Business Context and Reporting Period
Tsakos Energy Navigation Limited filed its Form 20-F for the fiscal year ended December 31, 2016, prepared under U.S. GAAP and audited by Ernst & Young, which issued unqualified opinions on the financial statements and internal control over financial reporting. The company is a Bermuda-based international marine transportation operator focused on crude oil, petroleum products, LNG and shuttle tankers.
At December 31, 2016, the fleet comprised 58 vessels, with an average fleet size of 52.6 vessels. By April 5, 2017, the operating fleet had increased to 62 vessels, including 57 conventional tankers, two LNG carriers and three DP2 shuttle tankers, with three additional Aframax vessels under construction.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Voyage revenue | $481.8 million | $587.7 million | Down 18.0% |
| Operating income | $89.8 million | $188.1 million | Down 52.2% |
| Net income attributable to TEN | $55.8 million | $158.2 million | Down 64.7% |
| Net income attributable to common shareholders | $39.9 million | $144.8 million | Down 72.4% |
| Basic and diluted EPS | $0.47 | $1.69 | Down 72.2% |
| Net cash from operating activities | $170.4 million | $234.4 million | Down 27.3% |
| Cash used in investing activities | $576.1 million | $174.8 million | Increased materially |
| Cash from financing activities | $303.8 million | $27.9 million | Increased materially |
| Cash and cash equivalents | $187.8 million | $289.7 million | Down $101.9 million |
| Long-term debt, including current portion | $1.754 billion | $1.393 billion | Up 25.9% |
| Total stockholders’ equity | $1.417 billion | $1.415 billion | Approximately flat |
Operating margin declined to approximately 18.6% from 32.0%, while net income attributable to TEN represented approximately 11.6% of revenue versus 26.9% in 2015. Preferred dividends increased to $15.9 million from $13.4 million, reducing earnings available to common shareholders.
- Average TCE declined to $20,412 per vessel per day from $25,940, primarily because of weaker spot-market rates.
- Fleet utilization was 96.5%, versus 97.9% in 2015. Off-hire days increased to 674 from 376, partly reflecting eleven dry-dockings.
- Vessel operating expenses increased 3.1% to $146.5 million because of fleet expansion, although operating expenses per ship per day declined to $7,763 from $7,933.
- Depreciation and amortization increased 7.1% to $113.4 million as nine vessels were added during 2016.
- Interest and finance costs increased 19.5% to $35.9 million, reflecting higher debt and interest rates.
- The company paid $24.5 million in common dividends, or $0.29 per common share, and $15.9 million in preferred dividends.
Material Changes Versus the Prior Comparable Period
- Revenue and profitability fell sharply as tanker markets weakened after the unusually strong 2015 environment. Management cited global fleet overcapacity, high petroleum-product inventories, reduced refinery growth, supply disruptions and rising bunker prices.
- Spot-market revenue declined to $203.7 million from $313.7 million, while the proportion of operating days on fixed-rate and variable-rate time charters increased. Time-charter revenue represented approximately 52% of 2016 revenue versus 41% in 2015.
- The company expanded through the acquisition or delivery of nine vessels, including the Suezmax Decathlon, four Aframaxes, two LR1 product carriers, the VLCC Ulysses and the LNG carrier Maria Energy.
- Investing cash outflows increased substantially because of $109.6 million of yard advances and $466.5 million for vessel acquisitions and improvements. No vessels were sold in 2016, compared with two vessel sales and a $2.1 million gain in 2015.
- Debt increased by approximately $365.9 million on a net basis to finance fleet expansion. Debt-to-capital increased to 55.5% from 49.7%.
- Market values weakened: management estimated fleet market value at approximately $2.1 billion versus a $2.7 billion carrying value. Fifty-four vessels had carrying values above market values, but impairment testing resulted in no impairment charge.
- The company repurchased 3.7 million common shares for $20.7 million under its buyback program; the program was subsequently suspended.
Liquidity, Debt and Commitments
- Working capital changed from a $35.0 million surplus at December 31, 2015 to a $48.0 million deficit at December 31, 2016.
- Approximately $291.1 million of debt was scheduled for repayment in 2017, including $85.3 million of balloon payments that management expected to refinance.
- The company reported compliance with leverage and other financial covenants, but was out of compliance with vessel-value-to-loan requirements in seven loan agreements because of lower vessel values. Two loans were cured shortly after year-end and the remaining loans were expected to be cured through scheduled repayments by February 2018. Approximately $2.4 million was reclassified to current liabilities.
- Seven vessels were under construction at year-end, with approximately $274.3 million of remaining contractual payments due in 2017. Financing had been arranged for up to $194.3 million, with the balance expected to be funded from cash.
- Non-cancelable time-charter revenue commitments totaled approximately $1.31 billion as of December 31, 2016, before brokerage commissions and off-hire.
Guidance, Outlook, Commentary and Risks
Management did not provide formal earnings guidance. It expected 2017 tanker markets to remain volatile, with continued newbuilding deliveries and weak crude and product tanker rates early in the year. Management identified potential support from global oil demand, longer-haul crude trades following OPEC and non-OPEC production cuts, limited fleet growth after 2017, newbuilding deliveries backed by long-term charters, and an expected recovery in LNG shipping. It also expected oil prices to remain broadly within a $45 to $60 per barrel range in the short to medium term.
- The principal operating risk is cyclical and volatile tanker charter rates. More than half of the fleet was exposed to prevailing market rates as of April 5, 2017, and thirteen vessel charters were scheduled to expire during the remainder of 2017.
- High leverage, scheduled maturities, refinancing needs and vessel-value covenants could restrict liquidity or permit lenders to accelerate debt upon an uncured default.
- Liquidity depends on operating cash flow, continued access to bank and capital markets, vessel sales and charterer performance. Management stated that resources were expected to meet requirements if market conditions remained relatively stable, but materially weaker markets could place debt and capital commitments at risk.
- Interest-rate exposure remained significant: approximately 89% of debt was variable-rate debt at year-end, and a 0.25 percentage-point increase in rates was estimated to increase loan interest payments by approximately $4.4 million annually before hedging effects.
- Risks include vessel overcapacity, declining vessel values, fuel prices, dry-docking and off-hire, environmental regulations, ballast-water compliance, the 2020 sulfur cap, pollution and casualty liabilities, piracy, terrorism, sanctions, geopolitical disruption and counterparty defaults.
- Related-party dependence is material. Tsakos Energy Management, controlled by the chief executive officer, provides executive and commercial management. A change-of-control termination could have required an estimated payment of approximately $166.3 million as of December 31, 2016.
- Subsequent to year-end, the company issued 4.6 million Series E preferred shares for net proceeds of approximately $111.4 million, delivered additional vessels, initiated a $40 million at-the-market equity program and declared a $0.05 common dividend.
Facts Investors Should Verify
- Whether scheduled 2017 debt maturities and balloon payments were refinanced without materially increasing borrowing costs or diluting shareholders.
- Whether vessel-value-to-loan covenant issues were fully cured and whether further declines in vessel values could trigger additional collateral requirements or defaults.
- Actual charter rates, utilization and renewal terms for vessels whose charters expired in 2017, particularly in the weak spot and product-tanker markets.
- Progress payments, financing and delivery timing for the remaining newbuildings, and the effect of new capacity on leverage and cash flow.
- Whether the market-value gap between vessels’ carrying values and estimated fair values leads to future impairment charges or asset-sale losses.
- The sustainability of common and preferred dividends given negative working capital, high debt service, capital commitments and dividend restrictions in financing agreements.
- Changes in related-party fees, management arrangements, insurance costs and potential termination obligations.
- Exposure to interest rates, bunker prices, foreign exchange, environmental compliance costs and sanctions-related trading restrictions.