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Operator
Thank you for standing by. Ladies and gentlemen, welcome to the Tacos Energy Navigation Conference call on the first quarter 2022 financial results. We have with us Mr. Takis Agarpaulu, Chairman of the Board, and Mr. Nicholas Sakos, President and CEO, Mr. Paul Durham, Chief Financial Officer, and Mr. George Sargaulu, Chief Operating Officer. 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 1 on your telephone keypad and wait for your name to be announced. I must advise you that this conference call is being recorded today. And now I will pass the floor over to Nicholas Borzonis, President of Capital Link Investor Relations, Advisors of Sockless Energy Navigation. Please go ahead, sir. or email us at 10TEN at CapitalLink.com, and we will have a copy for you right away.
Takis Agarpaulu
We will send you a copy by email. Please note that parallel to today's conference call, there is also a live audio and slide webcast, which can be accessed on the company's website, Please go ahead, Mr. Rappaport.
Rappaport
Thank you, Nicolas. Hello, good morning, and good afternoon to everyone. Thank you for joining our Q1 results call today. The world is going through a very complex and unprecedented period of contradictions and severe challenges. It's an event driven runaway inflation. generated by the great Cold War in the Ukraine and supply chain challenges. Although we have full employment, yet we have declining number of workers willing to work, declining household income, and less willingness of people to spend. The seriously belated actions by the central banks to quickly reverse loan and accommodating originally put in place to stem growth after the economic crash and COVID. And the resulting rate hikes will put pressure on public and private sector debt servicing worldwide in an over-indebted world, especially in emerging markets. And all this with a high probability of failing to avoid a recession in the process. All this results in serious unrest, public unrest, with extreme social repercussions, amplifying inequality and reducing social stability. Yet these environments offer also opportunities, which then, with its wide and stable footprint and its resilient business model, fully captures, allowing it to grow revenues, show profits, reduce debt and do all the right things, renewing its fleet with state-of-the-art vessels, and doing all this in full contrast with its peers. Although the market, given this very complex environment with low visibility, may produce surprises on the way, TEN is very confident that it will continue to improve further its operating performance. And let's not forget that we're currently in a multiple-event-driven positive market, still waiting for the long-expected crude tanker market recovery, which will be based on the existing very encouraging fundamentals. So thank you all for your continued support. And I would like to now pass the floor to Nikos Tsakos. Thank you.
Nicolas
Nikos Tsakos Thank you, and good morning to everybody. It's very good to be able to report net positive net income once again. Although our company has never stopped to report positive operating income over a very difficult period, but we are very happy that right now we have also returned to positive net income. And we're looking forward for a second quarter that will be even stronger than the one we announced today. As the chairman said, it has been a rollercoaster period. We started the beginning of the year feeling that things were going back to normal with COVID supposedly under control and parts of the world opening up to travel and business as usual. And then we were hit by the invasion in Ukraine that has complicated issues. A lot in operational matters for us, which meant that a company like ourselves with 32 vessels with mixed Russian and Ukrainian crew had to spend a lot of time and effort through our manning department, our human resources teams to make sure that everything goes smooth and we're very happy to... and we're very happy and thankful to all our seafarers about their professionalism. And we never had an incident between those two, I would say, sister or brother nations. It has been a worrisome period. However, we were able to maintain a steady, steady fast on the wheel. We took advantage of the better environment in the beginning of the year to renew 15 new charters or extend charters on an average with 25% higher rates than the ones expired. In the meantime, our pool, vessels in our pool, mainly on the clean side, are enjoying a very, very strong market. And the timely chartering of our two VLCCs has actually saved us tens of millions of dollars, not only in profit, but actually from what we are facing today in a much harder economic environment. So all in all, we are happy to announce that we have been able to maintain our program on target. took delivery of our LNG and chartered it in the middle of January, followed by our shuttle tanker this month from Korea, also on a very long charter. sold one of our older vessels, and we're taking delivery of a new VLCC with options for others going forward. So all in all, we have been able to achieve this, being profitable, pay a dividend, increase our cash, and reduce our bank debt. We are looking forward to a better second half of the year. The second quarter looks to be a strong quarter. And we'll be happy to maintain, of course, and increase our profitability that will enhance us further, reducing debt and paying dividends to our shareholders. And with that, I will ask Paul to George to come with the operating part of the first quarter and thereafter. Thank you.
Nikos Tsakos
Thank you, Nikos. Good morning to all of you joining our earnings call today. Let's go to the slides in our presentation. Sorry to interrupt you, but the first slide is a beautiful picture of the Porto just delivered. It looks like a drawing, but actually this is the actual ship. We're very proud of that state-of-the-art vessel. Thank you. Very good. Starting with slide three, we see that since inception in 1993, we have faced five major crises. This time is no exception. At the start of the year, it appeared that we were near the end of the COVID pandemic after almost two years. From the end of February, we were thrown to another crisis, a war in Europe that created new challenges for the world and our industry. In this difficult environment, with sanctions and self-imposed sanctions on Russia, a major commodity exporter, changing trade routes for our commodities, growth phase. We reported earlier this year new building contracts for four dual-fuel LNG-powered Afromax tankers against long-term employment to a major oil concern. Last week we had the naming ceremony of our latest state-of-the-art shuttle tanker delivered from a South Korean shipyard that is also employed against long-time charter. And today we announced the sale of a 2006 Factoring these latest transactions, the company has currently proformed a fleet of 71 vessels for an average annual growth of 15% in terms of deadweight tons spanning over four decades. in secured contracts, fixed time charters, time charters with profit sharing and COAs. This means that TEN is well positioned to capture the positive market, tanker market fundamentals. With global oil demand rebounding after two years and with already witnessing spot tanker freight rates reaching higher levels that lead to profitable operating results. Fleet modernity is a key element of our operating model. In January, we also took delivery of our latest LNG carrier named Energy, and this vessel has immediately entered a five-year time charter that is expected to contribute to our bottom line as at the If you look at the slides, we have four remaining new buildings which we expect to take delivery from the fourth quarter of 23. These form part of our green ship initiative with dual fuel LNG AfraMax orders. All four vessels are coming with long-term employment attached. Inclusive of the above charters, 10 minimum fixed revenue backlog exceeds one billion. Slide five, the left side presents we maintain a low cost base. During the year, the revenue generated from the time charter contracts was again sufficient to cover the company's cash expenses. And we must also highlight here the purchasing power of TCM and the continuous cost control efforts by management to maintain a low OPEX average for the fleet, while keeping a high fleet utilization rate And thanks to the profit-sharing element, which is a cornerstone of our strategy, our chartering strategy, for every $1,000 per day increase in spot rates, we have a positive $0.39 impact in annual earnings per share based on the number of our vessels that currently have exposure to spot rates. That reduction in slide 6 has also been an integral part of the company's capital allocation strategy. Since then, we have repaid 424 million of debt and repurchased 100 million in two series of step-up preferred shares that we had outstanding. In addition to paying down debt, dividend continuity is important for common shareholders and management. Tech has always paid the dividend irrespective of the market's difficulty. About half a billion in dividend payments have been distributed since the New York Stock Exchange listing in 2002. The next dividend is going to be paid on July 20. Global oil demand continues to recover, despite current headwinds. about 100 million starting from the second half of this year. Developed economies lead the oil demand expansion in 2022. However, 80 percent of the expected 2023 demand growth is forecasted to come from non-OECD countries. On the global oil supply front, OPEC-class producers continue to manage supply with monthly increases. However, countries outside the Middle East producers have struggled to meet their quotas. Global oil stocks continue to fall and are now almost 300 million barrels below the 2017-2021 average. Nonopex production is set to rise in 2022. And as a result of the war in Ukraine and high oil prices, we had another coordinated effort to release in total of another 240 million barrels from the Strategic Petroleum Reserves of the United States of America and major OECD member countries for the next six months Oil demand continues to rebound, but let's look at the forecast for the supply of tankers. The order book stands at around 5% for 255 tankers over the next three years. The lowest it has been in more than 20 years. The next slide shows 2018 was one of the highest scrapping years of records, with 22 million deadweight tons removed from the market. Last year, we've seen an acceleration in And with more environmental regulations coming, with discussions for alternative propulsive fuels, and at least 7.5 percent of the global fleet over 20 years, we expect scrapping activity to remain elevated and act as a balancing factor for fleet supply going forward. To summarize, if we look at oil demand, the rebound continues. Cargo production is set to increase in 2022, bringing more cargoes to the market. At the time, global oil stocks are below the five-year levels, and demand is surpassing pre-COVID levels. On outside events, like the recent geopolitical events in Ukraine and the sanctions that followed, we have seen that it forced a large number of Russian state oil and privately held tankers to be excluded from trade. as oil majors and oil traders boycotted these vessels, creating a supply squeeze, mainly in the Afra-Mex and Suez-Mex sectors. We have seen a redraw in oil trade routes, with heavily discounted Russian crude oil going to Asia, mainly India and China, and returning back to the OECD countries that are short refining capacity in the form of oil products, middle distillates, gasoline, kerosene. On the order book, the order book to the current fleet ratio is at historical low levels. A big part of the fleet is reaching phase-out age, pointing to a tighter supply of tankers for the next 18 to 24 months. And if we look at the company, we have a modern fleet. We have already started with our orders the transition towards the next generation of greener vessels. We have in the water an operating fleet that is well-positioned have a very strong balance sheet and strong banking relationships that allows the company to take advantage of the opportunities that this market will present. And with that, I will ask Paul to walk you through the financial highlights of the first quarter. Paul?
Nikos
Well, thank you, George. So in quarter one, Ten achieved a net income of $6.3 million, before minority interests of $0.8 million. This is compared to a net loss of $4.8 million in the prior quarter one, so we had a complete positive turnaround. In this quarter one, 10 increased revenue by $11 million, bringing our total revenue to $150 million in the first quarter. Of this, our time charters generated $83.4 million, which includes $1.3 million in profit share. while our spot vessels contributed $66 million, several of the vessels achieving spectacular rates. We had six vessels undergoing dry dock for survey purposes in quarter one, but still achieved 93% utilization for the fleet. The average daily TCE rate per vessel was $19,730, a 9% increase. Judging from the results of other tanker companies, This was clearly a strong average rate compared to average market rates. Total operational expenses increased by a manageable 2% over the prior quarter 1, primarily due to increased voyage costs, which consisted mainly of rising fuel costs, while vessel operating costs did increase due to the addition of a splendid new LNG carrier and due to the dry docking schedule. Daily OPEX per vessel remained relatively stable at about $7,700, while daily overheads per vessel remained the same at only $1,200 per day. Depreciation fell by $2 million in quarter one, due mainly to reduced vessel valuations accounted for in quarter four, while amortization of deferred dry dock costs increased due to the spate of dry docks over the past 12 months. We had one vessel in quarter one that is classified as held for sale and was actually sold in quarter two for $21 million, with certain similar vessels under consideration for possible sale, depending, of course, on market conditions for product carriers that continue to do so well for us. Finance costs were half that of the prior quarter one, mainly due to cash gains of $10 million from our bunker hedges. EBITDA increased 13% to over $42 million, boosting our cash reserves substantially. In the quarter, outstanding bank debt fell by $44 million, bringing total outstanding net debt to $1.3 billion, and net debt to capital down to 51%. As I've mentioned, there were some extra expenses in quarter one, but nothing unusual, and indeed are already attended to by our technical managers. And so our finances remain in good shape, and we believe we will continue to be throughout quarter two and the half year, indeed, as we enter the third quarter, which we expect will continue to generate strong cash flow, allowing us to further focus on debt reductions and disposal of older vessels, at the same time enabling us to continue rewarding our shareholders, as we have shown. And now I'll give the call back to Nikos. Thank you, Paul.
Nicolas
And hopefully the news next quarter will be even better. And with that, we would like to have the opportunity to answer any questions, sir, that you might want to ask. Please.
Operator
Ladies and gentlemen, if you have a question or a comment at this time, please press star then the one key on your touchtone telephone. If your question has been answered and you wish to move yourself from the queue, please press the pound key. Our first question comes from Ben Nolan with Stiefel.
Ben Nolan
Hi, guys. I have a handful. Hopefully that's okay. The first one was I know that you, in the release, you talked about having sold shares as part of the ATM program in the first quarter. I was curious if that was still the case in the second quarter.
Nicolas
The majority of the shares, I think, have been sold in the first quarter.
Ben Nolan
Okay. And I guess the reason that I ask is that, you know, I think generally speaking the shares have been below NAV. I'm trying to understand the rationale for selling shares and at the same time buying ships at NAV, but selling shares at a discount. It seems like it's, you know, an expensive form of capital for growth.
Nicolas
Well, we try to avoid whenever our cash flow is very positive, like it's today. The only reason we have used the ATM is for growth purposes. So our calculations, when the market is, as you call it, bad, when the shipping market is bad, that's when the opportunities arise. And that's the time that you need to put deposits down to buy cheap ships, that today, just to put in perspective, just to tell you how undilutive our actions were, is that our LNG, which we purchased at $175 million, or 76. Today we have offers for here at $240 million. So we would not have been able to buy those ships, $240 million. And that's one of the ships that we have bought during the crisis. Yeah, no, that's a good answer and a good point.
Rappaport
And also, Nikos, you may wish to add the discount through the ATM program is much less than any other way.
Nicolas
Yeah, there is no discount in the ATM program, but again, we only use it when opportunities arise, and right now our cash flow, thanks to the market, and mainly thanks to the product market, which is, I would say, it's unrepresented as long as I've been in the business, to see our product carriers earning six-figure numbers and not as significant to our bottom line.
Ben Nolan
You mentioned that asset values, specifically the LNG assets, but I think everything in general and new building prices have gone up a little bit. You sold the one LR2. At the moment, does it feel like that buying opportunity that you're trying to sort of be opportunistic with with respect to asset prices is sort of past or things, you know, no longer counter-cyclical with respect to value.
Nicolas
We don't want to, as you say, spin all the beans, but right now we are looking at offers, many of them with not even inspection on the majority of our ships, from people that would like to buy our first-generation vessels that will net an additional $50 million to $60 million profit to us. So we are more sellers of first-generation ships. I think as George rightly said in his statement, we are looking for vessels that are fully environmentally apt to new technologies if we were going to buy something. But I think right now we are very satisfied with our VLCC. and option price purchases. The VLCC is the market which is not out of the woods. It's suffering right now. Not in our case, because preemptively we have charted that VLCC is at profitable accretive rates. So we are not bleeding. Actually, if you go back to George to the slide with the break-even, just to put it in perspective, I think you can... There you go. You can see that our VLCCs are netting in excess of 30,000 in a spot market of minus, if you were in a spot. So I think in every category, we're making a significant profit. And I think in the handy sizes and DMRs, the profit is, I would say, five-fold from our break-even. So we're looking at a healthy second quarter and hopefully a third quarter.
Ben Nolan
Okay. Well, and actually, that leads into my question. We are literally a few hours away from the third quarter at this point. Can you give any color as to how, given the exposure that you do have to the market, how you envision the second quarter to shape up with respect to cash flows or day rates, or maybe just knowing that maybe just as a percentage, how it might vary relative to the first quarter?
Nicolas
Well, I think, just to put it in perspective, in the first quarter, I'm going to move to this, but I think you will get, because you are very, very, very analytical. In the first quarter, we enjoyed one month, less than a month of a good market. In the third quarter, we're enjoying three months of a good market in most segments.
Nikos
Paul, you're right here.
Ben Nolan
And then last, I'm glad you, hopefully you can hear me, Paul, because my last question is for you. Interest rates are rising. I'm curious what your... Oh, well, maybe he can't hear me. Maybe somebody else knows. What's the interest rate hedge position?
Nicolas
We're about close to 50%.
Ben Nolan
Okay, perfect. While I'm asking about hedging, in the way that you report your interest rates, you back out the bunker hedging. I'm curious why you connect the bunker hedging to interest rate expense.
Nicolas
I think it falls in the same risk category, but I'll get Paul to call you if he cannot hear you and give you an answer on that. But all our hedges fall under the same category, accounting water. Okay. All right.
Operator
Good enough. I appreciate it. Thank you.
Nicolas
Thank you.
Operator
Our next question comes from Liam Burke with B Reilly.
Liam Burke
Yes, thank you. Appreciate the time. On your clean product tankers, some of your older vessels, We're looking at a very, very healthy spot rate environment versus very high asset values for the MRs. How do you balance whether or not to divest these older vessels as they exceed 15 years old versus riding the economic life?
Nicolas
We need your advice too, but we are actually struggling with this question. But I think there is the best time to invest from something is when the buyer of your assets is also going to make money. So I think by not saying more, I think we are looking at ways to make our first-generation ships have a very profitable resale for us and hopefully make money for the guy down the line. So, yes, we have... This is London. Are we in contact? Yes, Paul, we can hear you. So this is our, we are looking to the investor right now and make a significant gain from our older vessels.
Liam Burke
Okay, great. And, you know, as I'm looking at, you know, your new builds coming online, the shuttle tankers, the LNG carriers. your revenues and cash flows are becoming less volatile and more predictable. How do I balance that with your capital allocation of paying down debt, paying down your preferreds, and your dividend policy?
Nicolas
Well, it's becoming, I would say, yes, more predictable. However, the way we are structured right now, I think every $1,000 increase, market adds another 40 cents to our annual EPA. So we still have, I would say, you know, we have 42 out of our 65 in the water vessels right now are enjoying the upside of the market through profit-sharing arrangements, and COAs. So we try to keep a balance. which is always, again, on that slide five, we want our time-sharded fleet to cover all our expenses. And if you look on page five as we speak today, the time-sharded vessels cover much more than all our expenses. So whatever is left on the spot vessels is profitability and paying down debt, and hopefully the preferred, which is our next target. Great. Thank you very much.
Operator
Our next question comes from Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge.
Clement Mullins
Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge. Clement Mullins with Value Investors Edge.
Nicolas
Clement Mullins with Value Investors Edge. Clement Mullins Well, you know, if you look at our fleet, George, please, can you fleet us? On page 4, you see we are... We are... Yorgo, put the other scuba-fitted. This is a problem. No, we have another scuba-fitted ship. Take it away, Marston. Yes. Excellent. Sorry, we have one more scuba-fitted VLCC, which is not shown here. So, take it, please. Anyway, so you see, we are a diversified company. We are almost 50% between products on your right-hand side, as you look at the... and crude carriers on your left side. We have been light on VLs. We used to have more VLs going forward. And the reason, of course, is that it's the only market that has not moved. And people are very nervous. These are big... You know, big investments, you know, it's close to $100 million, hopefully less. And the other logic behind this is you should invest when things are not overpriced. New building prices for exactly the same vessels are approaching the $125 million, if not exceeding them. So if we buy something in the 90s, I think it's a good investment going forward.
Clement Mullins
You have consistently employed your assets in a mixture of time charters and spot voyages, which has been very helpful over the past couple of years. And I was wondering if your strategy has changed on the product side of the business after the recent strength. And following up on this question, what kind of rates do you see available if you look for longer term contracts?
Nicolas
We have always, depending on the market, we always like predictability. We are not fans of fixed rates because someone at the end of the day for a long period of time, either ourselves or our charters, are going to be, in a sense, on the losing side. So every time we are looking to negotiate, and I said we rechartered, 15 vessels since the beginning of the year, the majority of them on a profit-sharing arrangement. So depending on where the market is, we sit down and we accept a rate that covers all our expenses, and then we are open to share the upside with the major oil companies. And I think this method of employing our ships has served us well so far.
Clement Mullins
Thanks for the caller. And final question from me. Do any of your Afromaxes have the coating required to trade clean cargoes?
Nicolas
Yes, I think we have right now, we have two of them and we're building another four.
Clement Mullins
Yeah, that's helpful. That's all from me. Thank you very much for taking my questions. Thank you.
Operator
And I'm not showing any further questions this time. I'd like to turn the floor back over to the CEO for any concluding remarks.
Nicolas
Well, again, as I said, we would like to thank all of you for your interest in our company. We believe that we are out of the woods. We are seeing demand growing, longer routes because of the Ukrainian situation. There is prediction that we will have a 7% increase in ton miles, which is very, very substantial. For 2023, on top of that, we will have slow steaming, which will increase even further the demand from our side. And we are looking at an order book that for 2023 is going to grow on average on tankers by 1%. And a total order book over the next four years of 8.5 percent. So the fundamentals look good. I mean, we've got news. I think we all saw the news yesterday from China. They're increasing by 50 percent crude imports and refining capacity to non-governmental institutions. We were nervous, I would say, in the beginning of this month when demand or growth in China was supposed to be 3 to 4 percent. But 3 to 4 percent in a gigantic country like that is still a significant part. So we believe that the fundamentals are there. And the sooner the world normalizes, the sooner we can have peace and quiet in the world so we can trade all over. uh all over the ports of the world and as soon as the pandemic starts easing down, we expect to see a very firm tanker market. We are preparing the company for that. We are taking advantage of the low market, which we did, to build up our fleet with quality vessels, LNG vessels, shuttle tanker vessels, VLCCs, and dual-fuel ships. And hopefully for the remaining of this year and for sure for 2023, we will be able to enjoy rates that finally will get our share price to where it should be. And with that, I would want to thank you. I wish you a very peaceful and restful summer for those of you that are planning to take a holiday. from us here. And on an in-house note, we have a very good colleague and friend of ours, Ms. Maria G., who has been with us for 15 years. And now she is on her way to enjoy parenthood. And we wish her all, Maria. She has been a very strong part of our accounting department, has been helping us report 15 years of growth. And I think the most important job for you is starting now. So enjoy parenthood and thank you very much for all the efforts you have made for the company. Thank you, Maria.
Operator
Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.
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