Tsakos 3Q, 9 Mo Report
Tsakos Energy Navigation Limited (TEN) (NYSE: TNP) reported financial results (unaudited) for the third quarter and first nine months ended September 30, 2008:
3rd Quarter Highlights
• Voyage revenues of $158.83 million versus $122.55 million in Q3 2007.
• Net income of $40.98 million (no capital gain) compared to $18.20 million from operations ($50.00 million including $31.79 million from capital gains) in Q3 2007.
• Earnings per share (diluted) of $1.08 versus $0.48 ($1.31 including capital gains) in Q3 2007.
• Period-end fleet of 44 vessels, with over 4.7 million dwt, and an average age 6.1 years.
• Average TCE per vessel $33,732 per day versus $26,467 for Q3 2007, a 27.5% increase.
• Declaration of semi-annual dividend of $0.90 paid on October 30, 2008.
• TEN celebrated 15-years of profitable operations in the public markets.
9 Month Highlights
• Voyage revenues of $466.99 million versus $369.66 million in the first nine months of 2007.
• Net income of $175.32 million including capital gains of $34.56 million versus $130.99 including $38.19 million for the first nine months of 2007.
• Earnings per share (diluted) of $4.60 up 34.1% from $3.43 in first nine months of 2007.
• Sale of 1999-built aframax Olympia for a capital gain of $34.57 million.
• Delivery and long-term charter of two newbuilding vessels at attractive levels.
• Average TCE per vessel $34,890 per day versus $29,233 for the first nine months of 2007, a 19.4% increase.
• 22-month time charter of LNG carrier Neo Energy to same end-user.
• Declaration of two semi-annual dividends of $0.90 paid in April and $0.90 in October.
• Acquired 745,300 shares for an average price of $31.33, bringing the average price of acquired shares since the initiation of the buyback program, in January 2005, to $22.13.
Net income was $40.98 million for the third quarter of 2008 as compared with $50.00 million (including capital gains of $31.79 million) for the third quarter of 2007. Net revenues (voyage revenues net of commissions and voyage expenses) increased 28.0% to $124.35 million from $97.17 million. The time charter equivalent per ship per day was $33,732 in the third quarter of 2008 versus $26,467 in the third quarter of 2007. Operating expenses per ship per day increased to $9,243 from $7,507 in the third quarter of 2007, mainly due to higher crewing costs and the impact of the declining dollar for much of the third quarter of 2008.
Depreciation and drydocking amortization costs were $22.42 million compared to $22.60 million in the same quarter of 2007. Net income excluding capital gains this quarter rose by 125.1% to $40.98 million against $18.20 million in the same quarter last year. Diluted earnings per share was $1.08 compared to $1.31 or $0.48 excluding capital gains in the third quarter of 2007. Management fees increased reflecting the increased number of ships and fee increases while office overheads including expenses relating to the stock compensation program increased modestly.
Operating income was $56.81 million in this year’s third quarter compared to $71.08 million (including capital gains of $31.79 million) in the similar period of last year.
Interest and finance costs net of interest income fell to $15.08 million from $21.04 million reflecting the reduction in interest rates and positive movements in interest rate swap valuations compared to the previous year’s third quarter.
9 Month Results
Revenues, net of voyage expenses and commissions, were $386.67 million in the first nine months of 2008, up from $300.89 million in the same period in 2007. TEN operated on average 43.7 ships as compared with 41.2 a year earlier. TCE per ship, per day increased to $34,890 from $29,233 while operating expenses per ship per day increased to $9,373 from $7,361. General and administrative expenses were $3.16 million, up from $2.37 million in the same period last year.
Management fees rose in line with fleet expansion and contractual fee increases.
Interest and finance costs, net of interest income, rose to $45.81 million from $43.12 million from the impact of increased borrowings to fund fleet expansion, negative interest rate swap valuations and a reduction in interest and investment income and capitalized interest. However, the benefits of lower interest rates reduced this impact. Depreciation and drydocking amortization costs rose to $66.43 million from $63.12 million as a result of fleet expansion.
Net income in the first nine months of 2008, including capital gains of $34.57 million, reached $175.32 million compared to net income in the 2007 period of $130.99 million with capital gains of $38.19 million. Earnings per share (diluted) for the first nine months of 2008 were $4.60, while the first nine months of 2007 had diluted earnings per share of $3.43.
“The record profits of the first nine months of 2008 reconfirmed the efficacy of TEN’s corporate strategy and business plan,” observed D. John Stavropoulos, Chairman of the Board. “TEN’s diversified, young, and growing fleet combined with a balanced employment program has resulted in strong secular earnings growth. These results have funded a dynamic newbuilding program, consolidation exploitation, increased dividends and a complementary share repurchase program. TEN’s strategy will be tested again in 2009. The generally hostile economic and financial environment will require exceptional navigational skills. I believe TEN’s management will steer safe passage,” Mr. Stavropoulos concluded.
Subsequent Events - Other
In the fourth quarter of this year to date, TEN has repurchased 329,700 shares for an average price
of $25.37 per share, an $8.3 million investment.
Since the beginning of the share buyback program, in January 2005 through October 17, 2008 TEN has reacquired a total of 3,436,580 shares (682,600 shares as Treasury Stock 352,900 of which were acquired in the third quarter of 2008 and 329,700 subsequently) for an average per share price of $22.13, a $76.07 million investment.
On October 6th, 2008, TEN repurchased the 2002-built double hull suezmax tanker Cape Baker (renamed Decathlon) from the German K/G institution that had acquired the vessel, from TEN, via a sale-and-leaseback agreement in 2003. The price paid by TEN, as per purchase option agreed in 2003, was estimated to be half the vessel’s expected fair market value at the time.
On October 21, 2008 the DNA aframax Maria Princess was delivered from Sumitomo Heavy Industries, Japan and immediately placed on an attractive short term charter. Handysize product tanker Delphi achieved a three-year time charter extension to a major South American end-user.
The tanker market continues to operate in an environment that seems to be insulated from the global economic malaise that since September 2008 has become part of the world’s daily repertoire.
Both spot and period markets were strong, despite the customary weak nature of the third quarter. The world economy on the contrary, after years of strong growth has entered a major downturn in the face of the worst financial crisis since the 1930s. Many advanced economies are close to or moving into recession while growth in emerging economies is also weakening. The top priority of governments and policy makers around the world is the stabilization of the global financial environment by injecting liquidity, restoring faith in the system and nursing economies through this period of turmoil. The International Monetary Fund (“IMF”) expects global growth to slow considerably in 2008 with a modest recovery late in 2009.
The deterioration of the global economy continues to impact different aspects of the oil market including demand for crude and products in the developed economies and to a lesser extent in the emerging economies. Forecasts for 2008 and 2009 were further trimmed by 240 kb/d and 440 kb/d, respectively, based on the most recent IMF global GDP assumptions and weaker OECD deliveries. World oil demand is now expected to average 86.5 mb/d in 2008 (+0.5% or +0.4 mb/d vs. 2007) and 87.2 mb/d in 2009 (+0.8% or +0.7 mb/d).
The WTI crude oil price fell by over 53% from its all time high of $145.29 per barrel on July 3rd, 2008. OPEC decided in an emergency meeting on October 24th, 2008 to cut production by 1.5 mb/d effective November 1, 2008. The level of compliance to these production cuts and its effect on energy transportation, together with the response of non-OPEC producers, remains to be assessed. Geopolitical conditions and associated risks primarily on the production and supply of oil will continue to play a major role in the tanker freight environment.
The rising cost of credit and more importantly the reduction in its availability has primarily affected the various markets where shippers experience difficulties in securing and renegotiating letters of credit to finance cargo movements. The tanker market has remained resilient to the prevailing negative economic sentiment and conditions. This can be attributed to the quality of charterers being primarily oil majors, refineries and government-backed end-users. Tanker shipping remains the most economic mean to transport energy globally as the freight paid constitutes a small part of the overall value of the cargo.
Based on current demand for crude oil and petroleum products primarily from the developing regions and the appetite of charterers for long term fixtures at healthy rates makes us believe that the impact of the current financial turmoil on the tanker universe will be manageable. The imminent International Maritime Organization (“IMO”) single-hull phase out in April 2010 (around 20% of current fleet) and the possible positive impact the current financial environment will have on the orderbook (order cancellations) could prove a boon to the industry going forward.
Fleet Strategy & Outlook
TEN has one of the more modern and versatile fleets in the public sector. The diversity of its fleet encompasses all available categories to service both the crude and oil products. Specifically, TEN owns and operates three Very Large Crude Carriers (“VLCC”), ten suezmaxes, ten aframaxes, seven panamaxes and fourteen handysize and handymax product tankers plus one LNG carrier. This fleet has enabled TEN to be on the forefront of worldwide chartering activity while its cash generating ability has significantly contributed in its organic development and facilitated the sustainability of the Company’s dividend program. As a result TEN’s cash generation ability is spread over various asset classes and an array of first-class charterers that insulates the company from violent market gyrations.
At the end of the third quarter, TEN’s operational fleet was 44.0 vessels and management continued to fine tune the fleet’s employment to closely conform to its preference for fixed charters with variable rates (minimum plus profit sharing). For the first nine months of 2008, TEN had fixed 55.0% of the fleet’s operational days in such flexible charters, up from 47.5% in the same three quarters last year. Over the same time frame, TEN reduced its pure spot market exposure to 8.1% of operating days from 16.4% in the first three quarters of 2007. This reduction however, does not reflect a change in the company’s outlook for the market. Rather, it is a reflection of the appetite of oil majors and other end-users to fix vessels for the long term and the company’s policy to closely align its employment policy to the needs of its long standing partners.
In doing so and in light of the size of the fleet coupled with the five additional newbuildings that are expected to join the fleet over the next seven quarters, the company maintains enough latitude to participate in the spot market if it views that such market, at any particular time, offers the best prospects for opportunistic gains. This timely combination of charters and ability to tap various chartering markets depending on demand has put the Company in good stead. With an almost equal amount of operating days and vessels, TEN, this quarter, generated 29.6% higher revenues than in the 2007 quarter.
TEN’s strategy is designed to produce earnings visibility and growth. Today out of an operational fleet of 45 vessels, 41, including four in Contract of Affreightment (“CoA”), operate on secured employment, 39 of which on charters with downside protection and upside potential, and four in the pure spot market. Of these only the four spot vessels are exposed to employment risks. In short, 91.1% of our fleet today has secured employment. As a result, for full year 2009 and assuming the profit sharing vessels will only earn the minimum, 70% of employable days have been secured with expected revenues of $290 million while for 2010 43% of employable days have been secured with minimum gross revenues of $140 million.
Apart from growing its cash generating assets, TEN will continue its fleet renewal program and consider attractive opportunistic sales. Trading of vessels has proved very lucrative for the company in the past and will continue to be a fundamental strategy to complement operational earnings with capital gains.
“In our 15 year history, TEN has gone through various cycles, maritime or not, and has always come out stronger. We are confident that TEN will again prove able to take advantage of opportunities and continue to add value to its shareholders.” stated Mr. Nikolas P. Tsakos, President & CEO of TEN. “Our long standing relations with our charterers, ship builders and finance providers coupled with our reputation in the tanker markets, makes us confident in identifying such opportunities,” Mr. Tsakos concluded.