Share Dilution

Tsakos Energy Navigation: Exposure to LNG will enhance returns (NYSE: TNP)

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Today I will focus on another Greek shipping company, this time in the field of oil transport. I’m talking about Tsakos Energy Navigation Limited (New York Stock Exchange: TNP), a company that currently owns a total of 65 ships of different types. In the following paragraphs, I will provide an overview of the company and name the most important reasons why I like this title, as well as some negative points that I consider important.

Size and type of fleet

As I mentioned in the introduction, Tsakos Energy Navigation has invested in a variety of vessel types, ranging from VLCCs to Handysizes and LNG carriers. In the graph below, we can see that most of the company’s vessels fall into the Aframax and Suezmax categories, followed by Panamax.

Tsakos Energy Navigation Investor Presentation, vessel types, vlcc, handysize, aframax, LNG

TNP ships by type (Data from TNP Investor Presentation January 2022, graph created by author)

The data does not include the newly delivered LNG vessel, which is currently chartered on a 5-year contract, with expected minimum gross revenues of $100 million. In addition to this, the company expects one DP shuttle to be delivered in the second quarter of 2022 and four other dual-fuel LNG vessels delivered in the second half of 2023.

The company’s fleet represents a total of 7.3 million DWT, mainly made up of the Aframax and Suezmax segments. The average age of the company’s fleet is 11.7 years. In recent years, the company has sold some of its older vessels and entered into agreements to purchase new LNG vessels, in an effort to gain exposure to the currently strong LNG market. Additionally, the company completed the dry-docking of a significant portion of its fleet last year, making it ready to exploit favorable oil market conditions when they arrive. Finally, the company’s two VLCCs are designated “eco” and the same goes for 9 of the company’s Aframaxes.

Spot market vs time charters

Tsakos Energy Navigation seems to prefer time charters over spot markets, which I personally like. Specifically, 55% of the company’s fleet is time chartered, representing 60% of the total fleet tonnage. A few weeks ago, they announced the extension of the time charter contract for two Panamaxes for a period of 24 months, with gross proceeds of $25 million. In their Q3 2021 earnings report, we can see that the average daily time charter rate reached $15.7k for the three months and $17.1k for the nine months.

The company has not released more recent information on the subject. However, we can see from the table below that tanker time charter rates exceed the previously mentioned rates. This points to an even better quarter for time charters.

Oil tanker time charter rates, Hellenic shipping, tsakos energy shipping

Tanker Time Charter Rates (Hellenic Shipping News)

This is particularly important given that, according to the company, for every $1,000 increase in the time charter rate per day, the company’s annual EPS increases by $0.48. The company hasn’t disclosed information on the average length of their time-lease, which would be nice. For example, in my article on Dianna Shipping (DSX), which is a company operating in the dry bulk segment but only engaged in time charters, I indicated that the company should now perform better, due to the expiry of many time charter contracts in the short term.

However, let’s not forget the company’s LNG footprint. Although still a baby, he has the ability to change the game, given the recent conflict between Ukraine and Russia and its implications. For the most part, Europe depends on Russian natural gas, which it seems is no longer an option, at least for a while. The gap was almost immediately closed by the United States declaring that it will supply much needed LNG to Europe. You don’t need a Nobel Prize in economics to understand the implications of such a policy.

As I wrote earlier, the company expects $100 million in gross revenue from its newly delivered LNG vessel, over a 5-year period. Such a figure corresponds to a gross daily rate of $55.5K. The recently delivered vessel is an XDF dual fuel vessel. As we can see in the table below, LNG spot rates for dual-fuel XDF vessels have reached the ballpark of $80,000 per day. Since long-term charter contracts are generally less volatile and therefore less risky than spot prices, this rate of $55,500 per day seems reasonable.

MEGI LNG spot rates

MEGI LNG spot rates (Image from Bunkerportsnews)

Financial profile

Like all shippers, Tsakos Energy Navigation uses leverage to maintain and grow its operations, in different market conditions. According to the latest available data, the company has a net debt to equity ratio of 48.6%, having repaid nearly $500 million in debt over the past 5 years. In fact, current debt levels are the second lowest, with the lowest seen in 2012.

Last October, the company proposed a change to its stock offering program, including a common and preferred stock offering worth up to $100 million. The company has moved to a 1 to 5 share consolidation in 2020. It seems that over the past 4 years, Tsakos Energy Navigation has issued approximately 1 million common shares per year (taking into account the consolidation of shares), i.e. approximately 4%-5% of the total number of shares. This, in my opinion, is a significant negative for the company. This serial dilution is offset to some extent by the existing dividend yield of 4.3%.

At the end of the line

Tsakos Energy Navigation is a company that is trying to differentiate its revenue stream and take advantage of the new perspectives that have emerged in the LNG sector. Despite the fact that the company has diluted its shareholders in the recent past, the differentiation of revenue streams gives the company an advantage by offering above average returns. Although there is no data available on when their next charter will expire, we can expect the company to provide less lucrative, but more stable returns, should oil market fundamentals turn around. improve.