“We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds.”
My first experience with Greece and the sea was a vicarious one. While reading the glorious works of Homer, my classmates and I were transported to a world of regal wooden ships, surfing sea maidens, and sea monsters. We navigated a tempestuous water world, who was both all-giving benefactress and doomsday machine. Needles to say, it was a complicated place for ship owners. I guess some things never change.
Shipping is a highly cyclical and competitive industry. It has been plagued with boom and bust cycles for which the owners are largely responsible. They have short-term memory, thinking that each period of prosperity will usher in an endless demand for tonnage. They literally sink their own ship as everyone rushes to the yards to order more vessels. Like the doomed seafarer in Hesiod’s poem, their ambitions are lost at sea — in this case, a sea of red on their balance sheets.
Despite the perils, Greek shippers have been in the game for at least three millennium and they presently hold 16% of the world’s commercial tonnage. One out of ten Greek workers is directly connected to the maritime industry. They breathe shipping.
Why do business in this market?
If you said there is no valid long-range strategy for a shipping business I would not consider that unreasonable. After all, didn’t we just witness a maritime apocalypse? A slowing economy and speculative vessel orders triggered a collapse in the shipping market, which has been in a sustained downturn since 2009. The tanker fleet alone accumulated losses in excess of $26 Billion U.S.D. You can be sure Mr. Market took notice; he punished shipping stocks indiscriminately. When the smoke cleared It was obvious who made speculative purchases. The guilty were scrambling back-and-forth between the lenders and the yards—negotiating with the banks and prolonging vessel deliveries in hope of a recovery that has yet to materialize. Adding insult to injury, these same managers soaked their shareholders in wave after wave of equity financing to stay afloat.
But not all was lost. In this calamitous seascape, a handful of conservatively run shipping companies had in-fact emerged more seaworthy. It is within this class that you can find opportunity for investment. As for me, the choice was clear; buy shares of Tsakos Energy Navigation (TNP). TNP has emerged as a premium brand in the energy transportation sector and by virtue of the following, it represents a sound and attractive investment:
- Exceptional management team
- Favorable future prospects
- Discount to NAV
You can make very profitable investments in the maritime industry, but your company selection must be excellent. Not all shippers are cut from the same cloth. You need to partner with an outstanding management team. One who is relentless in their effort to increase long-term shareholder value.
Phillip Fisher put it best when he said there are only two directions in business: forward and backward. The markets never sleep and neither should management. In a commodity based industry like shipping nothing could be more important for shareholders. Management should be focused on one thing; increasing intrinsic value. The key metrics to look at are 1) how they allocate capital and 2) how efficiently they run the business day in and day out. TNP excels in both fields. They manage the company with an investor mindset, buying vessels in bearish markets and relinquishing older tonnage in a more bullish setting. They tweaked this strategy to minimize downside by tying vessel acquisitions to accretive long-term charter agreements. The following press releases circumstantiate this policy:
Athens, Greece — November 5, 2014 — Tsakos Energy Navigation Ltd. (NYSE:TNP), a leading crude, product and LNG tanker operator, today announced an agreement for a long-term time charter to a national oil company of a new DP2 suezmax shuttle tanker for delivery in the first quarter of 2017, with an option for a second vessel. This project will make a positive contribution to TEN’s bottom line.
Athens, Greece — July 9, 2014 — Tsakos Energy Navigation Ltd. (TEN or the “Company”) (NYSE: TNP), a leading crude, product and LNG tanker operator, today announced the delivery of the 2013 and 2012-built suezmaxes, Eurovison and Euro, sister vessels to the 2011-built Spyros K and Dimitris P. “The addition of these two modern suezmaxes to the existing sister units, further solidifies TEN’s presence in the crude sector and reaffirms the company’s chartering strategy. Two vessels are on long time charters with profit sharing, the third is on a medium time charter with escalations and the fourth is already taking advantage of an improving spot market,” said Mr. Nikolas P. Tsakos.
Athens, Greece – December 12, 2013 – Tsakos Energy Navigation Limited (TEN or the “Company”) (NYSE: TNP) today reported the strategic partnership with Statoil, an international energy company headquartered in Stavanger Norway (NYSE: STO) for the construction and chartering of five to nine purpose built Daewoo Aframax crude tankers with a contract term of five to twelve years including options.
With respect to operational efficiency, their strategy is twofold; deploy a modern fleet that is homogeneous within each vessel category and run a first class maintenance program. The result is a fleet utilization rate of 97% (5 year average) and close to $280 million in capital gains from vessel sales since their 2002 NYSE listing. Mr. Tsakos sums it up nicely in the following press release:
Athens, Greece – August 24, 2004 –TEN also announced the sale of the Aframax Toula Z, built in 1997 to a third party. TEN will continue to operate the vessel until its delivery to the new owners in late December of this year. As a result, the sale will not impact the earnings potential of this vessel for 2004. However, the company will recognize a net gain of over $11 million from the sale of this vessel in the fourth quarter. Mr. Tsakos noted, “The Toula Z was the first of the series of 30 newbuildings vessels ordered since 1997. We have profitably operated the vessel for the past seven years and our focus on meticulous vessel service and maintenance made her an attractive acquisition for the buyer. As a result, we were able to negotiate a price that will be sufficient to cover almost all of TEN’s equity investment in the new aframax, announced today, without adding significant cost.”
Favorable Future Prospects
The current market price is $8.85/share and there are a number of pending catalysts that could send the stock price well into the double digits.
- If TNP puts together four consecutive quarters of strong earnings in 2015 that should trigger a re-appraisal of the stock price as long as market fundamentals remain positive. Profitability will facilitate a higher dividend yield, which I will address next.
- TNP management clearly expressed their intentions to ramp up the dividend on their last two conference calls. A return to 15¢ per quarter at the end of this fiscal year would be excellent, but any upside will be constructive for the stock price.
- The manifestation of contango in the second half of 2015. Contango is no mirage for TNP; they recently secured a six-month storage contract for their VLCC that will net $10 million.
- A sustained recovery in the tanker market for two to three years will unlock TNP’s intrinsic value, especially when coupled with the delivery of seven vessels in 2016 plus six more in 2017.
(To be continued)