Tsakos Energy Navigation Report
Board: Value Hounds
Time for another "Tanker in 2013" idea.
I had been holding off on tackling Tsakos Energy Navigation (TNP) because this company has not
yet reported Q4 2012 results. Initially, I was concerned TNP might have a bad surprise in
store, hence the delay. Perhaps there still is a surprise waiting. However, in mid March 2013
they indicated results would out on April 19th 2013. That was an added data-point in a TNP
Press release that announced the delivery of a shuttle tanker, and the scheduled delivery of
a second shuttle tanker in April 2013. That soothed my concerns a lot. The shuttle tankers are
a big deal for TNP, so the timely delivery of the first shuttle tanker was a big deal. The
two shuttle tankers each have a contract, and the combined revenue of those two contracts
represents about half of TNP's revenue backlog. There's more good stuff tied to those
shuttle tankers, but I will get to that a little later.
Awrighty, the TNP fleet.
TNP's fleet is a mix of tankers that transport crude oil, refined petroleum products,
and/or Liquefied Natural Gas (LNG). The fleet consists of
- 1 Very Large Crude Carrier (VLCC)
- 10 Suezmax crude tankers
- 1 Suezmax shuttle tanker
- 8 Aframax crude tankers
- 3 Aframax product tankers
- 1 LNG tanker
- 9 Panamax product tankers
- 6 Handymax product tankers
- 8 Handysize product tankers
- 1 newbuild Suezmax shuttle tanker
- 1 newbuild LNG tanker
- 1 newbuild LNG tanker option
or 47 operating vessels, 2 newbuilds and 1 newbuild option.
TNP used to own 3 VLCCs. The company put two of the VLCCs up for sale in December 2011,
after taking impairment charges on both vessels. One continued to operate for a few
months, while the other just remained idle. During 2012, TNP announced a deal for one of
the vessels, but that deal collapsed. I remember reading about a deal for the second VLCC,
but that deal also failed. In the end, the vessels were not disposed off until
mid-to-late December 2012. The vessels were 18 and 19 years old vessels, and would
have definitely been a money losing proposition in Q3, and very likely in Q4 too.
So TNP didn't lose too much by having two older VLCCS idle during the second half of 2012.
In fact, they probably saved themselves some money by not operating those vessels.
TNP have one operating LNG tanker. The company did not partake in the LNG vessel ordering
spree that occurred after the fallout from the Japanese Tsunami i.e. the idling of the Japanese
nuclear power plants, and the need to find alternate energy sources. The company waited
until 2012 to place their LNG tanker order. Actually, it was a 1 + 1 order, or one firm
order, plus an option to build a second vessel, on similar terms. The option order was
due to expire around the current time. That could be a plausible explanation for why TNP's
results will be so late- company management might still be scurrying around trying to
piece something together to finalize a go/no-go decision on the newbuild option.
When I have discussed other tanker companies, I have usually mentioned their chartering
strategy. Some companies prefer to operate the vessels in the spot tanker market. Nordic
American Tankers (NAT) is the one tanker company that opts for this strategy. To the
extreme, as all their vessels operate in the spot market. The other end of the spectrum
is Navios Maritime Acquisition Corp (NNA), with all their vessels on time charters.
Somewhere in between those two extremes are our friends at TNP. They tend to have a
mix of chartered and spot trading vessels, but usually a majority are on time-charters.
Where does TNP go in 2013?
As mentioned earlier, the shuttle tankers are important to TNP. Each of the vessels has
a 15-year charter with Petrobras (PBR). That's nice from a revenue and a cash flow
perspective, but there's more. During the Q3 2012 earnings call, TNP management had a
surprise item. They said they were looking into the feasibility of the Master Limited
Partnership (MLP) structure for the vessels with longer charters. They specifically mentioned
the shuttle tankers as assets that would fit well. Also mentioned as possible candidates
were the LNG tankers. While still a juicy contact in revenue and cash flow terms, the
operating LNG tanker only has three years remaining on its contract. Still, it could
work well for the MLP structure.
"Pari passu" - those who studied Latin, or the lawyer types might know what that
means. TNP management mentioned the term in an conference call once, and I had to go
look it up. It means "on an equal footing". So when they mentioned the term again during
the Q3 earnings call I was not so lost. Now, TNP management have made share purchases during
previous secondary offerings. While the participation hasn't been at a 50% level, I think the point
is the commonality of the action i.e. in the same spirit, as opposed to equal percentage. So
why do I mention this? Well, because TNP management mentioned this in the context of the
MLP entity they are considering. That had me puzzling over how exactly this would work i.e.
was this a two-slice pie or a three-slice pie? The three-slice pie would have slices
owned by TNP (as sponsor), TNP management and new investors. Even if the MLP idea does not
move forward, TNP already have financing in place for both shuttle tankers.
TNP slashed their dividend from 15c/sh => 5c/sh in Q3 2012. That was pretty drastic, but
probably necessary given the company was not meeting the terms on two loan facilities
(the ones tied to the two "for sale" VLCCs). Now that the vessels have been sold, that
removes two hurdles. One plus, the company has one new juicy income stream with the
first shuttle tanker in operation. Also, a second juicy income stream starts when the
second shuttle tanker joins the fleet shortly. In mid March 2013, TNP announced three-year
contracts for five of their product tankers. A few tanker companies have been arranging
one year charters. A couple have managed to arrange two-year charters, but not too many
reports of three-year charters. Not great rates, but profitable for the vessel category.
Overall, a few positives to build on as 2013 progresses.
When TNP made the announcement regarding the five multi-year charters, that was enough to
convince me to add to my then existing TNP stake. That resulted in TNP becoming my
largest tanker position. A nice 12.7% bounce after my purchase, the share price has
returned to trading at the same level as my purchase price :( I knew I didn't have that
kind of power over a tanker stock. Anyhow, Q4 results should be out in about 10 days.