Welcome to Tsakos Energy Navigation conference call on the second quarter 2016 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 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 Navigation. Please go ahead.
Thank you very much. Good morning to all of our participants. This is Nicolas Bornozis, Investor Relations Advisor to Tsakos Energy Navigation. This morning, the company, Tsakos Energy Navigation, publicly released its financial results for the second quarter of 2016. In case you do not have a copy of today's earnings release, please call us at 212-661-7566 or email us at tenn@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 addressed 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 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.
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. Takis 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 third quarter 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. Profitability is unquestionable. It underlines that TEN is one of the few companies that can demonstrate such profitability in difficult times. On behalf of the board, I'd like to congratulate Nico 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 million per annum in EBITDA.
Congratulations to Nico Tsakos and his team, and for managing and navigating the company in such a profitable way in difficult times. Over to you, Nico. Thank you.
Thank you, Chairman. Thank you, ladies and gentlemen. Welcome to our second quarter results. As Mr. Arapoglou said, the market environment in the second quarter has been uncertain. However, TEN, 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. Usually, the second quarter, 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 secondly, 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. Those are going to come on time for the market to turn around as we expected significantly on the fourth quarter. 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. They've been using a lot of their production to fulfill local obligations. We expect also this, and a colder winter to help the rates on the spot market. On the other hand, we are TEN.
We are following 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 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. 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 obligations. Profitability will not be in question. The 70% of our fleet that will have the long-term employment will cover all our obligations, and then anything else that our spot fleet produces will be the profit. 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. 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. We are here always trying to take advantage of them. I will ask George Saroglou, our COO, to tell us quickly what we've been doing for the last three and six months.
Thank you, Nico. We reported today another profitable quarter and half year results. 2016 is a landmark year for the company as its growth program, being the largest since inception in 1993, is coming to fruition. Despite a decline in rates during the second quarter 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 2010 until the end of 2013. 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 whose format we will follow during the call. Let's turn to slide number three with the key operating highlights.
We took delivery of two new buildings during the second quarter, the VLCC Ulysses in May, and the Aframax tanker Elias Tsakos in late June. After a repositioning voyage, Ulysses started a 40-month employment at an accretive rate. Elias Tsakos is the first of nine purpose-built Aframax tankers that will serve Statoil for minimum seven years, maximum 12, if charterers exercise all extension options. In addition, during the third quarter, TEN took delivery of the second Aframax, Thomas Zafiras, chartered to Statoil, and the first of two Panamax LR1 tankers, again built against a five-year time charter. From now and until the end of the year, the company expects to take delivery of another two Aframax tankers, also chartered for seven years to Statoil, a second Panamax LR1 tanker, also chartered for five years, and the company's second LNG vessel, Maria Energy.
2016 is the company's busiest growth year since 2007. Following a successful four-year charter that ended in February of 2016 and a few spot trading fixtures since then, we announced today the fixture of the 2007-built LNG Neo Energy to two years plus six months in charter options at a rate that covers the vessel's 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 fourth quarter. 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 second quarter of 2016, TEN operated on average 50.5 vessels. Pro forma, 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 the $40-$50 range level.
Compared to where the oil price has been not so long ago, back in 2014, this low oil price environment continues to impact 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 1.4 million 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 33.5 million 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 2016 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 12-18 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 is the main financial highlights of our press release, which Paul will present in more detail. I would like to point out the $16.4 million net income for the second quarter to $41.8 million for the six-month period, EBITDA of $111 almost million for the six months, and the strong balances and cash reserves at $263 million at the end of the first half of the year. This is the fleet as it stands right now, pro forma, 65 vessels, which includes the 54 vessels in operation. 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 new building vessels the company is building are fixed on long-time charters with minimum five-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 five vessels are specialized, covering the LNG and the 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 the Enterprise fleet, the average age number of TEN's fleet is expected to be reduced. Slide six lists the clients of TEN, 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 TEN built most of the fleet before the rise of new building prices. The purchasing power of the technical manager, Tsakos Columbia Shipmanagement, and the stringent cost control by management has reduced the fleet OpEx levels, this has also to be highlighted. Slide eight gives some few pointers about the market. Demand, as we said, is expected to continue growing at 1.4 million barrels per day, which is higher than the long-term growth trend, which is about of 1 million 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 benefits the tanker market.
Rising volumes, arbitrage trades, longer distances, and manageable fleet growth for crude tankers are expected to support the market in 2016 and beyond. Next slide is the order book, as you can see, the order book beyond the next three, four quarters is shrinking as shipyards in the Far East reduce capacity, are also in the midst of restructuring, 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 10th to the shareholders of record on November 4th. In total, since 2002, TEN has paid $10.36 in cash dividends per share, or approximately $436 million, this compares with a listing price in our IPO of $7.50.
The average yield since the IPO is five and a quarter per annum. In addition, the company has repurchased since January, 3.7 million common shares at an all-in cost of $5.58 per share. In the last 10 years, the company has repurchased 7.5 million common shares at an all-in cost in excess of $103 million. Slide 11 has the most recent NAV calculation and lists the analysts covering TEN. The management vision is to continue growing the company responsibly, 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 second quarter and first half of the year. Paul?
Thank you, George. Despite a challenging quarter, TEN achieved net income of $16.4 million in quarter two and earnings per share of $0.15 after preferred stock dividends of $4 million. Six-month net income was $41.8 million, 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 two by $7 million compared to the previous quarter two.
Fortunately, as George has mentioned, the vessel's new storage charter will generate revenues that offset 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 two was $21,700 and $22,500 for the six months. Half our Suezmaxes were on spot at rates 18% down on the prior quarter two, and Aframax rates were similarly down. The Suezmax tanker Decathlon acquired in quarter one and the more recently delivered VLCC Ulysses fortunately did help to boost net income by a combined $1.5 million in quarter two.
While those product carriers on spot also earned less than in the prior quarter two, 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 two daily average OpEx per vessel fell 2% to $8,026. For the six months, OpEx was $7,958, also 2% down from the six 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 $1,400 per vessel per day. Finance costs were at $8 million, similar to the prior quarter two, slightly higher interest being offset by reduced payments on bunker hedges, which also helped reduce the six-month finance costs. EBITDA amounted to over $51 million in quarter two, while six-month EBITDA was $111 million.
All vessels generated positive EBITDA in quarter two, apart from one vessel in dry dock and the LNG carrier. In quarter two, outstanding loans increased by $133 million as our new building program progressed. $77 million of this was for the new VLCC, which generated healthy income on the spot market before entering an accretive time charter. This brings overall debt to $1.56 billion at the half year end, and net debt to capital to 47.8%. We have approximately $410 million arranged debt still to draw in connection with the remaining 11 vessels, nine of which have charters attached, which will generate more than adequate cash to service that debt. Now I'll return the call to Nikolas.
Thank you, Paul. 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. 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. 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. Whereas the LNG put a burden on our second quarter results because of her repositioning for her FSU charter, we hope that they will be able to pay this investment back very soon.
With this, we would like to open the floor and to any questions that you may have. Thank you.
Question and answer session. If you would like to ask a question, please press star one and wait for your name to be announced. If you would like to cancel that request, just press the hash key. Your first question comes from the line of Noah Parquette from JP Morgan. Please go ahead.
Hey. Thanks. Just have a couple of questions. Can you give any guidance on the terms of the LNG floating storage charter? Perhaps, an annual EBITDA number or something that we could use to get a sense of what the profitability is?
Yeah. Hi. This is something that we see as a long-term project. The initial two-year period is covering our all-in breakeven, as George mentioned it. If the options are taken, I think we will have additional profits from that. Of course, after that, the vessel is being chartered for two years on a fixed rate, which covers our bottom line at a significant increase, almost more than doubling of the other period, of the optional period. Much more negotiations going forward. I think for us, we're very happy with this situation because 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. For the Ulysses, the charter, again, can you give 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 is very accretive. All I can say, it's twice our breakeven. If you go to our breakeven chart, this is also something very accretive, it has also upside because it has bunker fuel protection clauses. If I tell you more, I will have to send you the charter party also.
All right. 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, have you given some thought to that? Thanks.
Again, we tried to act thanks to the guidance from our technical people. We acted preemptively, and not only us, big part of the industry. Big part of the industry acted preemptively, which means that we completed a heavy dry docking and special survey schedule that will show effect in our 2016 results. In order to get a five-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 the minimum cost will be half a million dollars per vessel for the average size of ships, excluding the off-hire. We believe that within five 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, Mark.
Just wanted to follow up first on Noah's question on the FSU contract or 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 relative to where spot rates are today? Call it $38,000. I know it's a bit of a loaded number because utilization across the fleet is not nearly uniform. If we just think about it, if we just allow for that and just think about a $38,000 rate on a spot basis, how would an FSU contract look right now for two years?
I think you have on two 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 you said, for a tri-fuel vessel, because then you have to put some discounts on ships that are technologically smaller, et cetera. Hopefully by next week, because I'm in the market talking to these people every day, by next week, we can talk about $40,000 a day. Every week we can get a little bit more. The FSU, considering that an FSU project, the vessel is in semi lay-up, you do not have the expenses of a normal ship. You have less crew, less lubricant consumption, less Expenses, less insurance, as Mr. Harris told us, on the vessel. You have to have a discount from the $38.
Today, I would say for a time-to-buy investment, if you could find business, it would be in the mid-$20s. I think that's about the levels that-
Okay
storage business, but of course, then it is more profitable because you have less expenses also.
Right. No, that's very helpful. 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?
Oh, yes. I think this is for sure. I think we get the feeling that, in 2018, it's just a feeling, this is what we hear from the market and actually from the end users. From 2018 on, there will be a significant disturbance between supply and demand. There will be more cargos than ships. We hope this is true.
Fair enough.
From 2016 and 2017, like in the tankers, you have more deliveries. We believe that 2018 will be a year. We will not charter a ship post 2018.
Right
At today's levels.
That makes sense.
For new building, it's very important to get a very good name to start the vessels and on the right foot. We believe that she has a very good future.
Got you. Just one more on that and I'll move on, 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 FSU 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 gave a lot of information here. The Chinese had the choice to build a storage unit at the harbor or to charter a ship.
It was not really replacing an FSRU. 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.
Yes, Mark.
Just one more from me, then I'll move on. Just around usage of cash. Obviously rates are easing, and you gave 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? 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 dive into asset values that are at a multi-year low?
Well, as I said, I think we have already a program well planned since 2013 of the delivery. We're not looking immediately for any additional. We have too much tonnage all of it chartered out coming. We are very excited about what is happening, what is coming. We will, of course, we will not shy out of opportunities. I think our cash, first of all, we will keep to reduce debt and to pay dividends. Those are our obligations.
Okay
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.
Yeah, thanks. 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 million, 83 and a half million shares.
Okay. Perfect.
83 million , I think that's a good round number.
Perfect. Thank you. Another question maybe for you, Nick. I know in the past you talked a lot about ongoing discussions that you'd 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, 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. I said, we're all for this, and we are right now in a very positive turning point after 23 years.
We are trying or we are in the process of turning the company from one of the major shipping, transporting tanker companies into a much more industrial company, helped by the nine new buildings that are coming with very long contracts from one major, two from another major, the shuttle tankers. 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 spot player. This will be accomplished by the end of 2017.
Okay.
Our aim will be to be able to cover, as we do with profit sharing, all our obligations by our chartered out fleet. As George pointed out in his own break-even transactions, I think this is something that we can achieve. We know that all the ships that have two or three years more employment can cover the obligations for the whole fleet, then the remaining of the fleet, anything positive on that will go straight to the bottom line.
Yeah, that makes sense. That's very helpful color there. Along those same lines, everything that we're hearing is that bank finance is extremely hard to come by. Obviously there are the have and the have-nots, I would assume that you guys would put yourselves in the category of those that can access finance. 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. Even for you, 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?
Yeah. This is a very good point. As you know, our strategy has always been in order to avoid having to aim for huge rates of returns. 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 five or 10 years. We know that all our obligations will be paid. We will make a high single digit or a low double-digit return, have a profit share that could actually have a very much higher return. That's the strategy we've been following to avoid having to fight long battles with our clients.
Okay. Just on that line, you would expect that probably the incremental business that you'd be doing would very likely include some sort of profit-sharing element?
Yes.
Okay.
We would be happy to get a 10% return on our equity guaranteed, and then split 50/50 the upside that could double that. At least we could be guaranteed the 10% in this environment.
Right. 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 you, I guess, to grow that segment out more and explore new opportunities?
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. We are not a very simple 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. We are going to follow the requirements of the client. If 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. I have to say, we are very excited about the LNG prospects long term. We have the feeling that LNG is where the tankers were 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.
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. We are in cooperation with Hyundai Overseas Services. We have a 50/50 joint venture to run in-house technical management and, of course, the commercial management.
Got it. Appreciate that color. Just want to 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. So there's no expectation of that, but I guess it's been smaller opportunistic transactions since then. If we think about the next few years, maybe, is it more likely that we're going to see these continuing bolt-on transactions? 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?
Well, this is a 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. Of course, at numbers that do not meet our criteria. I think the lesser newbuildings that are coming in 2018 and 2019, the more interest will be from oil companies to cover their obligations. I expect to see, as we go through 2017, 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 million up to something higher. I'm not sure if you can disclose what that was and how much is left.
We have increased it to another $20 million.
Perfect. Thanks for the information, gentlemen. Have a nice weekend.
Thank you.
Question comes from the line of Fotis Giannakoulis from Morgan Stanley. Please go ahead.
Yes. Hi, gentlemen, and thank you. Nik, 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. 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 newbuildings as you take delivery, how are you going to think about your capital allocation and your dividend policy? You have stated about a 30%-50% earnings distribution. I'm wondering if in a weak market environment, you would still consider raising your dividends. If earnings go upper, of course.
As you know, every October, we have our strategy meeting where the board and a lot of good advisors, we discuss these issues. I think our aim is to stick to the, I think, 25%-50% or 30%-50% distribution as we've been doing. We exceeded it a bit this time, 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 insist a little bit on this question. Would your recommendation be to increase the dividend if earnings increase together with the newbuildings 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 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 a collapsing, which we don't expect it to be, we will have to reconsider.
Okay. That's very clear. Thank you, Nik. 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 third quarter. We've been hearing about the lack of capital, the pressure that a lot of shipowners, they have, not only from tankers, but particularly from dry bulk and container ships, also the lack of financing. Given the order book, it seems that this year or next year is going to be weaker than 2015 or earlier 2016, how do you see the risk of a further softening in asset prices? How do you see the asset prices compared to the previous downturn during 2010-2014?
Well, this is the first time that you are right that we are seeing a complete lack of financing for speculative ships. No bank will pay attention to someone who will just go place an order or buy a ship in the second market without specific business, mainly the dry cargo and the container that have affected the tankers. This is the first time, last week, that we have seen an intervention by the Korea Development Bank. I think that this is unprecedented, and it creates a new, I would say, buffer. There were some orders being placed speculatively at significant, very low prices at Korean yards. I think in the 80s for VLCCs and in the mid-50s for Suezmaxes. We had the Korea Development Bank actually not guaranteeing the loans 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 shipyards right now, the majority of them are financed and owned by the Korea Development Banks. Whereas, as you rightly said, in 2010-11, the yards were competing very hard for business, but of course, did not have the best results for them, as we saw. Right now it has the opposite. There is support on that.
Okay. Thank you. Nik, 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. We have never had a single problem with them. You can never say never, but I think every month, no news is good news. We are continuing with the relationship, and I think Right now they finished 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. I think, it's a huge country. Petrobras plays a very significant role. I believe that more opportunities will come. I expect a lot of more opportunities to come from Brazil in the next two years.
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 these levels, if it is at all. I get the feeling that in the next two 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.
All sorts of vessels, not only shuttle tankers.
These are long-term deals that they might be of interest for you, I assume.
Yes. For me and I'm afraid for some other people, so I don't have to talk to them now because yes, I think for the industry, it will be interesting.
One last question, given that you are the last company that you have reported, which means that you have a pretty good view of the third quarter results, what shall we expect for Suezmaxes and Aframaxes during the third quarter? I'm talking about mostly both for your spot fleet, but also for your overall blended rate, including your time charters.
Well, I think that the third quarter had faced a little bit of bumps on the way. I mentioned the Russian reduction of exports, the Nigerian disruptions, which are turning back. From what we see, hopefully this will turn around, and we're going to look at a much stronger market. We're already looking, the Chinese will be looking for more imports, more fuel. I think we base everything with our breakeven. I believe that our average will be well above our breakevens.
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 better numbers than the market, Clarkson, for example, for Suezmaxes, it shows something like, I think a very low number, something like $11,000 in the third quarter. If this is something close to reality or it's understating what the-
The year-to-date figures are in the mid-20s, which are comfortable. The specific third quarter, which has not finished yet, the market could be half of that. You are right. With prospects to get higher with Nigeria coming back.
Okay. Thank you very much for your answers.
Thank you.
The next question comes from the line of Magnus from Seaport Global. Please go ahead.
Yeah. Hi, guys. Just one question left to ask on the LNG projects that you're working on. With two of these ships now Soon contracted. What are your prospects after getting these two put away on contracts? Are you looking to order ships against contracts? 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, this is going to be another segment under the categories that the company has, VLCC, Suezmax, Aframax, Panamax, Handysize, shuttle tankers and LNG. 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. We are 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.
Maybe you mentioned a 10% return on equity plus profit sharing on some of those tanker long-term contracts. What are your targets on the LNG, 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. 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. Without completely exposing ourselves, we will have to compete up to a level that is comfortable.
Okay. If you would order a ship today, what kind of deliveries could you get on that, and also what pricing are we talking about?
Magnus, it is so complicating because right now we would not order a ship unless the charterer 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. Right now the dust has not settled in technology. The tri-fuels, which we're going to be taking delivery of one of the highest quality built tri-fuels with amazing performance equal to the mega engines and much better and much more tested in some technologies, but some more charterers might even go back to steam. Other charterers we would like to have charterers talking to us about Moss designs on ships. We will not order anything unless it is specifically instructed by a charterer what to order.
I get it. All right. That's good to hear. Okay. That's all. It's on me. Thanks.
Thank you.
Your next question comes from the line of Amit Mehrotra. Please ask your question.
Hey, thanks so much. I just have a quick one, maybe from 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. The reason I ask that, if I just look at the VLCC fleet that's on the water today, only 1.5% of the ships are 21 years and older, and I can compare that to over 6% of the Capesize fleet that's at that age. 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.
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 cost associated with trading older tonnage? Thanks.
Well, if you look at how many vessels, I think we have it also in the presentations, are currently over 15 years. We have 128 VLCCs, and the current order book is at about 119 vessels, 120 vessels. We do not say that all of them immediately will go to scrap. Scrap levels for tankers because of the market being very strong in the last 2 years has been minimal. 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.
The new regulations with the water ballast system and everything will make all these things a little bit more expensive for them to pass the survey. 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.
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 deployment. Now you see that 16 years is the barrier. For all these reasons, we expect that in the next two, three, four years, we are going to see a significant part of the older tonnage exiting or going to places that will be just reserved for the trade of the older vessels.
Right. That's what I was getting at. Right now, how difficult is it today to get employment for a 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 scrapped, so they assume to be getting some employment. How difficult is that? Just so we get a little bit of a sense in terms of the headwind.
I think 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. Going to, let's say, places like Europe or the U.S., you might have significant restrictions in trading the vessels there.
Okay. Thank you for that. One last question specifically related to, maybe for Paul Durham or someone else, in terms of the capital structure. We're 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 $1.1 billion. About half of that has now been paid. The debt agreed relating to that program was $800 million, $340 million of that. We have about another, whatever the difference is, $410 or whatever, to draw over the next 18 months or so.
Okay. As of today, you've got $550 million left, of which $460 of that will be debt financed.
Yes. Give or take. Yeah.
Okay, great. Thanks. That helps. Okay, guys, I appreciate it. Have a good weekend. Thank you.
Thank you.
Thanks. Bye.
Thank you. 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. 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 DOE numbers were down pretty sharply yesterday. Is there any insights you have on that and what's going on in that market which maybe 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.
Yeah.
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. The market is trying right now to assess whether this is a one-off event. I think 14.1 million barrels drawn. This is a huge number. That's why we've seen the rally in the price of oil yesterday. 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 continue.
Okay. Okay, guys. Thanks for the time.
Thank you.
Thank you. Your last question comes from the line of Mark Suarez of McQuilling 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 obtaining those rates, but I'm wondering if you have seen any renewed interest on the secondhand market, particularly on the zero to five-year, let's say, VLCCs and Suezmax. I know that you talked about having a pecking order in terms of buybacks and dividends. Have you seen any sort of interest pick up in that area in the secondhand on the five to 10-year, let's say, [VSGT2, Max], sort of like the same sort of transaction you had done with the Suezmax recently?
Yes. 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 a forced, I would say, situation by banks. We see owners that might own three or four tankers, and then they have a fleet of five or 10 dry cargo ships. They are in distressed situations. It's been a while since we have seen such a quiet environment on the secondhand market. I have to say that the summer is not the best period. We're waiting to see how it will develop now in the autumn.
Got you. 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 Suezmaxes on time charters, 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 our current level. Is that something you can attain for those two Suezmaxes?
Yeah, I think right now, the Catherine and the [Dasso] are on the spot. We have actually, as we speak, charterers offering for them for at least one 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. Yeah, a 50/50 split will be also our policy.
Okay. Well, I appreciate it, guys. Thanks for the call.
Thank you.
Thank you. There are no further questions at this time, sirs. Please continue.
Well, thank you very much for being so interested in TEN, hopefully you'll also be interested on the TEN stock, which we believe as the company moves in its new phase, it will be a very good opportunity. We are here very busy on both operational and commercial fronts, looking for an exciting autumn, the remaining of the third and fourth quarter. Looking forward, the team is arriving in New York over the weekend, and they will be participating and doing a lot of one-on-ones and presentations during that period of time. I think there is also a big event in Boston on the 15th that the team will be presenting. For those of you who did not get bored by our presentation already, we will have the TEN team in New York for the next two 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.