Business context and reporting period
Tsakos Energy Navigation Limited is a Bermuda-based owner and operator of crude oil, petroleum product, LNG and shuttle tankers. This Form 20-F reports the fiscal year ended December 31, 2017, rather than a standalone 2017 fourth quarter. The company prepared its consolidated financial statements under U.S. GAAP and operated 65 vessels at year-end, with an average fleet of 62.6 vessels and average age of 7.7 years.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Voyage revenue | $529.2 million | $481.8 million | +9.8% |
| Operating income | $63.5 million | $89.8 million | -29.3% |
| Net income attributable to the company | $7.6 million | $55.8 million | -86.4% |
| Net income attributable to common stockholders | $(16.2) million | $39.9 million | Turned to loss |
| Basic and diluted EPS | $(0.19) | $0.47 | Declined |
| Net cash from operating activities | $170.8 million | $170.4 million | +0.3% |
| Net cash used in investing activities | $(241.8) million | $(576.1) million | Lower outflow |
| Net cash from financing activities | $73.0 million | $303.8 million | Lower inflow |
| Average TCE per vessel per day | $18,931 | $20,412 | -7.3% |
| Fleet utilization | 96.7% | 96.5% | +0.2 percentage points |
Operating margin was approximately 12.0% in 2017 versus 18.6% in 2016; net margin was approximately 1.7% versus 11.7%. Voyage expenses were $113.4 million, vessel operating expenses were $173.9 million, depreciation and amortization was $139.0 million, and general and administrative expenses were $26.3 million. Interest and finance costs increased to $56.8 million from $35.9 million.
At December 31, 2017, cash and cash equivalents were $189.8 million, restricted cash was $12.9 million, total assets were $3.37 billion and stockholders’ equity was $1.51 billion. Long-term debt including the current portion was $1.75 billion, representing a debt-to-capital ratio of 53.9%. Working capital was negative $50.5 million. Approximately $228.1 million of principal payments were scheduled for 2018.
The company paid $17.1 million, or $0.20 per common share, in common dividends and $22.8 million in preferred dividends during 2017. Dividend payments remain subject to board discretion, cash availability, financial covenants and applicable law.
Material changes versus the prior comparable period
- Revenue increased primarily because the average fleet expanded from 52.6 to 62.6 vessels, including seven vessel deliveries during 2017.
- Revenue quality shifted toward contracted employment: fixed-rate time-charter revenue rose to $222.1 million from $166.8 million, while spot-market revenue declined to $158.1 million from $203.7 million.
- Market rates weakened. Average TCE declined to $18,931 per day from $20,412, reflecting tanker overcapacity, OPEC production and export cuts, refinery outages and high inventories.
- Operating expenses rose 18.6% to $173.9 million as the larger fleet added crew, insurance, maintenance and other costs; average operating expense per vessel day nevertheless declined slightly to $7,688.
- Depreciation and amortization rose 22.6% to $139.0 million, and interest and finance costs rose 58.4% because of new vessel debt and higher interest rates.
- The company recorded an $8.9 million impairment charge on the vessels Silia T and Millennium and a $3.9 million loss on the sale and leaseback of Eurochampion 2004 and Euronike.
- The company issued 4.6 million Series E preferred shares, generating $110.5 million net proceeds, and raised additional proceeds through sales of treasury common and Series D preferred shares.
- Net cash from operations remained stable, but operating cash flow was largely absorbed by debt service, fleet investment, dry-docking and dividends.
Guidance, outlook, commentary and risks
Management described 2017 tanker markets as unusually weak and expected only a gradual recovery. It cited potential support from U.S. crude exports, Asian demand, refinery additions, vessel scrapping and reduced ordering, while noting that OPEC production cuts, fleet overcapacity and weak early-2018 rates could delay recovery. Product tanker markets were expected to recover sooner than crude tanker markets, and LNG demand could strengthen if liquefaction projects are completed.
Management stated that existing cash, operating cash flow and contracted employment were expected to cover liquidity and working-capital needs for the next twelve months if market conditions remained relatively stable. A significant deterioration could threaten timely debt service and capital commitments and require additional asset sales, debt refinancing or capital raising.
- Four loan agreements were not in compliance with value-to-loan requirements at year-end because of depressed vessel values; $0.9 million was reclassified as current debt. The company remained compliant with leverage and other reported covenants and had paid scheduled debt service.
- Vessel values were materially below carrying values: estimated fleet market value was approximately $2.4 billion versus carrying value of approximately $3.1 billion, with 60 vessels having carrying values above market values.
- Approximately 63% of 2017 revenue came from time charters, and 14 vessel charters were scheduled to expire during the remainder of 2018, exposing renewal economics to weak market rates.
- Debt is primarily floating-rate and exposed to LIBOR. A 0.25 percentage-point rate increase was estimated to increase annual loan interest payments by approximately $4.4 million.
- Environmental compliance costs, including the IMO 2020 sulfur cap and ballast-water treatment requirements, may increase capital and operating expenses.
- Other material risks include charterer counterparty failure, fuel-price volatility, foreign-exchange exposure, piracy, sanctions, accidents and spills, insurance limitations, refinancing risk, related-party management arrangements and dependence on Tsakos Energy Management and affiliated companies.
- The company had approximately $1.19 billion of minimum future charter revenue under non-cancelable time charters at December 31, 2017, before brokerage commissions and off-hire.
Subsequent events included refinancing activity in 2018, the planned sale of Millennium for approximately $17.7 million, and a declared $0.05 common dividend payable in May 2018. The filing states that management identified no substantial doubt about the company’s ability to continue as a going concern within one year from issuance of the financial statements.
Important facts for investors to verify
- Confirm the post-year-end refinancing, scheduled 2018 debt maturities and resolution of the four value-to-loan covenant exceptions.
- Assess current tanker, product-tanker and LNG charter rates against the company’s breakeven costs and debt-service obligations.
- Review vessel market values, impairment sensitivity and the potential for additional write-downs if rates or asset values remain weak.
- Verify charter renewals and rate terms for vessels whose charters expired or were scheduled to expire in 2018.
- Evaluate whether operating cash flow can sustainably fund debt service, dry-docking, environmental compliance, preferred dividends and common dividends.
- Review the economics and governance of related-party management, insurance, travel and brokerage arrangements, including the potential approximately $160.7 million termination payment under the management agreement.
- Monitor exposure to LIBOR or successor interest rates, bunker prices, the U.S. dollar/euro exchange rate and customer concentration.