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Operator
Thank you for standing by, ladies and gentlemen, and welcome to the SACOS Energy Navigation Conference call on the third quarter and nine months 2020 financial results. We have with us Mr. Takis Arapaglu, Chairman of the Board, Mr. Nicholas SACOS, President and CEO, Mr. Paul Durham, Chief Financial Officer, and Mr. George Soroglu, Chief Operating Officer of the company. At this time, all participants are in a listen-only mode. There'll be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, please press star and 1 on your telephone keypad and wait for your name to be announced. I must advise you that this conference is being recorded today. And now I pass the floor to Mr. Nicholas Bournois, President of Capital Link, Investor Relations Advisor of Tacos Energy Navigation. Please go ahead, sir.
Takis Arapaglu
Thank you very much, and good morning to all of our participants. I am Nicholas Bournos of Capitalink, Investor Relations Advisor to Chakos Energy Navigation. This morning, the company publicly released its financial results for the nine months and third quarter ended September 30, 2020. In case we do not have a copy of today's earnings release, please call us. at 212-661-7566, or email us at 10TEN at CapitalLink.com, and we will have a copy emailed to you right away. Please note that prior to today's conference call, there is also a live audio and slides webcast, which can be accessed on the company's website on the front page at www.TENN.com. The conference call will follow the presentation slides, so please, we urge you to access the presentation slides on the company's website. Please note that the slides of the webcast presentation will be available and archived on the website of the company 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 Security Litigation Reform Act of 1995. Investors are costumed that such forward-looking statements involve risks and uncertainties which may affect TENS business prospects and results of operations. And at this moment I would like to pass the floor on to Mr. Arapoglou, the chairman of Xakos Energy Navigation. Mr. Arapoglou, please go ahead, sir.
Nicholas Bournos
Thank you, Nicholas. Good morning and good afternoon to all. Thank you for joining us on our call today reporting third quarter nine-month results. As you've seen, a more than double increase year on year in operating income and positive quarterly results in such a weak market while paying off all our obligations, replacing all the tonnage with new accretive business, maintaining a comfortable cash position, redeeming recently a preferred issue and maintaining a healthy dividend. All this demonstrates alertness and flexibility by our management, and fully validates our strategy and positioning in the market that you've been hearing all along. These attributes will certainly allow us to benefit from the anticipating gradual recovery in the market so that we can continue offering our shareholders value going forward. Thank you from my side. Happy Thanksgiving to all. And I'll now pass the floor to Nikos Tsakos, who deserves, together with his management, once again, congratulations. Nikos, the floor is yours.
Nicholas
Thank you, Chairman, and good morning to all of our participants. It has been, as described in the press release, a very, very strange, I would say, painful years on a personal basis for many of us. However, in the meantime, we have been able to maintain a steady course in taking 10. One step further to its goal, which is the full appreciation of its shareholders' value and the company's growing business. The chairman was kind enough to mention with the help of all on board, our seafarers, our technical management team, the whole Tsakos organization, we have been able to maintain an unprecedented high utilization in very difficult times, operational difficult times. And the last quarter, the third quarter, which seasonally is a slow quarter, was actually also influenced by operational difficulties barriers to doing business as usual caused by the pandemic. In the meantime, TEN was able to achieve its goals regardless of the circumstances. The most important part of it has been the modernization of the fleet. In the first nine months, we have sold six of our older ladies, as we say, And we have replaced them with a significant four economically designed and environmentally designed vessels, all of them with accretive businesses. This has been, I think, also in our bottom line, we have been able to maintain our very high utilization, reduce debt, reduce preferred obligations, and prepare the company going forward in a much more normalized environment. We are seeing around us significant signs in the other segments of the shipping business that go in parallel or with a time lag. We're seeing that the dry cargo market has turned a corner and going from strength to strength. We're seeing a very strong recovery from a very, very low starting point of the container sector. And since November, we are seeing similar signs of recovery in our business. So with this introduction, we are looking at going forward in an environment where the supply, which is usually what hurts our business, is very, very normalized. We have the lowest supply in the last 30 years. And also a very significant scrapping. We finally, the pain of the last quarter has led to finally some of the older VHLCs being scrapped after a very long time. And we already have seen 380 tankers being scrapped. A strong 7% of the tonnage out there being scrapped within this year and growing. So this group gives us very good prospects going forward. The company has maintained its uninterrupted It's an interrupted dividend payout, and having a strong balance rate and a strong cash position, we're looking at better times going ahead. I will ask George Saroglu to give you a detailed analysis of the last three and nine months, and then we will be available, all of us, to answer any questions. Thank you. Thank you, Nikos.
George Saroglu
Good morning to all of you joining our earnings calls. We report today a profitable third quarter and nine months of 2020 operation. It has been a rollercoaster year for the tanker industry and the world because of the COVID-19 pandemic and its economic, social and health-related repercussions. We continue to successfully navigate the logistic and regulatory challenges of COVID-19 with no impact to our operations so far. Thank God. The shipping industry, because of the pandemic, the lockdowns, border closures and reduced airline capacity has experienced significant challenges with crew changes. We have safely performed crew changes, but the problems with restrictions and logistics remain as different parts of the world navigate through the second wave of the pandemic. We anticipated the second wave and planned all crew changes before it arrived, with no cases of contaminations for the sign-on crew on board our vessels and in full support of our Charter's trade requirements 24-7. It has been a Herculean task. I want to take the opportunity to thank one more time and tell how proud we are for all our seafarers and onshore personnel for their hard work, patience, perseverance and professionalism during this unprecedented time. We will continue to work hard to normalize crew changes and bring seafarers safely back home to their families without disrupting the operational readiness and efficiency of the fleet. This has been and will continue to be our number one priority while the pandemic lasts and until we return to normal industry practices for crew changes. Let us now go to the slides of our presentation. In slide three, we see that Since Ten's inception in 1993, we have faced four major crises. The Far Eastern crisis in 1999, the 9-11 crisis, the credit crisis of the credit recession in 2008-2009, and currently the COVID-19 pandemic. But each time, the company, thanks to its operating model, which is built to be crisis resistant, has come out stronger. from four modern vessels in 1993 to a pro forma fleet of 50 vessels for an average 15% annual growth in terms of deadweight tons in the four decades we operate. This time has not been an exception. Since the start of the year we sold six tankers with an average age of 14.7 years and replaced them with new building orders for four eco-design conventional tankers plus one option one shuttle tankers. Last week we reported the delivery of the last vessel in this four series new building program. consisting of two Suez Maxes and two Afra Maxes in South Korea that can move with minimum five-year contracts to an oil major that's expected to generate approximately 200 million during the minimum hire period. The company continues its current growth program with the construction of two vessels in the specialized shipping sectors, namely DP-2 shuttle tankers and LNG, both with long-term employment. In slide 4, we see the pro forma fleet and its current employment profile. We have a combination of vessels in fixed time charters and flexible employment contracts, time charters with profit sharing, contract of arrangements, and spot trading that capture the market's upside. All dark blue color vessels, 23 in the slide, are on fixed rate time charters. while the light blue and red color vessels currently in the water have exposure in the markets up-side. Approximately 55% of the fleet is in secured contents. On the next slide we see the break-even cost for the various vessel types we operate. As you can see, we have a cost base that is very low. In addition to the low shipbuilding cost, we must highlight the purchasing power of SACOS Columbia Ship Management, the continuous cost control efforts by management to maintain a low OPEX average for the fleet and the low general administrative expenses while keeping a very high fleet utilization rate, quarter after quarter, in excess of 95% for the first nine months of 2020. We should highlight again the high utilization number for the fleet as we navigate through the pandemic. Thanks to the profit-sharing element, that a big portion of the fleet enjoy, then benefits further when market conditions are strong, like the freight market we have witnessed during the first half of the year. As demand for oil continues to recover from the lows of the second quarter and oil inventories continue to fall, we expect the freight market to recover from the current levels. Every $1,000 per day increase in spot rates has a positive 59 cents impact in annual EPS based on the number of 10 vessels that currently have spot exposure. Slide 6, debt repayment and reduction is an integral part of the company's capital allocation strategy. Since the end of 2016, when the company's debt peaked, we have reduced debt by $262 million. In addition, we have repaid 100 million of preferred shares by retiring 50 million Series B in July 2019 and the 50 million Series C preferred shares in October 2020. Net debt-to-cap ratio at the end of September is at 46.5%. In addition to paying down debts, growing the company through timely sale and purchase and new building acquisitions, we continue to reward shareholders with dividend payments. We announced today a 12.5 cents per share dividend for common shareholders that will be paid on December 22. The full year dividend is 50 cents for the common shareholders if we add the June 26 payment and the December 22 upcoming distribution and factor the reverse stock split of July 1st. Since our New York Stock Exchange listing in 2002, the company has paid dividends without interruption and has distributed almost half a billion to common share shareholders for an average yield of 5.25. In addition, the company has an active share buyback program and has repurchased a little over 5% of its common shares outstanding. So besides debt repayments, Cash dividends and buybacks of common and preferred shares are three main pillars of the company's capital allocation, with fleet growth and renewal the fourth pillar. It has been an unprecedented year for global oil demand because of the COVID-19 pandemic and the measures to contain it. 2020 will be the first year of negative growth since the period of the Great Recession in 2008-2009. Year-end demand will be approximately 8.8 million barrels per day below the levels of the 2019 year-end demand, or approximately down 8%. Most of the losses are in jet aviation fuel. The expectations for 2021 are for oil demand to grow by 5.4 million barrels per day. Full demand recovery to the pre-COVID-19 levels is deferred to late 2021 or in 2022, subject to how well the world will manage the resurgence of the pandemic, how effective the two vaccines are and the other vaccines that are being developed, and how quickly they will be approved and distributed worldwide in order to allow the gradual return to normal social and economic life. Nearly all these massive reductions are found in OECD countries. For the non-OECD world, the International Energy Agency has raised demand estimates, mainly due to improved demand expectations in China and India. Non-OECD countries continue to be the growth engine for oil demand. On the global oil supply front, OPEC Plus producers eased production cuts by 2 million barrels per day from August. There is an additional 7.7 million barrels per day of shut-in production that OPEC Plus plans to gradually restore over the next 16 months. Compliance with these cuts continues to be very high, almost 100%. The return of Libya in the oil markets following the recent ceasefire to the civil war and the quick increase in production from 100,000 barrels per day back in August and prior to the ceasefire to a million barrels per day currently will most probably lead OPEC plus producers in their upcoming meeting on December 1st to agree to relax production cuts by another 2 million barrels per day at the end of the first quarter of 2021. With oil inventories, especially in OECD countries, continuing to grow, the expected growth in global oil demand in 2021, together with OPEC plus further oil production increases, should be very positive for tanker demand and tanker rates. Slide number nine. With oil demand expected to grow over the next year, let us look at the forecast for the supply of tankers. The order book as of October stands at around 7% or 348 tankers over the next three years, the lowest in almost 30 years. And at the same time, a big part of the fleet is over 15 years. To be exact, 1,350 vessels or 28% of the fleet. 360 vessels or 7.1% of the current fleet. or above 20 years. Upcoming environmental regulations could push more tankers approaching or above 20 years to go for scrapping. As the next slide shows, 2018 was one of the highest scrapping years of records. Last year scrapping was lower as expected. The strong freight market and the pandemic has put scrapping to a standstill. But with so many tankers older than 15 years, we could see a pickup in scrapping as more environmental regulation on the horizon, especially create an unfavorable trading environment for both vessels approaching or currently above 20 years. To summarize, demand for oil... On the demand for oil, the recovery continues with strong growth expected in 2021 with the speed of this demand recovery related and affected by COVID-19 developments. On the supply of oil, production increases are on the horizon in 2021 by both OPEC Plus producers and other non-OPEC producers. We should note that despite the fall in U.S. production, U.S. crude oil exports continue to be strong at approximately 3 million barrels per day with most of these exports destined to long-term destinations, including Asia. Vessel supply. The order book to current fleet ratio is at historical low levels, which implies at minimum a balanced market for the next 18 to 24 months. And finally, 10th balance sheet, we have a modern fleet, a strong balance sheet, strong cash reserves, and strong banking relationships that will allow the company to take advantage of the opportunities that will be presented. With the expectations of better days ahead, we conclude the operational part of our presentation. Paul will walk you through the financial highlights for the third quarter and the nine months. Paul? Thank you, George.
Paul
So as expected, on top of seasonal factors, Q3 results were impacted by pandemic lockdowns, low oil demand, and the continuous draw on oil inventories globally. Nevertheless, Q3 operating income was $15 million and net income $1.4 million, while in the nine months operating income reached $117 million double that of the prior quarter three, with net income of $54 million. In a weak market, revenue in quarter three was still up 9% to $143 million, including $4 million profit share, and 21% up in the nine months. Ten had two vessels dry docked in quarter three, and three in the nine months. and still achieved 93% utilization in quarter three, 95% employment in the nine months. Daily TCE per vessel in quarter three averaged nearly $21,000, and over $25,000 for the nine months, again exceeding average market rates. Time charters generated $86 million in quarter three, enough to cover most expenses in the quarter. while vessels operating mainly in the spot market generated a further $57 million before voyage expenses. Total OPEX stayed at $45 million, and average daily OPEX per vessel increased to just $7,900 due to extra dry dock costs and a weaker dollar, but remained at about $7,700 for the nine months. EBITDA in Q3 amounted to $48 million, just 2% up from the prior Q3 due to the more difficult market, while 9-month EBITDA increased by 40% to $230 million. Q3 finance costs totaled $13.5 million, down from the $22 million in the prior Q3 due to reduced loan LIBOR, lower LIBOR and margins. Also, average outstanding debt fell by about $79 million since the prior quarter three. There was also a $4 million positive turnaround in bunker hedge valuations since the prior quarter three. In quarter three, total net debt did increase by $34 million, mainly due to the delivery installment for the new Suez Max. payments in quarter form. In fact, we are expecting total net debt in this year to have decreased by about $90 million by the year end. Part of this decrease was due to the sale of six tankers earlier in the year, which in itself reduced debt by $61 million and released $38 million cash, at the same time bringing the average age down. In addition to loan reductions, we also had the recent $50 million redemption of preferred stock paid from our strengthened cash reserves. Due to our increased cash in the year and the time charter strategy, we still remain in a comfortable liquidity position with our cash approaching the levels we had at the beginning of the year. We now have just two vessels being built, an LNG carrier with delivery in a year, and a shuttle tanker, with $237 million remaining to be paid for these two vessels. And we are in process of finalizing pre-delivery finance for both vessels at competitive terms. At the same time, we have three vessels under consideration for sale that are expected to free more cash after repayment of related debt. Finally, While several market observers focus on a tanker recovery in 2022, we are more confident in a return to normality within a shorter timeframe, assuming a reduction in new vessel deliveries and successful COVID vaccinations releasing pent-up demand. And now I'll give the call back to Nikos.
Nicholas
Thank you, Paul. And I think as very well said by you and George, we have been able to tame the turbulent waters of most of 2020 and place the company in the right track for being able to take advantage of what is going forward. With 40% of our fleet right now on the spot market and a significant part of our profit-sharing arrangements being able to take advantage of the higher market, we expect that as the beginning of the year finds the world in a bit more normalized state, both politically but also health-wise, we are seeing the signs of stronger movements. I mean, we have seen already significant hardening in the last month of the trade, the transatlantic trade in the product side. We're seeing the highest U.S. imports registered in products since 2016. And I think that's a very strong signal, and we're seeing the majority of our MRs and LRs trading in that part of the world. And we're seeing a slow increase in the demand, of course, with crude, basically supported from a strong appetite of exports coming from Libya. which has been very slow in the past, and now it's increasing its output by about a million-plus barrels a day, trying to become the major force of exports in the MED and competing very strongly with the Russian exports. We are seeing normalization and we are seeing trade happening much more than we were reporting back a quarter ago. The signs are good. The supply is non-existent. I think this is something that... I have always been speaking and talking about actually putting and asking people and my colleagues through my position in Tertanko some years ago and in other forums to stop ordering. It seems like if you ask too many times, someone listens to you, but... I'm sure I'm not the reason, but the confusion on propulsion technology right now has created the lowest supply in tankers and vessels in general for a generation. So, I mean, as we speak today we see about eight, we have a fleet of 830 VLs in the water. some of them in storage, of which 220 are in excess of 15 years of age, and only 75 vessels being built. So that's less than 9 percent on the VLs. And it's a very similar situation across the board as we speak forward. I think that will show that with the confusion of all the regulations that are coming out, ship owners very rightly so are preferring to slow steam rather than find other solutions in order to achieve their targets, their environmental targets, their emission targets that are being set as recently as last week by the IMO. So in general I think I have the feeling that unless something really, unless we get a third severe way and I'm knocking on wood of the virus hitting us anytime after Christmas that we are getting as close of being out of the woods as possible and better days are ahead of us. In the meantime we have been able to successfully navigate the difficult times and with that I would like to open the floor for any questions. Thank you.
Operator
Thank you, ladies and gentlemen. As a reminder, if you wish to ask a question, please press star 1 on your telephone keypad and wait for the automated message advising your line is open. Please then state your first and last name before you ask your question. If you wish to cancel your request, please press star 2. Once again, please press star 1 if you would like to ask a question. Thank you. We will take our first question. Please go ahead. Your line is open. Hello, Randy. Your line is open.
Randy
Howdy, Givens. It's Randy Givens at Jefferies. How are you? Hello, Randy. Very well, thank you. Great, great. I'm doing well. So I guess a couple questions. Can you provide maybe a little more color on that decision to repurchase the Series C Preferreds? Do you plan on continuing it? You don't really have any more new buildings. Your share price is at a steep discount to NAV. Any appetite for common share repurchases.
Nicholas
Yes, I think, as I said, our first obligation has been to repurchase. Actually, within a bit more than a year, within the last 18 months, we have spent $100 million of our hard-earned cash to repurchase the two step-up perpetuals. So that was our obligation. As George mentioned, we have bought back since May 5% of the company, which is a significant amount. So there is buying. We have set targets, but it's buying also from the common. And, of course, maintaining our dividends. So it is a balance, a priority to reduce expensive paper that is out there. That is our first priority. Our dividend is also significant to continue this five and a quarter. I think it is... I think a significant achievement that within almost 20 years now we have averaged a five and a quarter dividend yield. I think today we are closer to 7% with the last payment. So I think in a world where, in an environment where you have negative dividends, negative returns in many cases to have a dividend like that, it's positive. So I think that's how we look at it. Expensive paper has to be redeemed first, dividend second, and, of course, common support to our common shares. Great.
Randy
All right. Yeah, that sounds like a prudent strategy there. Now, looking at your fleet, I've heard some differing reports. So can you just give an update on that LNG new exercise that for later next year, and then on the shuttle tanker orders. It looks like you placed one firm order. When do you have to decide on the, you know, additional two shuttle tankers?
Nicholas
Well, as you, I'm sure, follow as close as we do, right now, because of all the issues I mentioned before, which many of them were commercial, economical, and technical issues, you have... very low demand for new buildings, which means the shipyards are offering quite attractive propositions for people. So I don't think we have lost anything. I mean, it was our choice not to take our options at the time, because we believe the way things have gone that we will get ships that will be technologically more advanced going forward and perhaps at a lesser price. There are no people queuing to take those options. I think we are in the front of the queue, as they say.
Randy
That's fair. And then I guess last question, you know, on multiple calls in prior weeks, you know, we've heard from some of the crude players, we've heard from some of the product, kind of product carrier only players. Which market are you more bullish on? Obviously, you have both crude tankers and refined product tankers. So do you kind of favor one over the other here in the next few months?
Nicholas
First of all, I have to say that we are glad that we are diversified within the energy segment. This has been our strategy and policy, you know, going back to the family's founding many, you know, many, many, many decades before. So we are client-driven. We do not, I would say, we do not have an opinion in actually following something stronger. I believe we are light on the VLCCs on the crude, so this is something that we are looking positive going forward. But both segments move within perhaps a quarter or six months lag between themselves. We have seen already a movement, as I mentioned earlier, on the products, so our product carriers are taking advantage of that, and we hope that the crude will follow. There is less storage than it used to be sometime a year or six months ago, which means there is less oil being stored, so more oil will be demanded, less oil being inventoried.
Randy
Yeah, yeah, that makes sense. All right, well, that's it for me. Looks like the market's liking your responses today, so keep it up. Happy Thanksgiving. Thank you. Same to you.
Operator
Thank you, ladies and gentlemen. As a reminder, if you would like to ask a question, please press star and 1 on your telephone keypad now. If you wish to cancel your request, please press star 2. Once again, please press star and 1 if you'd like to ask a question. There are currently no further questions, sir. I'll hand back to you for closing remarks.
Nicholas Bournos
Well, once again, thank you all. Great call. Unfortunately, not many questions, but then the stock price shows that you're all happy. And we hope that our next call early next year will be even more successful than this one today. So happy Thanksgiving to everyone. Nico, would you like to say a closing word?
Nicholas
Well, I hope the next presentation has not to... I do not have to do it through a mask, which makes it a little blurry, but we wish everybody a very happy Thanksgiving and a very safe conclusion of this very strange year. And as the chairman said, early next year, hopefully we will be able to talk about much more exciting and better things. a better and healthier visibility going forward. Thank you for your support. And as I said, I think that we are out of the worst part and moving to better times. Thank you very much. Stay safe. Happy Thanksgiving. Bye.
Operator
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.
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