Business Context and Reporting Period
Tsakos Energy Navigation Limited filed an audited Form 20-F for the fiscal year ended December 31, 2014, prepared under U.S. GAAP. The company is a Bermuda holding company operating a global fleet of crude oil, petroleum product, LNG and shuttle tankers. The filing is annual rather than a standalone fourth-quarter filing, although fourth-quarter market conditions materially influenced full-year results.
At year-end, the company operated 50 vessels with approximately 5.1 million deadweight tons. The average fleet size was 49.0 vessels, utilization was 97.7%, and average TCE was $20,910 per vessel per day.
Financial Performance and Key Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Voyage revenues | $501.0 million | $418.4 million | +19.8% |
| Operating income | $76.0 million | $4.9 million | Significant improvement |
| Net income | $33.7 million | Net loss of $38.6 million | Return to profitability |
| Net income attributable to TEN | $33.5 million | Net loss of $37.5 million | Return to profitability |
| Net income attributable to common shareholders | $25.1 million | Net loss of $41.1 million | Return to profitability |
| Basic and diluted EPS | $0.32 | $(0.73) | Improved |
| Cash flow from operations | $107.0 million | $117.9 million | -9.2% |
| Cash used in investing | $254.3 million | $144.4 million | Higher fleet investment |
| Cash provided by financing | $187.2 million | $44.5 million | Higher equity and debt funding |
Operating margin was approximately 15.2% of voyage revenue, compared with approximately 1.2% in 2013. Net income attributable to TEN represented approximately 6.7% of voyage revenue. The improvement reflected stronger tanker rates, increased spot and variable-rate exposure, lower bunker prices and the absence of the $28.3 million vessel impairment charge recorded in 2013.
- Voyage expenses increased 15.7% to $135.3 million, primarily because spot and contract-of-affreightment days increased. Bunker prices declined approximately 10% year over year, partially offsetting higher fuel consumption.
- Vessel operating expenses increased 12.7% to $147.3 million as the company added Eurovision and Euro, operated the two shuttle tankers for a full year, and incurred full-year operating costs for Millennium after its bareboat charter ended.
- Interest and finance costs increased to $43.1 million from $40.9 million, including approximately $9.4 million of unrealized losses on non-hedging bunker swaps caused by the sharp fall in oil prices.
- No vessel impairment charge was recorded in 2014, compared with $28.3 million in 2013. Nevertheless, 36 vessels had carrying values above estimated market values at year-end.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $202.1 million, with restricted cash of $12.3 million.
- Total assets were $2.70 billion, including vessels at net book value of $2.20 billion and $189.0 million of advances for vessels under construction.
- Total debt, including current maturities, was $1.42 billion, up from $1.38 billion. Debt represented 54.6% of debt plus equity; net debt to capital was 50.6%.
- Total stockholders’ equity was $1.18 billion, compared with $997.7 million in 2013, mainly reflecting common equity issuance and the return to profitability.
- Working capital was negative $49.8 million, primarily because $228.5 million of debt was classified as current. Two facilities required aggregate balloon payments of approximately $100.6 million in December 2015, for which refinancing discussions were underway.
- The company reported compliance with its financial covenants except for one loan-to-value covenant associated with debt of approximately $31.7 million. Management expected the shortfall to be cured through scheduled repayments and stated that the lender had not requested additional collateral or acceleration.
- Minimum non-restricted liquidity required under the loan agreements was approximately $79.6 million at December 31, 2014.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by stronger crude tanker markets, lower oil prices, increased demand for transportation and floating storage, higher spot exposure, and the addition of two Suezmax vessels.
- Fleet utilization remained broadly stable at 97.7% versus 97.8%, while TCE increased 16.8% to $20,910 per day.
- The fleet expanded from an average of 47.5 vessels to 49.0 vessels and from 48 vessels at year-end 2013 to 50 at year-end 2014.
- The company issued 25.6 million common shares in two public offerings, raising net proceeds of approximately $169.3 million, and issued 1.1 million additional shares through its at-the-market program for approximately $7.1 million.
- Investing cash outflows increased substantially, including $130.4 million of newbuilding advances and $121.6 million for Eurovision and Euro.
- Common dividends paid totaled $0.15 per share, or $12.6 million. Preferred dividends totaled approximately $8.8 million.
Guidance, Outlook, Risks and Unusual Items
Management expected 2015 to feature strong but seasonally variable crude tanker rates, supported by low expected crude tanker fleet growth, continued oil demand and limited deliveries. Management also expected product tanker conditions to improve as new refineries increased long-haul trade. LNG shipping was viewed less favorably: excess vessel supply, delayed LNG projects and lower spot rates were expected to limit returns until approximately 2017.
- Approximately 60% of fleet employment had shifted to variable-rate or spot exposure by early 2015, increasing upside in a strong market but also increasing earnings volatility.
- Ten vessels had time charters expiring during the remainder of 2015. Re-chartering at attractive rates was not assured.
- The company had 13 vessels under construction with remaining contractual payments of approximately $710.5 million at year-end. Financing was arranged for the aframaxes and LR1 vessels, while financing for the LNG carrier’s delivery balance and the shuttle tanker was still being negotiated.
- The existing LNG carrier’s charter expires in March 2016, and replacement employment had not been arranged. The LNG newbuilding expected in 2016 also lacked a replacement charter at the filing date.
- Major risks include tanker-rate cyclicality, vessel-value declines, covenant compliance, refinancing and newbuilding funding, interest-rate and bunker-price volatility, fuel and foreign-exchange costs, environmental liability, piracy and geopolitical disruptions, counterparty credit risk, and dependence on affiliated managers.
- The management agreement with Tsakos Energy Management could result in a termination payment of approximately $166.3 million under specified change-of-control circumstances.
- Related-party transactions included management fees, commissions, insurance premiums and travel services. The company also acquired Eurovision and Euro from entities influenced by members of the Tsakos family.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2014. The auditor’s opinion on the financial statements and internal controls was unqualified.
Most Important Facts for Investors to Verify
- Verify the refinancing status and repayment schedule for the approximately $100.6 million of 2015 balloon maturities and the remediation of the outstanding loan-to-value covenant shortfall.
- Verify financing commitments and cash requirements for the $710.5 million of remaining newbuilding payments, particularly the LNG carrier and shuttle tanker.
- Monitor charter expirations, spot-market exposure and realized TCE rates as market conditions normalize after the late-2014 tanker-rate improvement.
- Assess the sustainability of dividends in light of negative working capital, debt service, preferred dividend obligations and loan-agreement restrictions.
- Review vessel appraisals and impairment sensitivity: 36 vessels had market values below carrying values despite no 2014 impairment charge.
- Evaluate LNG employment risk, including the March 2016 expiration of the Neo Energy charter and the absence of a reported charter for the Maria Energy newbuilding.
- Review related-party fees, management agreement termination provisions and the company’s dependence on Tsakos-affiliated commercial, technical and insurance providers.