Business Context and Reporting Period
Tsakos Energy Navigation Limited, a Bermuda-based international marine transportation company, filed its annual Form 20-F for the fiscal year ended December 31, 2018. The company operates crude and petroleum product tankers, LNG carriers and DP2 shuttle tankers worldwide under time charters, contracts of affreightment and spot voyages. The filing is annual rather than a standalone fourth-quarter filing, although management discusses fourth-quarter market improvement.
At December 31, 2018, the fleet comprised 64 vessels with approximately 6.9 million deadweight tons and an average age of 8.2 years. The company reports under U.S. GAAP. Its common shares and Series B through Series F preferred shares are listed on the NYSE.
Key Financial Metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Voyage revenue | $529.9 million | $529.2 million |
| Operating income (loss) | $(28.1) million | $63.5 million |
| Net income (loss) attributable to TEN | $(99.2) million | $7.6 million |
| Net loss attributable to common stockholders | $(133.0) million | $(16.2) million |
| Basic and diluted loss per share | $(1.53) | $(0.19) |
| Net cash from operating activities | $73.9 million | $170.8 million |
| Cash and cash equivalents | $204.8 million | $189.8 million |
| Restricted cash | $15.8 million | $12.9 million |
| Total debt, before deferred financing costs | $1.607 billion | $1.763 billion |
| Total stockholders’ equity | $1.507 billion | $1.508 billion |
| Fleet utilization | 96.2% | 96.7% |
| Average TCE per vessel per day | $18,226 | $18,931 |
Voyage expenses increased 10.5% to $125.4 million, principally because bunker expenses rose 24.8% to $70.2 million. Vessel operating expenses increased 4.5% to $181.7 million, while depreciation and amortization increased 5.6% to $146.8 million. Net interest and finance costs rose 35.1% to $76.8 million, reflecting higher interest rates and financing costs.
Working capital improved to a positive $44.2 million from negative $50.5 million. Cash flow from investing activities was nearly neutral at $(0.2) million, compared with $(241.8) million in 2017, while financing cash flow was $(55.9) million after substantial debt repayments, dividends and refinancing activity.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially flat as a larger average fleet offset weaker freight rates and slightly lower utilization.
- Average TCE declined 3.7%, reflecting difficult tanker markets for most of the year. The LNG fleet performed better, with average TCE increasing 25%.
- Operating results deteriorated from $63.5 million of operating income to a $28.1 million operating loss.
- The company recorded a $66.0 million vessel impairment charge in 2018, compared with $8.9 million in 2017. The charge covered five vessels and an abandoned construction advance.
- Net loss attributable to the company shifted from $7.6 million of income to a $99.2 million loss, while preferred dividends increased to $33.8 million from $23.8 million.
- Operating cash flow fell $96.9 million, or approximately 57%, primarily because of weaker earnings, higher interest costs, working-capital movements and dry-docking expenditures.
- Debt declined by approximately $156 million through repayments and refinancing. The debt-to-capital ratio improved to 51.6% from 53.9%.
- In July 2018, the company issued 6.0 million Series F preferred shares and raised $144.3 million net of issuance costs. Common dividends paid declined to $13.1 million from $17.1 million.
- The company sold the VLCC Millennium in April 2018 for net proceeds of $17.1 million and recognized a $0.4 million loss.
- ASC 606 was adopted on January 1, 2018, changing voyage revenue recognition from discharge-to-discharge to loading-to-discharge and reducing opening retained earnings by $1.3 million.
Guidance, Outlook, Risks and Unusual Items
Management described 2018 as a historically weak tanker year because of fleet overcapacity, oil-production cuts, refinery outages and elevated bunker prices. Freight markets improved materially in the fourth quarter, supported by higher OPEC and Russian production before further cuts, stronger U.S. crude exports and increased demand from Asian refiners. Management expected tanker fundamentals to improve as fleet growth moderated, older tonnage was scrapped and vessels were removed from service for regulatory upgrades, but provided no formal earnings guidance.
Management stated that existing cash, operating cash generation and the time-charter fleet should be sufficient to meet expected 2019 liquidity needs if market conditions remain relatively stable. It warned that a significant deterioration in freight rates could impair debt service and capital expenditure capacity.
- Debt maturities and scheduled principal payments totaled $163.9 million in 2019, with additional payments of $211.2 million in 2020 and $286.1 million in 2021.
- The company was compliant with leverage and other financial covenants but breached value-to-loan requirements in three loan agreements because of low vessel values. No additional cash collateral or reclassification was required at year-end, but lenders could accelerate debt following an uncured default.
- Existing newbuilding commitments totaled $88.2 million at year-end, including $57.0 million payable in 2019 and $31.2 million in 2020. Two additional suezmax contracts entered in early 2019 added approximately $138.4 million of commitments.
- The company expects to continue paying common and preferred dividends, but payments remain subject to board discretion, cash availability, results, Bermuda law and financing restrictions.
- Approximately 72% of the fleet was employed at fixed or variable period rates as of April 2, 2019; 46 of 64 vessels were under time charters or time-charter profit-share arrangements. Six vessels had charters expiring during the remainder of 2019.
- IMO 2020 sulfur requirements, ballast-water treatment requirements and other environmental rules could increase capital and operating costs. The filing states that the financial impact cannot be determined with certainty.
- Interest-rate exposure is significant because most debt is floating-rate. A 0.25 percentage-point increase in rates would increase loan interest payments by approximately $4 million based on year-end debt.
- Vessel market values were estimated at approximately $2.2 billion versus a carrying value of approximately $2.9 billion. The filing identifies impairment sensitivity to charter rates, vessel values and management assumptions.
- Related-party transactions totaled $44.3 million in 2018, including management fees, commissions, insurance premiums, special charges and travel services. Termination of the management agreement following certain changes in control could have required an estimated payment of approximately $161.8 million.
Important Facts for Investors to Verify
- Reconcile reported revenue, TCE and utilization with the effects of ASC 606 and confirm comparability with prior periods.
- Assess liquidity after the $163.9 million of 2019 scheduled debt payments, newbuilding installments, dry-docking costs and preferred dividends.
- Review the three value-to-loan covenant exceptions and the potential effect of further vessel-value declines on collateral requirements and refinancing.
- Evaluate whether the $66.0 million impairment charge adequately reflects current vessel values and the sensitivity of future cash-flow tests to freight-rate assumptions.
- Monitor charter expirations, re-chartering rates and the proportion of earnings exposed to spot markets.
- Verify the funding plan and contracted employment for the four newbuildings under construction or ordered after year-end.
- Review the sustainability of common and preferred dividends given the 2018 net loss and reduced operating cash flow.
- Quantify the expected cost and operational impact of IMO 2020, ballast-water treatment and other environmental compliance requirements.
- Review related-party management, brokerage, insurance and travel arrangements, including the change-of-control termination payment.
- Confirm subsequent refinancing, dividend declarations and other post-year-end transactions disclosed through the filing date of April 12, 2019.