Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Tsakos Energy Navigation conference call on the third 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, and Mr. George Saroglou, Chief Operating Officer of the company. At this time, all participants are in a listen-only mode. There'll be a presentation followed by a question-and-answer session. At which time, if you wish to ask a question, you'll need to 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. I now pass the floor to Mr. Nicolas Bornozis, President of Capital Link, Investor Relations Advisor of Tsakos Energy Navigation. 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 third quarter and nine months of 2017. 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@capitallink.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, please, we urge you to access our 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. This 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 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. Efstratios-Georgios Arapoglou, the Chairman of the Board of Tsakos Energy Navigation. Mr. Arapoglou, please go ahead, sir.
Thank you, Nicolas. Good morning, everyone. Thank you for joining us on this call today. We're presenting today our nine-month, third quarter 2017 results, which show that despite a continued weak market, TEN remains profitable and more than capable of covering its expenses, its financial obligations, and maintaining its steady dividend payment track record. We have now successfully completed our largest-ever new building program. In line with strategy, we have more than two-thirds of our fleet locked into long-term equity time charters with a substantial proportion of profit-sharing arrangements. This secures over $1.3 billion of revenues for the next three years, providing a cover for all our obligations and enables us to capture any upside potential. We continue to maintain well over $200 million in cash. We use the opportunity of a weak market to accelerate special surveys for three of our vessels.
As it will be explained later, our results include approximately $3.5 million of special survey costs that normally we would have incurred at a later stage and would have been spread over a longer period. Lastly, management must again be congratulated for the successful efforts of further reducing fleet operating costs to best-in-class levels. Once again, congratulations to management and the team for perfectly executing our strategy, providing stability, and positioning TEN to fully reap the benefits of the next market recovery, which we expect to start shortly. That's it from me for now, and I pass on the floor to Mr. Nico Tsakos. Thank you very much.
Thank you, Chairman, and thank you for listening in our call. As the chairman said, the third quarter has been a difficult quarter. I would say after that quarter has been behind us, we would say the worst is over, for now at least. We're looking at the fourth quarter, a significant recovery as parts of the industry and of course as a company. As Mr. Arapoglou said, we took advantage of the very weak market of the third quarter to bring forward three of our surveys. We used that period to complete the largest expansion in TEN's 25 or 24-year history, very soon 25-year history. We will be starting 2018 with a 30% increase in revenues just by the minimum results for the new ships that are coming into the fleet. In the same time, we pay a lot of attention in details.
We try to keep operating expenses as low as possible, and I think we have been successful to do that too. We're proud that our G&A expenses must be one of the lowest in our peer group. We're just touching $1,000 or a little bit above for everything that has to do with running TEN. We're looking optimistically at the future. We're looking and discussing with our clients a lot of accretive transactions. We have the opportunity to continuously charter out a bigger majority of our fleet. We expect the remaining of 2017 and 2018 to be a much better year or much better quarters than the third quarter. We're proud that we will have another profitable year in our very long history, maintain our dividend, and hopefully, going forward, we will have chances to even increase it as time goes.
With that, I will ask George to describe what has happened the last nine months and the quarter, and we will be available for questions after Paul Durham, our CFO, gives us the figures.
Thank you, Nikos. The company reported today the results for the third quarter, nine months of 2017. The results for the third quarter were impacted by the seasonally soft summer months, three dry dockings that the company brought forward in order to take advantage of a stronger market we anticipate going forward, and the completion of the company's newbuilding program. For the nine-month results, we recorded profitability, which we also expect for the full year 2017. Since the start of last year, TEN embarked in the biggest fleet expansion program of its history with 15 newbuilding vessels. The last of these newbuildings was delivered to the company at the end of October.
All 15 order vessels had medium to long-term employment attached to first-class charterers ranging from minimum two to maximum 12 years, which will result to a 30% increase in revenues, assuming only their minimum rates for 2018. The opening slide of this presentation shows the various growth phases in the company's history since inception. If we turn to slide number four, we see the key corporate highlights. We have currently an operating fleet of 65 vessels, where 25 vessels have ice-class capabilities. After completion of our newbuilding program, TEN is well-positioned to take advantage of a stronger freight market, which is ahead of us. The average age of the fleet is 7.6 years versus the average of 10.2 for the world tanker fleet. We have a balanced employment strategy that takes advantage of market peaks with profit-sharing arrangements.
In our press release today, we announced two more time charters for two vessels that were previously operating in the spot market. One charter is a fixed-rate charter, the other has profit-sharing arrangements. Currently, 51 vessels out of the 65 vessel operating fleet have secured employment with an average tenure of 2.5 years. The emphasis is on charters with profit-sharing arrangements that enable the company 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. We have built a modern, diversified fleet covering client transportation requirements in crude, products, shuttle, and LNG, and we have become the carrier of choice for many of the top oil majors, commodity traders, and refiners. We have a high utilization with the nine-month figure being at 96.4%, which is almost like having full utilization.
The next slide has the main financial highlights of our press release, which Paul will present in more detail. I just want to highlight the profitability for the nine months, 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 six has basically the breakdown of the current 65 vessel fleet. 47 vessels are engaged in crude trading, 13 in products. We have three shuttle tankers and two LNG vessels. Next slide has the clients of the company with all 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 Enterprise fleet. On the next one, we list the strong secure coverage.
We have 51 vessels out of the 65 vessel fleet fixed under secured revenue contracts, which is a combination of time charters, time charter with profit-sharing, and contracts of affreightment. 34 vessels are on market-related charters, including spot, which secures this way the company's ability to immediately capture the market's upside. The revenues expected from the vessels in the fleet with secured employment covers the company's annual financial obligations. Slide nine shows the 15 new building vessels that we took delivery since 2016. All vessels are currently tied on medium to long-term time charters. These vessels have now been fully integrated in the fleet, and we expect them to contribute at least 30% increase in revenue from 2018, considering just the minimum base rate that some of these vessels have.
On the left side of this slide, we see the break-even cost for the various vessel types that we operate in the company. As you can see, the cost base is low. In addition to the low shipbuilding cost, we must highlight the purchasing power of our technical manager, Tsakos Columbia Shipmanagement, 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. 78% of the fleet operating days are tied to secured revenue contracts that cover the company's annual obligation. In addition, the combination of time charter with profit sharing COAs and spot charters guarantees the company's share of the market's upside every time we have a spike or a sustained strong freight market. This is what we see in the market.
Global oil demand continues to grow above historical growth levels. In the last 25 years, oil demand growth has averaged around 1.1 million barrels per day. The latest forecast for oil demand growth in 2017 is 1.5 million barrels per day. International energy agencies continuing to revise upward their oil demand figures, not just for this year, but also for the years to come. Also, improved economic conditions in OECD countries and the low oil price environment continue to support strong demand in the United States, in Europe, and China, where we see both consumer demand and stockpiling for strategic reserves, and obviously India. On the supply side, the tanker order book is coming down. The bulk of the orders placed in past years have been delivered, and despite the short-term headwinds, which we have experienced in the second half of this year, longer-term supply is managed.
We should note that a big part of the existing tanker fleet is over 15 years. The implementation of new environmental regulations with high compliance costs and charter discrimination against older tonnage could lead to an increase in scrapping. We have already witnessed increased scrapping in the larger vessel categories. The dividend on slide 13. In view of all, we have announced today another dividend of $0.05 per share to be paid on December 29th to the shareholders of record on December 21st, 2017. In total, since 2002, TEN has paid $10.61 in cash dividends or $457 million, and 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 nine months. Paul?
Thank you, George. It was expected that the quarter three market would be poorer than in quarter two for seasonal reasons, but other factors included fleet overcapacity, refinery outages, high inventories, and OPEC cuts. While for the nine months operating income was $60 million and net income nearly $18 million, through the quarter, TEN incurred a loss of $3.4 million due to the poor spot market and, as mentioned, impact of brought forward dry dockings. With nine new vessels delivered since quarter three 2016 contributing to the $15 million increase in net revenue, with 70% of our operating days on time charter, TEN remains in a good, protected position. During quarter three, 15 vessels were operating on spot voyages, some in trading areas which were especially hit by poor market conditions. Nevertheless, the average daily net revenue was $17,430, similar to the prior quarter three.
For the nine months, the average daily net revenue was $19,140. The 43 vessels on time charter were able to generate enough revenue to cover virtually all the voyage, operating overhead, and finance costs of the whole fleet, including the spot vessels. Total operating expenses increased due to fleet additions, especially as such vessels build up stores and supplies in their initial period, which are not treated as inventory but expensed. However, the daily average OpEx per vessel in quarter three fell by 2%, and for the nine-month period by nearly 3% due to savings on repairs and maintenance and sundry expenses. Daily overhead costs per vessel, which include management fees and G&A, fell to the low level of $1,085.
Finance costs at $15.4 million were noticeably higher than in the previous quarter three, this was mainly due to the financing of the new vessels and partly to increases in dollar interest rates. However, this was down from quarter two, as outstanding debt declines with scheduled repayments, we would expect finance costs to fall commensurately in future periods. In quarter three, there was $23 million of new debt on delivery of a new Aframax and scheduled repayments of $47 million. Refinancing of four vessels at competitive terms resulted in a net drawdown of $8 million. Net debt to capital was a comfortable 51.5% at September 30. With the delivery of the last vessel in October, there was another drawdown of $23 million in quarter four, expected quarter four repayments will total $48 million. This concludes my comments, now I'll hand the call back to Nikolas.
Thank you, Paul and
Look you forward for a much better report in March. Thank you very much. With this, we would like to open the floor for any questions. Hello?
Hello. Hello, sir. I'll just advise everyone to ask a question. You need to press star and one on your telephone keypad and wait for your name to be announced. That's star and one. Your first question from Stifel comes from the line of Ben Nolan. Your line is now-
Great. Can you guys hear me?
Yeah.
Okay, good. I have a couple of capital questions. Obviously, I think you guys are now finished with your CapEx program, and that gives you a lot of options as to how to think about deploying capital going forward. You've made it pretty clear that any expansion is going to be project-oriented, which I think makes sense. Away from that, first of all, I was curious if you might be able to, Paul, to update me on how much your debt repayment obligations are for 2018 and 2019. Associated with that, how do you think about paying additional debt? You're generating free cash flow. How do you value that relative to sort of projects?
Paul will give you the nitty-gritty, but for us, as I said, we always are conservative in debt. I think although conservative, it's going to be dropping significantly down from here. We have already refinanced a lot of the obligations that we had for 2018 and 2019. I think a priority for us, of course, is the dividend. Dividend is important for us. If there are funds left over, then debt repayment is another alternative. Here is Paul on the more details.
For 2018, we're looking at total scheduled repayments of around $180 million. In the year after that, about $150 million. That's based upon current existing debt, not taking into account the potential refinancing or whatever.
Actually could be a little lower than that, I guess.
Yes.
Secondly for me, and this will do it, but something that I don't know that I've ever heard you address, but a few of the preferreds that you've done in past years become callable next year. They're not too terribly big, but as you do begin to have free cash flow, certainly depending on what the spot market allows, is that something that you would consider doing as well, perhaps calling back some of those preferreds to reduce the cash flow component of those?
We've taken into consideration the refinancing or redemption of those preferred stocks over the next few years. We feel that we can comfortably redeem them.
Okay.
In any account at the moment, we are on a relatively small scale buying back where possible.
Okay.
We have been doing that. We can always revert back to buying back and gradually lowering the total amount that has to be redeemed.
Okay. No, that's helpful.
We feel fairly comfortable given our four-year forecast that we can manage to redeem them quite successfully.
Okay. No, I was unaware that. I appreciate the color there, Paul. That does it for me. I'll turn it over. Thanks.
Thank you.
Thank you very much, sir. Now, your next question from Morgan Stanley comes from the line of Fotis Giannakoulis. Your line is now open, sir.
Yes. Hi, thank you. Nik and Paul, you mentioned the focus on maintaining the dividend. Can you remind us, are there any potential covenants or that they can put any pressure on this dividend, or shall we consider that this dividend is fixed and the current level is the absolute floor?
As far as covenants, we do not have any restrictions. I said that we expect that this third quarter looks to have been the worst being behind us with a poor third quarter for the whole industry. Our intention, as you know, we are very large shareholders. The management is a very large shareholder, close to 40% together with the board. Dividend is very important for us. As long as we can logically increase it, we will logically increase it. I will leave it to that.
Thank you. Nik, can you give us your outlook for the tanker market next year? I remember last time that we discussed, you were probably the most optimistic for 2018 compared to your peers. How has your outlook changed, if it has changed at all, compared to the previous quarter?
As you know, we live in a country with a lot of sun that makes us optimistic. Most of our peers are up north, that’s basically the reason. Joking apart, I am optimistic for our company because we took a lot of effort. We brought the company in its largest growth program. We built in 18 months, 15 state-of-the-art vessels from shuttle tankers to LNGs, all of them successfully, all of them, believe it or not, with almost no delays, all of them chartered very soon. I'm very optimistic for what we have in the book, which is, I think as Paul mentioned, $1.3 billion of income fixed going forward at a minimum level. As long as this part of the business, according to our strategy, is good enough to pay for all the obligations for the whole fleet, including the spot vessels.
If the market moves the way we believe it's going to move, I have a feeling that 2018 and 2019, for reasons that I think you are all aware, I mean, you are much more analytical than I am. I believe today in the tanker market, we are where we were exactly a year ago in the dry cargo market. I know that Morgan Stanley, all of you analyze dry companies, and we were looking at Capesize at $6,000. The third quarter of 2016 was the weakest for the dry cargo. The market gradually is what it is today at $25,000 on the Capesize and has a gradual uptick. I believe we're going to be facing the similar situation for tankers.
I mean, we're looking at small rays of hope or I just listened that the Chinese are opening up their teapot refineries to import almost a 50% increase on the quotas. That's equivalent of a 37% increase in Chinese crude imports from year-to-year. That's huge. I mean, for us with tankers, China is a very big importer. We have technological reasons that are delaying or taking out a lot of the older tonnage. In general, regardless of the sun or not, we are optimistic, and we have positioned the company to take advantage. I think the last quarter was a quarter which we actually used it in order to finish some of our special surveys.
Thank you, Nik. Sorry, one last question about giving your outlook and the cash that you have in the balance sheet. I was wondering which asset class looks more attractive for potential investment. I remember that you have mentioned in the past many times that vessels with long-term charters is going to be your plan for expansion. Are these kind of deals available? If you can also comment about the potential expansion in either LNG, in the LNG market that has seen a significant improvement in fourth quarter or even in the shuttle tanker market that we saw some of your peers ordering additional new buildings.
As I said, we are quite diversified, so if you look at our fleet, it has to make sense with the customer, the duration of the contract, and of course, the returns. We are seeing right now in all the spectrum, and it's not very usual in shipping, that we are seeing long-term businesses, and when I say long, it's five years and over, in all categories. We are looking in strategic relationships from VLCCs to, as you correctly said, LNGs, where our two vessels are doing better and better every quarter with renewing them at higher levels. I think there is a lot of appetite.
Thank you very much, Nik.
Thank you.
Thank you very much, sir. Just before we move on to the last question, anybody who'd like to ask a question, please press star and one on your telephone keypad. That's star and one. Now from Maxim, you have a question from the line of James Jang, and your line is now open.
Good afternoon, guys. Can you just go over how the Handysizes performed during the quarter?
Yes, Paul? The Handysize.
Yes.
If you look at our Handysize fleet, I think a big part of it is on time charter. I think I would say we have six vessels that are on the spot market, most of them trade in the Mediterranean area. How did the average fall?
The average time charter equivalent during the nine months was about $11,000-$12,000 a day. In the quarter, it was a little less than that. Yes, it was.
For the vessels on the spot?
Yeah, the spot vessels. Yeah.
Yeah. The spot. Of course, the vessels, if you include the non-spot vessels, it will be a higher level, but the focus on the spot was about this for the third quarter, but they have significantly improved in the fourth quarter.
Yeah.
Okay. Because yeah, I know the global fleet there, it was really difficult in terms of the spot earnings, right?
Yeah.
I was just wondering if, like you said, so for the fourth quarter, we should look at a nice increase or is it a steady increase?
I think we're seeing the $11,000-$12,000 going up to around the $13,000-$14,000. Today it's $15,000, but on average, I would say, let's say around $14,000. It will be a good increase, yes.
Okay, thanks. The next question is about, it seems like they're going to extend the production cuts. A lot of players are okay with $60-$65 oil. You guys have mentioned previously that you guys are working with a U.S. oil major on projects. Are there any opportunities near term to fix some of the spot, the VLCCs, Aframaxes, on some of these projects out of the U.S. or, I mean, like what's the plan short and medium term for these?
Well, we are seeing higher and higher increase of exports from the U.S. I think we have seen a 200% increase in exports from year-to-year. Now we're at about 1.3 million barrels a day of exports, which is unprecedented in the past. We have a decrease in imports by 3%. The Caribbean market, I think you're very correct to say that right now the Caribbean market, because of the U.S. exports, is the star of the Aframax market. We're enjoying this. We have a big concentration of our Princess vessels in the Caribbean, and I think they are closer to the 20,000 barrels a day.
Okay, any plans to, I guess, fix these at on longer term charters, or are you happy operating them on the spot market for now?
As you know, we have a big concentration of ships on Aframaxes on long-term charter.
Yeah.
We are enjoying the spot market with those ships because we do not want to disappear from the spot market, because otherwise you lose the clients. I think at this stage we're satisfied by keeping the mix the way it is.
Okay, great. Another thing, just on the macro side, how do you see the crude trading market shaping up for 2018? If OPEC does, let's say minimum they extend the cuts for six months. Right? Do you see more exports, long-haul exports developing to China and India, or do you think that pricing is still going to win out and ton-miles won't expand as much?
Well, that's a good point because we have seen a very big increase on long-haul cargoes, basically the Aframax and the Suezmax in the last year. We're studying this because we have seen that a trade which was not very usual, the Black Sea Russian crude going to China and India on Suezmaxes and Aframaxes. In 2016, I think we were able to record 12 export cargoes. Far this year, we're about 80.
Wow.
That has increased significantly the ton-mile. I think we're expecting to see more and more of that trade.
Okay, great. Thank you for that. My last question is just on fleet renewal. DHT and Euronav, they've been selling off some of their older tonnage, and I know that you guys had mentioned that you guys were looking at possibly selling some of the older tons that you have. What's the plan right now? Are you still happy operating the older vessels, especially like the Millennium, or were you-
Yes, that's a very good point. I think we are at the stage, I think hopefully within this side of the year, we'll be announcing the sale of some of the older vessels that we have on the fleet. The Millennium has been a vessel that we built it from scratch. She operated it very successfully for us for almost 18 years now. She's on a storage business in Singapore, making $17,000 a day with very minimum. Her actual special survey due is next autumn. We will be milking the ship to the beast. We will be milking her up to her special survey, which will be next autumn. Of course, if there is an offer which is significantly above scrap, we will consider selling her. That would be the last baggage for Q4.
I see. Okay, ahead of a special survey, we can assume that'll be taken care of.
Yes.
Okay.
We will not have a special survey.
Okay. If that does happen, asset prices are still okay. They still look pretty good from the SNL side. Would you look to acquire more tonnage? Not with a project in mind, but just speculatively, or are you guys going to still stick to the strategy of project-linked asset acquisitions?
We are right now digesting a very big bite. As we said, we increased the fleet by 30%. We will stick to project transactions right now.
Okay. All right. Thanks for the call, guys.
Thank you.
Thank you very much indeed. From J.P. Morgan, we have a question from the line of Noah Parquette, your line is now open, sir.
Great. Thanks. I just wanted to get you guys' thoughts. Have you had any discussions yet with your counterparties, particularly the long-term charters, on how you're going to meet the 2020 emission regulations and how you guys are thinking about that?
I was worried nobody will ask the 2020 question, which is the Thanks for bringing this up. I think this is something that I think very few of owners, but much, much fewer of the shareholders have understood that we are going into a head-on collision that will have very, very positive effects for rates as soon as the middle of 2019 and 2020. I think for those who are not familiar, we in shipping, we're very tired because we have to deal with it every day, is that we have to reduce our emissions from 3.5% on New Year's Day in 2020 down to 0.5%. This is a Herculean task, being Greek, as you say. There are solutions. The oil companies are pushing owners to put scrubbers on the ships. Owners have not reacted positively at all.
They were hoping that by today, 40% of the world fleet would have scrubbers. Less than 3% have scrubbers today, and we're talking about a couple of years that this has to happen. We as Intertanko, which I happen to chair, our position is that the ships are not going to become refineries because it's not good for the environment, and it's not good for the human factor. Refineries have to be on land. We believe that there will be enough of fuel at the time. If there is not, we can cover our obligation by slow steaming. I think this is the key because as you know, by slow steaming, there will be much more demand. Utilization will grow, and there will be much more demand, and we hope this will help the rates.
We have calculated by reducing our speed by 25%, we can meet our obligation of burning 0.5% of emissions. I'm not a very technical person, but that's where we're going, and we expect this situation to create a lot of positive for the market.
Okay. Thank you.
That's all I have.
Thank you very much. Now from Credit Suisse, your next question comes from the line of Gregory Lewis. Your line is now open, sir.
Yes. Hi, thank you, good afternoon. I wanted to dive a little bit into the winter season, right? Clearly, as we look at rates not really showing up in Aframax rates, which I know you guys have a lot trade in spot. I imagine you have a good understanding of how long your voyage times are taking. Really what I'm wondering is between less daylight hours, between maybe some starting of inclement weather, has there started to be any delays building on any of your trades that you're involved in, or is that at this point it's business as usual?
Well, I think the last delays we had to do, of course, with the disruption we had because of the hurricanes in the Gulf three months ago, two months ago. I think right now we're almost up to refining capacity where it was at that period. As the winter comes in, we're seeing the, I think the Black Sea getting heavy on vessels, which will affect positively the rates in the Mediterranean, which have been very poor. Already in the Black Sea, we see 4 to 6-day delays, which means that the ship is on a demurrage. Usually, the demurrage with the spot market is at $12 for an Aframax. The demurrage is at about double that. That helps us with the earning for the fourth quarter.
Okay, perfect. All right. Thank you for the time, guys.
Thank you.
Thank you very much indeed, sir. As there are no further questions, I now pass the call back to you for closing remarks.
Thank you very much and for your questions. As we said, we are looking forward for an exciting 2018. TEN will be 25 years old at the time, the most seasoned publicly traded tanker company. I hope we will have much better news to report in our next quarter. Our team is going to be visiting New York for the Capital Link events in a couple of weeks, and we will be very happy to see you and explain more about the company and to wish you all the best for the holidays. Thank you very much.
Thank you very much indeed. With many thanks to our speakers today, that does conclude our conference. Thank you all for participating. You may now disconnect.