Welcome to TACOS Energy Navigation Conference Call on the Second Quarter 2016 Financial Results. We have with us Mr. Takis Arapoglio, Chairman of the Board Mr. Nicholas Takos, President and CEO Mr. Paul Durham, Chief Financial Officer and Mr.
George Saroglou, Chief Operating Officer of the company. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today. And now I pass the floor to Mr.
Nicholas Bornovis, President of Capital Link, Investor Relations Advisor of Takof Energy Navigation. Please go ahead.
Thank you very much, and good morning to all of our participants. This is Nicolas Bornodis, Investor Relations Advisor to Tsakos Energy Navigation. This morning, the company Tsakos Energy Navigation publicly released its financial results for the Q2 of 2016. In case we do not have a copy of today's earnings release, please call us at 212-661-7566 or email us at 10tncapitallink.com and 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 addressed 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, and that means that by clicking on the proper button, you can move to the next or to the previous slide on your own. At this time, I would like to read the Safe Harbor statement.
This conference call and slide presentation of the webcast contain certain forward looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward looking statements involve risks and uncertainties, which may affect TEN's business prospects and results of operations. Such risks are 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. Teix Arapoglou, the Chairman of the Board of TEN.
Mr. Arapoglou, please go ahead, sir.
Thank you, Nico. Good morning, everyone. Thank you for attending our call for the Q3 results. Despite the difficult times in the world economy and world trade, Tsakos Energy Navigation Management continues to run the company in a profitable way. On the way, there are shortcomings, difficulties, but profitability is unquestionable.
It underlines that TEN is one of the few companies that can demonstrate such profitability in difficult times. And on behalf of the Board, I'd like to congratulate Nikos Tsakos and his team for this continued success. The positive trend of the company's profitability will be reinforced going forward in view of the delivery of a series of vessels in the next 12 months that are estimated to add an additional €100,000,000 per annum in EBITDA. So again, congratulations to Nikos Tsakos and his team and for managing and navigating the company in such a profitable way in difficult times. So over to you, Nippo.
Thank you.
[SPEAKER NICOLAS COTE COLISSON:] Thank you, Chairman. Thank you, ladies and gentlemen, and welcome to our Q2 results. As Mr. Arafatoglou said, the market environment in the Q2 has been uncertain. However, 10 with the structure of chartering that has followed for many quarters now is trying to take the seasonality out of or to be affected by this seasonality as little as possible.
We are usually the Q2 we are facing a seasonal down in the market. This year it has been very, very obvious. On top of this we had political events that were out of the ordinary. We have had a lot of disruptions of exports from Nigeria which is one of the largest exporters of oil and affects a lot the Suezmax and secondarily VLCC and then the Aframax size. I'm glad to hear that these disruptions are being ironed out and very soon we will go back to full exports from Nigeria.
So those are going to come on time for the market to turn around as we expected significantly on the Q4. We have also seen some of the countries using inventories more and we are seeing in the United States quite a strong drop in the recent week of inventories, which is another good sign. We have been affected by Russia due to sanctions and low prices of oil. They have significantly limited their exports from the Black Sea and from the north side of the country. And they've been using a lot of their production to fulfill local obligations, but we expect also this and a winter, a colder winter to help the rates on the spot market.
On the other hand, we are following a steady our program. We are in the process of almost on the first third of a very long renewal of our fleet, which we started in we started and planned in 2013 when the market was very poor. We started taking delivery of those ships. All those ships have long term accretive contracts. And what we would like to be able to have is a company that its long term fleet, which will approach 70% of our outstanding days will be able to cover all our obligation.
So profitability will not be in question. The 70% of our fleet that will have the long term employment will cover all our obligation and then anything else that our spot fleet produces will be the profit. So I think this is the model we would like to follow and we are almost halfway there. We still have up to the end of 2017 to achieve this target. And with this, I would again thank all of you for your support.
We are living at exciting times. There are always opportunities during the high and lows of the market, and we are here always trying to take advantage of them. And I will ask George Arrollo, our COO to tell us quickly what we've been doing for the last 3 6 months. Thank you, Nikos.
We reported today another profitable quarter and half year results. 2016 a landmark year for the company as its growth program being the largest since inception in 1990 3, is coming to fruition. Despite the decline in rates during the Q2 and the summer months, due to seasonal factors and reduced oil supply in key export areas, rates have remained significantly above the cyclical lows experienced in the period from the second half of twenty ten until the end of twenty thirteen. We expect rates to gradually move higher during the upcoming winter months when increased oil demand and winter weather seasonality typically improves tanker market conditions and rates. For those of you who are connected to the Internet and our website, there is an online slide presentation, which format we will follow during the call.
Let's turn to Slide number 3 with the key operating highlights. We took delivery of 2 new buildings during the Q2, VLCC Ulysses in May and the Aframax tanker Elias Tsakos in late June. After repositioning voyage, Ulysses started a 14 month employment at an accretive rate. Elias Tsakos is the 1st of 9 purpose built Aframax tankers that will serve Statoil for minimum 7 years, maximum 12, if charters exercise all extension options. In addition, during the Q3, TEN took delivery of the 2nd Aframax, Thomas Zafiras, chartered to Statoil and the first of 2 Panamax LR1 tankers, again built against the 5 year time charter.
From now and until the end of the year, the company expects to take delivery of another 2 Aframax tankers also chartered for 7 years to Stratoil, a second Panamax LR1 tanker also chartered for 5 years, and the company's 2nd LNG vessel, Maria Energy. 2016 is the company's busiest growth year since 2007. Following a successful 4 year charter that ended in February of 20 16 and a few spot trading fixtures since then, we announced today the fixture of the 2,007 built LNG Neo Energy to 2 years plus 6 months in charter disruptions at a rate that covers the vessels' expenses. The LNG market is improving after touching bottom earlier this year. We expect to take delivery of the company's second LNG vessel, Maria Energy, during the Q4.
We are in active discussions with various parties for a charter either of short or medium tenor that will eventually reflect the expected recalibration of rates to higher levels. During the Q2 of 20 16, TEN operated on average 50.5 vessels. Pro form a, we have a fleet of 65 vessels. Thanks to the modernity of the fleet and the balanced employment strategy, we continue to operate the fleet at a very high utilization rate. For all the tankers in the fleet, the number is 98%, almost full employment.
We should also point out that we have 60% of the earnings capacity days of the operating fleet fixed forward. 33 vessels in the 54 vessel fleet have secured employment at healthy rates with an average duration of 2.8 years. We have 21 vessels currently trading in the spot market as we are about to enter the winter months, which usually are the strongest months for energy demand and transportation requirements. The oil price seems to have found the floor and appears to be trading in a range, which for Brent is currently in the $40 to $50 range level. Compared to where the oil price has been not so long ago, back in 2014, this low oil price environment continues the crude sector and TEN in a positive way.
World oil demand continues to be strong. We have seen upward revisions to the 2016 global oil demand figures by the International Energy Agency coming back to the 1,400,000 barrels per day growth number forecasted at the start of the year. The low oil price continues to stimulate demand and encourage strategic and commercial stockpiling among consuming nations. Despite significant oil supply disruptions in Nigeria, the problems in Libya and supply disruption in certain Latin American producers, OPEC continues to produce oil at record levels, reaching $33,500,000 in August, led mainly by increases in productions coming out of Iraq and Iran. Supply of oil going forward is expected to remain at these elevated levels and this is positive for tanker demand and tanker earnings.
Fleet growth in the first half of twenty sixteen was less than 3%. Fleet growth is expected to be higher during the next 12 months. However, the lack of new tanker orders during 2016, mainly due to restricted access to capital, should result in low fleet growth once the current order book is absorbed over the next 12 to 18 months. Scrapping should pick up as we have more vessels reaching 20 years in the next couple of years, together with new environmental regulations coming into force. Overall, we still believe that 2016 is going to be another positive year for crude tankers, thanks to growing global oil demand, high supply of oil and relative low oil price, which should moderate the effect of a growing tanker fleet.
The next slide has the main financial highlights of our press release, which Paul will present in more detail. I would like to point out the $16,400,000 net income for the 2nd quarter to $41,800,000 for the 6 month period, EBITDA of $111,000,000 almost $1,000,000 for the 6 months, and the strong balance sheet and cash reserves at $263,000,000 at the end
of the first half of the year. This is
the fleet as it stands right now, pro form a 65 vessels, which includes the 54 vessels in operation. And as we said, we have a strong fleet growth, thanks to the company's new building program, which is already financed and built against long term business as 13 out of the 15 newbuilding vessels the company is building are fixed on long time charters with minimum 5 year duration excluding optional periods. Predominantly, the fleet is engaged in crude oil transportation. There is a sizable number of vessels engaged in transporting products, while 5 vessels are specialized covering the LNG and the offshore shuttle tanker sector and offshore and shuttle tanker sector. The fleet is very modern.
The average age of the operating fleet today is 8.6 years versus 9.9 years for the World Tanker fleet. As more new building vessels enter enterprise fleet, the average age number of TEN's fleet is expected to be reduced. Slide 6 lists the clients of 10, all of whom are blue chip names with whom the company is doing repeat business over the years, thanks to the quality of service, fleet modernity and the safety record of the enterprise fleet. The next slide shows the all in breakeven cost for the various vessel types that form the enterprise fleet. The cost base, as you can see, is low as Sten builds most of the fleet before the rise of new building prices.
The purchasing power of the technical manager, Tacos Columbia Ship Management and the stringent cost control by management has reduced the fleet OpEx levels and this has also to be highlighted. Slide 8 shows gives some few pointers about the market. Demand, as we said, is expected to continue growing at 1,400,000 barrels per day, which is higher than the long term growth trend, which is about of 1,000,000 barrels per day. The global economy, despite headwinds in some regions continues to grow. Lower oil prices are supporting demand, strong demand, we have to say, especially in the United States of America, China and India.
This supply driven drop in the price of oil benefited tanker market. Rising volumes, arbitrage trades, longer distances and manageable fleet growth for crude tankers are expected to support the market in 20 16 and beyond. Next slide is the order book. And as you can see, the order book beyond the next 3, 4 quarters is shrinking as CPAs in the Far East reduce capacity, are also in the midst of restructuring and available bank finance is very selective and also shrinking. Also a significant percentage of the fleet is above 15 years, approaching 20.
The dividend. Slide 10 has the dividend history of the company. We announced today a dividend payment of $0.08 per share payable on November 10 to the shareholders of record on November 4. In total since 2,002, TEN has paid $10.36 in cash dividends per share or approximately 4 $36,000,000 and this compares with a listing price in our IPO of $7.50 The average yield since the IPO is 5.25 per annum. In addition, the company has repurchased since January 3,700,000 common shares at an all in cost of $5.58 per share.
In the last 10 years, the company has repurchased 7,500,000 common shares at an all in cost in excess of $103,000,000 Slide 11 has the most recent NAV calculation and lists the analysts covering 10. The management vision is to continue growing the company responsibly and at the same time have this reality being reflected in the company's share price. At the same time, believing in the company's value and the business in which we operate, management continues to increase their holdings in the company. That concludes the operational part of our presentation. Paul will walk you through the financial highlights for the Q2 and first half of the year.
Paul?
Thank you, George. So despite a challenging quarter, Tenn achieved net income of $16,400,000 in quarter 2 and earnings per share of $0.15 after preferred stock dividends of $4,000,000 6 month net income was $41,800,000,000 with earnings per share of $0.39 The reduction in net income compared to previous periods was mainly due to rates softening due to factors as Nikolas and George have mentioned and factors that we expect to have a declining effect in the forthcoming months from now. The LNG carrier faced an especially poor market and consequently repositioned in search of more favorable earnings. That alone reduced our revenue in quarter 2 by $7,000,000 compared to the previous quarter 2. Fortunately, as George has mentioned, the vessel's new storage charter will generate revenues that offsets its costs while we seek future profitable employment in the stronger LNG market anticipated by observers to start in 2017.
Nevertheless, excluding the LNG carrier, the remainder of the fleet enjoyed full employment at 98%. The average daily rounded TCE rate in quarter 2 was $21,700 $22,500 for the 6 months. Half our Suezmaxes were on spot at rates 18% down on the prior quarter 2 and Aframax rates were similarly down. The Suezmax tanker Decathlon acquired in quarter 1 and the more recently delivered VLCC Ulysses fortunately did help to boost net income by a combined one $500,000 in quarter 2. While those product carriers on spot also earned less than in the prior quarter 2, the rates earned by our product carriers on time charter were at least 50% higher than average available spot rates.
TEN's technical managers kept operating expenses under control. Quarter 2 daily average OpEx per vessel fell 2% to 8,000 and $26 For the 6 months, OpEx was $7,958 also 2% down from 6 months 2015. Despite a temporary modest increase in vessel overhead costs, we believe they remain within the lowest levels of such costs within the industry at about $1400 per vessel per day. Finance costs were $8,000,000 similar to the prior quarter too, slightly higher interest being offset by reduced payments on bunker hedges, which also helped reduce the 6 month finance costs. EBITDA amounted to over $51,000,000 in quarter 2, while 6 month EBITDA was $111,000,000 All vessels generated positive EBITDA in quarter 2, apart from 1 vessel in dry dock and the LNG carrier.
In quarter 2, outstanding loans increased by $133,000,000 as our new building program progressed. $77,000,000 of this was for the new VLCC, which generated healthy income on the spot market before entering an accretive time charter. Brings overall debt to $1,560,000,000 at the half year end and net debt to capital to 47.8%. We have approximately $410,000,000 of range debt still to draw in connection with the remaining 11 vessels, 9 of which have charters attached, which will generate more than adequate cash to service that debt. And now I'll return the call to Niko.
Thank you, Paul. And as you said, I think this is a challenging market environment which we expect to look at it in a much more positive way going forward. A very positive segment seems to be the change of sentiment in the LNG. And I think this is very well timed and very welcome not only for our long term FSU charter on the Neo Energy but on the delivery of our vessel, which is going to be subject to her final sea trials within October. And we believe that she will enjoy a much healthier rate and those rates will be increasing as we're looking for a much better market.
So whereas the LNG puts a burden on our Q2 results because of her repositioning for her FSU charter, we hope that they will be able to pay this investment bank back very soon. And with this, we would like to open the floor to any questions that you may have. Thank you.
Your first question comes from
the line of Noah Parquette from JPMorgan. Please go ahead. Thanks.
Just had a couple of questions. Can you give any guidance on the terms of the LNG floating storage charter or perhaps an annual EBITDA number or something that we could use to get a sense of what the profitability is?
Yes, hi. Yes, this is something that we see as a long term project. So the initial 2 year period is covering our all in breakeven as George mentioned it. And if the options are taken, I think then we will have additional profits on that. And of course after that the vessel is being chartered for 2 years with them on a fixed rate which covers our bottom line, a significant increase almost more than doubling of the other period, of the optional period and then much more negotiations going forward.
So I
think for
us it's a very good we're very happy with this situation because it will it's the ideal employment for those who understand the dynamics of the LNG market for a very good quality steam turbine ship, which is a very efficient membrane vessel when it's on storage.
Okay, great. Then for the Ulysses, the charter, is that again, can you give us some color there? Is that more like an index linked charter or is that more of a minimum profit sharing? I know you can't disclose the actual formula.
It has a fixed rate, which very accretive. All I can say, it's twice our breakeven for it's twice our breakeven if you go to our breakeven chart, which is also something very accretive and it has also upside because it has bunker fuel protection clauses. But if I tell you more, I would have to send you the charter part also.
All right. And then I just wanted to ask a little bit about in the news, the ballast water treatment regulations. How does that affect you guys in terms of what CapEx you could still need to do? And have you given some thought to that? Thanks.
We again, we tried to act thanks to the guidance from our technical people. We
acted preemptively
and not only a big part of the industry, so big part of the industry acted preemptively, which means that we completed a heavy dry docking and special survey schedule that has will show effect in our 2016 results. In order to get a 5 year extension to when we will have to implement the system on our vessels. In today's market, we estimate every time you will have to retrofit a system like this on a ship depending on the very confusing technology that you will the minimum cost will be $500,000 per vessel for the average size of ships, excluding the off hire. But we believe that within 5 years technology will have caught up with developments and the investment will be more efficient and less time consuming and cheaper.
Okay. That's
all I have. Thank you very much.
Next question comes from the line of Mark Webber from Wells Fargo. Please go ahead.
Hey, good morning, guys. How are you?
Hi. Hi, Mark.
Just wanted to follow-up first on Noah's question on the FSU contracts, the potential FSU contract. I guess maybe without giving a firm sense on EBITDA, can you talk to where the rate on that would be kind of relative to where spot rates are today, so kind of call it $38,000 I know it's a bit of a loaded number because utilization across the fleet is not nearly uniform. But if we just think about it, if we just kind of allow for that and just kind of think about a $38,000 rate on a spot basis, How should how would an FSRU contract look right now for 2 years?
So I think you have on 2 years down the road, it's significantly higher than 38 today, which I think is the ongoing spot rate if you can get it for correctly as we said for the dry fuel vessel, because then you have to put some discounts in ship
that technology
smaller etcetera, but and hopefully by next week and I'm not because I'm in the market talking to these people every day, by next week we can talk about 40,000 a day. So every week we can get a little bit more. But so the FSU considering that an FSU project, the vessel is lay it's in semi layup, so you do not have the expenses of a normal fit. You will have less crew, less lubricant consumption, less expenses, less insurance as Mr. Harvey stole us on the vessel.
So you have a discount from you have to have a discount from the 38. Today, I would say for a steel to buy vessel if you could find business it would be in the mid-20s. So I think that's about the level that storage business, but of course then you have to increase it is more profitable because you have less expenses also.
Right. No, and that's very helpful. In terms I guess with regards to the term and you mentioned rates are kind of grinding a little higher and it's pretty easy to see, I guess, a decrease that's somewhat of an improvement over the next couple of years in rate. Do you bake in some escalations into those contracts and or some sort of contango into that rate structure?
Yes, I think this is for sure. I think we get the feeling that in 2018, it's sort of feeling is what we hear from the market and actually from the end users. And from 2018 on there will be a significant disturbance between supply and demand. So there will be more cargoes than ships.
We hope
that will be true. From 2016 'seventeen like in the tankers, you have more deliveries, but I will believe that 'eighteen will be a year. So we will not charter a ship post 'eighteen at today's level. So I think what's the new building, it's very important to get a very good name to start the vessel and on the right foot and then we believe that she has a very, very good future.
Got you. Just one more on that and I'll move on. But that asset is replacing a relatively new FSRU that presumably gets re let into the market. Can you talk about the dynamics around those negotiations, the rationale for the Chinese moving to a pair of SSUs as opposed to keeping the current equipment in place?
Well, it's not exactly the issue because they the Chinese as you correctly said, you have a lot of information here, the Chinese they had the choice to build a storage unit at the harbor or to charter a ship. That was not really replacing an infrastructure unit, they had a choice between building expensive and environmentally confusing and delaying storage facilities at the port and decided to use our ship as this tank.
Okay, that's helpful. Just
one more for
me and then I'll move on. But just around uses of cash, obviously rates are easing and you have a good slot in your deck kind of outlining the EBITDA generation versus your dividend over the last decade plus. You've got a decent amount of amortization, but nothing that can't be handled and there should be some surplus cash in there. I'm just curious, you've been buying back a little bit of stock, would we expect that to continue? And then at what point do you think that the assets get attractive enough that you'd want to take on a bit more leverage and or use most of that cash to kind of dive into asset values that are at a multiyear low?
As I said, I think we have already a program well planned since 2013 of the delivery. So we're not looking immediately for any additional we have too much tonnage and all of it started out coming. We are very excited about what is happening, what is coming. We will of course we will not shy out of opportunities, but I think our cash, first of all, we will keep to reduce debt and to pay dividends. Those are our obligations to our bankers and to our shareholders.
That's helpful. Thanks for the time guys.
Question comes from the line of Ben Nolan from Stifel. Please go ahead.
Yes, thanks. So I guess I have a couple of questions. First, just for modeling purposes, after having done the share repurchases that you've done thus far, what share count should we be using as of the end of the quarter or maybe currently?
About 83,000,000, 83.5 $1,000,000 shares between these.
Okay. $83,000,000 I think that's a good round number.
Perfect. Thank you. And then another question, maybe for you Nick. I know in the past you talked a lot about ongoing discussions that you've been having with primarily oil majors who were looking to really do project specific situations, be it long term tankers, shuttle tankers or other things, even in the LNG market. Just curious if those conversations of varying types are still taking place in this environment or is that not really the case at least to the extent that it was?
Yes, I think from what we see today and you see them also out being in the market, I mean companies that traditionally are not that often out in the market like Exxon, they are out there. Chevron is out there for long term businesses. And I think at this stage, they are just discussing with owners like ourselves to see where new building prices will end up or secondhand prices will end up in order to price this piece of business. And I said we are all for this and we are right now in a turning point, very positive turning point after 23 years where we are trying or we are in the process of terming the company from 1 of the major shipping transporting tanker companies into a much more industrial company, helped by the 9 new buildings that are coming with very long contracts from 1 major, 2 from another major, the shuttle tankers. So all the ships that we're going to be taking in, it will change the balance and we will become a much more long term player rather than a sport player, but and this will be accomplished by the end of 2017.
And our aim will be to be able to cover as we do with profit sharing all our obligations by our chartered out fleet and because as George pointed out in his own breakeven transaction, I think this is something that we can achieve to know that all the ships that have 2 or 3 years more employment can cover the obligations for the whole fleet and then the remaining of the fleet make anything positive EBITDA on that will go straight to the bottom line.
Yes, it makes sense and that's very helpful color there. But along those same lines, everything that we're hearing is that bank finance is extremely hard to come by. And obviously, there are the have and the have nots, and I would assume that you guys would put yourselves in the category of those that can access finance. But does that change the way you think about rates of return when looking at these kind of transactions, long term charters with oil majors to the extent that probably very few of your competitors actually can participate in situations like that. Does it and even for you, I mean, bank finance is probably not quite as easy as it used to be.
Does it mean that you need to get better rates of return in order to justify effectively a higher cost of capital for the industry?
This is a very good point. And as you know, our strategy has always been in order to avoid having to aim for huge rates of return that I think when the market should be paying tanker owners for their effort. We prefer the method where we achieve a comfortable minimum rate, let's say for 5 or 10 years. So we know that all our obligations will be paid, then we will make a high single digit or low double digit return and then have a profit share that could actually have a very much higher return. And that's the strategy we've been following to avoid having to fight long battles with our clients.
Okay. So just on that line, we would or you would expect that probably the incremental business that you'd be doing would very likely include some sort of profit sharing element?
Yes. This is RMA. I mean, we can we would be happy to get a 10% return on our equity guaranteed and then split fifty-fifty the upside that could double that, but at least we could be guaranteed the 10% in this environment. Okay.
No,
that's very helpful. That does it for me. Thanks a lot.
Thank you.
Question comes from the line of Spiro Dounis from UBS Securities. Please go ahead.
Good morning, everyone. Thanks for taking the question. Just want to start off on LNG. You've been building out the technical management in that area. I'm just wondering was that solely around the Neo Energy FSU project or should we still expect to I guess to grow that segment out more and explore new opportunities?
Well, we believe that the LNG segment is a segment with a lot of future. We are an energy company and we are a diversified energy company. So we're not perhaps we are not a very simply company to analyze because we are in every single part of energy transportation, starting from small product carriers up to VLCCs and of course LNGs. So we are going to follow the requirements of the client. So if and we are seeing that the clients will require us to build more LNGs.
We are going to be doing this not opportunistically, but with employment. So I have to say, we are very excited about the LNG prospects. Long term, we have the feeling that LNG is where the tank is where back in the 60s when everything was chartered by appointment between oil companies and a handful of owners. We see the same environment now prevailing in LNG. And 50 years down the road you see how spot oriented the oil is, it could happen, I'm not saying it will, it could happen that this could be in the next 50 years, I doubt we will be around in the same shape that we are now, but at least the future generations can enjoy a much more liquid LNG.
So we are in cooperation with Hyundai Overseas Services, which is we have a fifty-fifty joint venture to run in house technical management and of course the commercial management.
Got it. Appreciate that color. And then just one follow-up on Ben's question just around doing these big strategic deals, but maybe ask it a different way. Obviously, the Statoil, Aframax deal was pretty significant, hard to come by those every year. And so there's no expectation of that, but I guess it's been smaller opportunistic transactions since then.
And if we think about the next few years maybe, is it more likely that we're going to see these continuing bolt on transactions? And maybe what's going to make the majors sort of trigger over to say, okay, we want a lot of tonnage for a lot of years, I guess what's the inflection point we're looking for?
I mean this is a business of pure business of supply and demand in good names. I think it's coming and I think the question was asked previously I think by Ben, but about there is significant right now because the rates have shown a softening, we get more calls by major oil companies trying to get long term business, but of course at numbers that do not meet our criteria. So I think the lesser new buildings that are coming in 2018 2019 more interest will be from oil companies to cover their obligations. So I expect to see as we go through 'seventeen interesting offers on this.
Got you. That's helpful. Last one, just quick housekeeping on the buyback program. Sorry if I missed it, but I think last quarter you mentioned that the Board approved an increase from the $20,000,000 up to something higher. I'm not sure if you disclosed what that was and how much is left?
We have agreed to another $20,000,000
Perfect. That's it
for me.
Thanks gentlemen. Have a nice weekend.
Thank you.
Question comes from the line of Fotis Giannakoulis from Morgan Stanley. Please go ahead.
Yes, guys, gentlemen, and thank you. Nick, I want to ask about some of the comments that your Chairman made at the beginning of this call about the poor market and contrary to this poor market, your solid profitability. And I want to ask you about your dividend distribution. If the market continues to be as weak as it has been at this point, but your earnings are rising because of the new buildings that you take delivery. How are you going to think about your capital allocation and your dividend policy?
You have stated about the 30% to 50% earnings distribution. And I'm wondering if in a weak market environment, you would still consider raising your dividend, if earnings go up, of course?
I believe that we are I mean, as you know, every October we have our strategy meeting where the Board and a lot of good advisers will discuss these issues. But I think our aim is to stick to the 25 to 50 or 30 to 50 distribution as we've been doing. We exceeded a bit this time. But if we continue, I think our aim is to continue the dividend. We believe the dividend is the best way to reward shareholders.
I just want to be a little to insist a little bit on this question. Would your recommendation be to increase the dividend if earnings increase together with the new buildings that you know that they are coming and they have solid contracts?
If the market environment also is in a healthy, not in a booming, in a healthy situation, yes, I think this will be our aim is as our income increases to increase the dividend, not to levels that will put the company in any danger, but to levels that will satisfy the shareholders and return the right value. Of course, if the environment around us is in collapsing, which we don't expect it to be, we will have to reconsider.
Okay. That's very clear. Thank you, Nick. And I want to ask about the asset values. We have seen asset values softening even before the chartering environment becoming so soft as it has been in the Q3.
And we've been hearing about the lack of capital, the pressure that a lot of ship owners they have not only from tankers, but particularly from dry bulk and container ships and also the lack of financing. Given the order book and it seems that this year or next year is going to be weaker than 2015 or earlier 20 16. How do you see the risk of further softening in asset prices? And how do you see the asset prices compared to the previous downturn during 2010 to 2014?
Well, this is the first time that you are right that we are seeing a complete lack of financing for speculative ships. I mean no bank will pay attention to someone who will just go place an order or buy a ship in the 2nd market without specific business, mainly the dry cargo and the container that have affected the tankers. But this is the first time last week that we have seen an intervention by
the Korean
Development Bank. And I think that this is unprecedented and it creates a new, I would say, buffer. There were some orders being placed speculatively at significantly very low prices at Korean yards. I think in the 80s for VLCCs and in the mid-50s or for Suezmaxes. And we had the Korean Development Bank actually not guaranteeing the loads and pulling the plug or the carpet under the shipyards.
The shipyards were desperate to get the loans, they said no these loans are going to destroy because the CPAs right now, the majority of them are financed and owned by the Korean Development Banks. So whereas as you rightly said in 20 ten-eleven, the yards were competing very hard for business, but of course did not have the best result for them as we saw. Right now because it has this the opposite, so there is support on that.
Okay, thank you. And Nick, I also want to ask about your exposure with Petrobras, If there is anything there that you can give us some color how these projects that you have with Petrobras are developing and if you've seen any risks on these contracts?
We've been doing business with Petrobras for 40 years and we have never had a single problem with them. You can never say never, but I think every month no news is good news. So we are continuing the relationship. And I think when they get right now they finish the Olympics, they have to finish the Paralympics and after they get a little bit straight with their political situation, the underlying demand for shipping there is there. And I think it's a huge country, Petrobras plays a very significant role.
So I believe that more opportunities will come. I expect a lot of more opportunities to come from Brazil in the next 2 years, Because the Brazilians, I think now with the new political situation, they have accepted the fact that they cannot build 150 vessels that they were planning to build of any sort and kind to move their own oil which was a more I would say left wing socialistic mentality for their exports. I think they have accepted that their shipbuilding capacity is not at this level, if it is at all. So I get the feeling that in the next 2 years, we're going to see a lot of demand for ships from Petrobras.
Just to clarify, you're talking about shuttle tanker deals and long term deals and these are
All sorts of vessels, not only shuttle tankers.
And these are long term deals that they might be of interest for you, I assume?
Yes. For me, I'm afraid to for some other people. So I don't have to talk to them now because but yes, I think for the industry, it will be interest.
And one last question, given that you are the last company that you have reported, so which means that you have a pretty good view of the Q3 results. What shall we expect for shuttle for Suezmaxes and Aframaxes during the Q3? I'm talking about mostly for your both for your spot fleet, but also for your overall blended rate, including your time charters?
Well, I think that the Q3 had faced a little bit of bumps on the way. And I mentioned the Russian reduction of exports, the Nigerian, as you know, the Nigerian disruptions which are turning back. But from what we see, hopefully this will turn around and we are going to look at a much stronger market. We are already looking the Chinese, we'll be looking for more imports, more fuel. So I think we base everything with our breakeven.
So I believe that our average will be well above our breakeven.
Is this a number that you can guide us that is the average of the market? I'm not asking specifically for you. I know that you have a better numbers than the market, but the Clarksons, for example, for Suezmaxes, shows something like, I think, a very low number, something like $11,000 in the Q3, if this is something close to reality or it's understating?
The year to date figures are in the mid-20s, which are comfortable. The specific Q3 which has not finished yet could be the market could be half of that. So you are right. But with prospects to be to get higher with Nigeria coming
back. The next question comes from the line of Magnus Fuhr from Seaport Global. Please go ahead.
Yes. Hi, guys. Just one question left to ask on the LNG projects that you're working on. With 2 of these ships now soon contracted, what are your prospects after getting these 2 put away on contracts? Are you looking to order ships against contracts?
And maybe you could talk a little bit about delivery schedule and pricing for additional vessels?
Yes. Hi, Magnus. Yes, our aim is to as I said, we're not going this is going to be another segment under the categories that the company has VLCC, Suezmax, Aframax, Panamax, Hanjin, Shuttle Tankers and LNG. So we're not we are not GasLog. I believe these guys do an amazing job and they're focusing on gas and we're not Dynagas.
We are a company that will own, I would say, half a dozen LNGs from now up to the end of this decade based on our long term charters. And we're always open in discussions, but we want to be as good in running LNGs as we are in running tankers and this is something that we will achieve.
And maybe you mentioned a 10% return on equity plus profit sharing on some of those tanker long term contracts. What kind of are your targets on the LNG for the for going ahead with a contract?
Well, our targets should have been higher because of course it is a more specialized business, it's a more demanding business, it's a much more expensive asset and it's an asset with technology still. So our targets according to our Chairman here should have been in at least 15% and higher. However, some of our colleagues in the peer group tend to get business for half of that. So we will have to without completely exposing ourselves, we will have to compete up to a level that is comfortable.
Okay. And what's the if you would order a ship today, kind of deliveries could you get on that and also what pricing are we talking about?
Marginship is so complicated because right now we would not order a ship unless the charter would come and actually explain to us what type of ship they would like us to order, which means what type of engine, what type of size. I mean right now the balls are the DASK has not settled in technology. I mean the dry fuels which we have we're going to be taking delivery of 1 of the highest quality built dry fuels with amazing performance equal to the MEG engines and much better and much more tested in some technologies. But some charters might even go back to steam, other charters would like to we have charters talking to us about most designs on ships. So it is it's we will not order anything unless it is specifically instructed by a charter what to order.
All right. That's good to hear. Okay. That's all. It's on me.
Thanks.
Thank you.
And your next question comes from the line of Amit Mehroty. Please ask your question.
Hey, thanks so much. I just have a quick one and maybe for my own education. It's regarding the age profile of
the fleet
and really sort of the tipping point if there is one in the crude tanker market that a ship needs to go for scrap. And the reason I asked that, I mean, if I just look at the VLCC fleet that's on the water today, only 1.5% of that of the ships are 21 years or older, and I can compare that to over 6% of the Capesize fleet that's at that age. So obviously, there is a practical reason for scrapping older tonnage and that makes sense to me. But the question is, if we look over the next 3 or so years, over 4% of the VLCC fleet will basically come of age. So there's obviously a good story here.
And I just wanted to understand it better maybe from a technical standpoint of how difficult is it for older crude tanker tonnage to actually trade in the spot market? And what would the market need to be like to maybe offset the extra costs associated with trading older tonnage? Thanks.
Well, I mean, if you look at how many vessels, I think we have it also in the presentations, are currently over 15 years. I mean, we have 128 VLCCs and the current order book is at about 119 vessels, 120 vessels. We don't say that all of them immediately will go to scrap. I mean, scrap levels for tankers because of the market being very strong in the last 2 years has been minimal. But on the other hand, if rates soften and this softening remains for, let's say, a period of 3, 4 quarters, then people when they have vessels that are due to go for the next special survey, they will have to think over if they're going to pass a vessel that will be 20 years old or approaching 20 years old.
Also the new regulations with the water ballast system and everything will make all these things a little a little bit more expensive for them to pass the survey. And let's not forget that in a market environment where we have many options, younger options, you have oil majors who are lowering the age bar. And so if let's say in previous cycles, we had people that were willing to take vessels up to 20 years, not for spot, but for period employment. Now you see that 15 years is the barrier. So for all these reasons, we expect that in the next 2, 3, 4 years, we are going to see significant part of the older tonnage exiting or going to places that will be just reserved for the trade of the older vessels.
Right. And that's what I was getting at. So right now, it's is it how difficult is it today to get employment for 20, 21 year old VLCC? Is there any sort of way you can just I know you talk about the bar being lowered, but clearly those ships are still on the water and not being So they assume to be getting some employment. So how difficult is that, just so we get a little bit of a sense in terms of the headwind?
I think it's going to it's more difficult for an oil major to approve a vessel to trade on their behalf. You might have certain spots like places in China. You might have places in maybe Africa where you can trade. But going to, let's say, places like Europe or the United States, you might have significant restrictions in trading the vessels there.
Okay. Thank you for that. One last question specifically related to maybe for Paul or someone else in terms of the capital structure. I mean, we are so far out of the end of June. Is there a way to just update us on what the capital structure and the new building commitments are maybe as of today or as of a more recent time than the end of the second quarter?
Sure. Well, I know you've been following our CapEx payments. We kicked off with a program of $1,100,000,000 About half of that is now being paid. The debt agreed relating to that program was $800,000,000 $340,000,000 of that. And we have about another, whatever the difference is, dollars 410 or whatever to draw over the next 18 months or so.
Okay. So as of today, you've got $550,000,000 left of which $460,000,000 of that will be debt financed?
Yes, give or take.
Okay, great. Thanks. That helps. Okay, guys, I appreciate it. Have a good weekend.
Thank you.
Thank you. And your next question comes from the line of Gregory Lewis of Credit Suisse. Please ask your question.
Hey, guys. How are you doing? I realize the calls run a little bit late here. So, really just a quick one for me on the industry. And I can see it seems like in the last week, we've seen a pickup in Aframax rates in the Caribbean that might have coincided with the lack of imports into the U.
S. The OE numbers were down pretty sharply yesterday. Is there any insights you have on that? And what's kind of going on in that market, which may be has picked up Aframaxes? Has there been a shift in trading?
Is it congestion? Any sort of color you could provide on that would be pretty helpful.
Well, as I said we are looking at one side of the Atlantic going through some sort of anomaly in the exploration and the export of oil. And I think that's why we have seen this side of the Atlantic moving up from the very low rates that they had in the lull of August. Also I think in the United States you are preparing for some stormy season?
You had the Hermine, the tropical storm Hermine which passed last week. And I think this is the main reason why we've seen this drop which we haven't seen drop in the crude stocks which we haven't seen since I think 1999. So the market is trying right now to assess whether this is a one off event. I think 14,100,000 barrels drawn, I mean this is a huge number. That's why we've seen the rally in the price of oil yesterday.
And so let's wait and see if this significant, let's say, drop in the crude stocks is a one off event because of the tropical storm that hit the U. S. Gulf area or whether this is going to be to continue.
Okay, guys. Thanks for the time.
Thank you.
Thank you. And your last question comes from the line of Mark Suarez of Macquillan Holdings. Please ask your question.
Thanks, guys. Thanks for taking my question. I'll also keep it quick here. I know it's been a long call, but just to go back on opportunities, I know that we talked about strategic opportunities on the new builds. I know you guys have done a pretty good job of paying those rates.
But I'm wondering if you have seen any renewed interest on the secondhand market, particularly on the 0 to 5 year, let's say, VLCCs and Suezmax. I know you talked about having a pecking order in terms of buybacks and dividends. But have you seen any sort of interest pick up in that area in the second hand on the 5 to 10 year, let's say, BFT 2, MAX, sort of like the same sort of transaction you had done with the Suezmax recently?
Yes, hi. We are seeing right now the only interest that actually is out the only sale candidate out in the market are sale candidates that are in forced, I would say, situation by banks. So we see owners that might own 3 or 4 tankers and then they have a fleet of 5 or 10 dry cargo ships, they are in distressed situation. So we have it's been a while since we have seen such a wide environment on the second hand market. I have to say that the summer is not the best period.
But we're waiting to see how it will develop now in the auto.
Got you. And then real quick on the second on the Suezmaxes. I know they're currently on spot. And I know, Nick, you mentioned that you want to increase your secured available days from 60% to a target of maybe 70%. I'm wondering if the strategy here will be to at some point lock in those Suezmax and uncharted And what sort of duration and type of employment are you looking for?
You mentioned profit sharing something you often want to see 50%, 50% above the current level. Is that something you can obtain for those 2 Suezmaxes?
Yes, I think right now the customer and petals are on the spot. But we have actual as we speak, Charter is offering for them for at least 1 year's employment. We could fix them today, but we would like to get into October closer to the winter season to be able to get a better rate. But yes fifty-fifty split will be also our policy.
Okay, well appreciate it guys. Thanks for the color.
Thank you. There are no further questions at this time. Sir, please continue.
Thank you very much for being so interested in TEN and hopefully you will also be interested on the TEN stock which we believe to as the company move in its new phase it will be very good opportunity. And we are here very busy on both operational and commercial fronts looking for an exciting autumn, the remaining of the 3rd Q4. And looking forward, the team is arriving in New York over the weekend and they would be participating and doing a lot of 1 on ones and presentations during that period of time. I think there is also a big event in Boston on 15th that the team will be presenting. So for those of you who did not get bored by our presentation already, we will have the 10 team in New York for the next 2 weeks.
Thank you very much for your interest.
Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may now disconnect.