor like yourself could actually step in at a price point that really made a lot of sense with a low breakeven.
I'm just curious, when you're looking at the market today, are you thinking an order with a couple options and you're going after smaller tenders? Or are you trying to get in there and compete for larger four or five-vessel tenders? Just curious how you think about approaching it this go around.
Yes. As I said, in order to keep you analysts busy, as you know, we have a very diversified energy fleet.
Anything from product carriers to VLCCs to LNGs to shuttle tankers. This way, we keep our analysts looking at all the markets. However, do we
We have no problem chasing our own tail to begin with, but we appreciate that.
I know. Perhaps you are one of those who do not have a problem, and our company strategy is we look at ourselves as a client-driven operator rather than someone that we have invented that, let's say Suezmaxes or Aframaxes are the answer to the question. We will be looking at increasing some of these diversified sections of our business. We are seeing today, whereas the spot market is not as strong as, let's say, five years ago, but it has come back to life. There are contracts out there. We will be looking to increase the size of our fleet up to 6 vessels, as we have said this, by 2020. This is something we've been saying, I think, in the last couple of years, be it doing two option, 2 ships. Values today are about $30 million-$40 million cheaper than where they were.
The reason we have not gone head over heels, as they say, in gas, is the changes in technology. That you rightly said, we ordered our first ship with a five-year time charter at the time. The Neo Energy is and has been one of our most profitable ships. It kept the company's profitability going during the tanker market slump in 2013 and 2012.
She was earning $80,000 a day. I think she had an all-in breakeven of $27 or something like that, so it was a cash cow. She's still, right now, she's working on a FSRU project very positively.
Technology changes, and that's why we have waited for technology to settle down. I start to believe that we are, with the new ME-GI type engines and the X-DFs and the size of the ship at around 180,000 cubic, we are, for the next at least foreseeable, let's call it 10 years, in a more stable environment technologically. That's why we're starting to look at it, and asset values are also lower. I think it's a good time to increase the size up to 6 vessels.
Got you. When you said vessel values are $30 million-$40 million inside of previous levels, is that just a generic comment, or do you think you can buy something inside of $180 million or another $170 million range?
Talking about gas carriers.
Yeah.
Not the whole industry or not the whole tanker.
Sure, yeah.
new building gas carriers. Yes, I think we see ships that were about in the 210s, 220s are around the 190s today.
Okay. That makes sense. Then you mentioned, I guess you've got the one asset, I believe it's in China on a storage contract. It seems like you've got a decent relationship there. Hudong-Zhonghua is actively trying to increase their presence in the LNG market. If memory, I think Dynagas's actually building a couple FSRUs there as well. Would you look at that if you could get the price point cheap enough?
Sure.
I think Korean built is actually more attractively priced at this point, so it might be a non-starter, but what's the likelihood you could actually go somewhere besides the big three yards?
Not there yet.
Okay. Fair enough. Very diplomatic, I appreciate that. Okay. All right, listen, I appreciate the time, guys. Thank you.
Thank you.
Thank you very much. There are currently no further questions waiting, sir. I'll hand the call back to yourself.
Okay. Well, thank you very much. It has been a very interesting year and a very challenging start for 2018. We believe that, as we said, that we are off the bottom and looking for changes. Looking at the markets, I think we are where the container market was in 2016 and the dry cargo market in 2017. I expect that after Posidonia, when everybody gets sober and back to their offices, we're going to see the tanker market turning a corner, and we're preparing the company for that. I would like to thank all of our associates, our colleagues, mainly our men and women on board the ships that operate those vessels 24 hours a day safely, and I'm knocking on wood, together with the Tsakos group and all their support on the technical side that has brought us where we are today.
Looking forward for the next 25 years of continuous profitability. We are, as Mr. Bornozis said, ringing the opening bell on the New York Stock Exchange celebrating our 25 years as a public company on Wednesday. The management will be here in New York for the next 10 days. We will be very happy to have one-on-one presentations with any of you that you'll be interested. We will be having also an analyst day on Friday, just before St. Patrick's Day, to get everybody drunk for the event. With that in mind, thank you very much, and looking forward to seeing you this week in New York. Thank you.
Thank you very much, sir. Ladies and gentlemen, that does conclude our conference. You may now all disconnect your lines.