In Hellenic Shipping News 02/12/2016
Top line below of our estimate; company posts losses: Tsakos Energy Navigation’s (TNP’s) operating revenue dropped 23% y/y in 3Q16 to USD 109.2m (lower than our estimate of USD 117.7m) even though the company added three newbuild Aframaxes and two LRs to its fleet. The fall in revenue was primarily on account of a 31% y/y decline in the average TCE rates to USD 17,608pd as well as five dry-dockings during the quarter. The TCE revenue of USD 81.8m has been lower than our estimate of USD 90.3m. The adjusted EBITDA of the company plunged 44.9% y/y to USD 39.3m on account of the reduced top line and stable opex, and is south of our estimate of USD 45.2m.
The profits vanished during the quarter, and the company reported a net loss of USD 2m compared with a net income of USD 36m a year ago. TNP reported a net loss of USD 0.02 per share and missed our EPS estimate of USD 0.04 per share. Although delivery of newbuild vessels along with charter coverage provides downside protection to an extent, the inevitable weakening of spot day rates will hit the earning potential of the company’s fleet and will reduce profitability for TNP in 2017-18. Accordingly, we reduce our fair value estimate to USD 4.90 per share and maintain our stance as Neutral.
Three newbuild Aframaxes and two LRs hit the water: TNP took delivery of three newbuild Aframaxes and two newbuild LRs during the quarter, expanding its operating fleet capacity by 8.2% during 3Q16. All five newbuilds (Thomas Zafiras, Leontios H, Parthenon TS, Sunray and Sunrise) were immediately deployed on long-term charters at profitable rates to north European charterers or oil major with an option of profit sharing in two cases. DFRS estimates that the vessels will generate revenue of USD 36m per annum at current contracted rates and would lift the annual EBITDA by USD 15m.
Management optimistic about future of LNG carriers: In late October, TNP took delivery of its newbuild LNG carrier Maria Energy and deployed it for a minimum 18-month contract with the option of an extension of another 18 months. We believe the LNG carrier has been fixed at profitable rates as management had stated that Maria Energy is expected to generate ~ USD 70m over the next three years if the option is exercised, implying a day rate of above USD 60,000pd. The company’s first LNG vessel Neo Energy has also been fixed on a charter contract for 30 months to be deployed as floating storage. During the call, management indicated that it is optimistic about the prospects of seaborne trade of liquefied natural gases. Management also mentioned that the company aims to induct half a dozen LNG carriers in the next five years, once the current newbuilding programme is completed.
Leverage on the rise, could limit future payouts: The company’s net gearing has increased by 16% in the last 12 months to 96% in September 2016, slightly north of the sector’s average of 85%. We expect the leverage to rise further by ~20% over the next few quarters as a result of higher borrowings for meeting the planned capital commitments of TNP’s newbuilding programme. We believe the company will have sufficient liquidity in the near future, but rising leverage (which is already higher than peers) would limit the dividend payments at a time when the market is likely to head south as its dynamics are changing.
Value and risk: We maintain our stance as Neutral but reduce our fair value estimate to USD 4.90 per share on account of declining asset prices and surging deliveries of newbuild vessels in late 2016 and early 2017. These two factors will adversely impact the freight market and earnings potential of tankers. We had earlier stated that the unchecked ordering activity of 2015-16 will cut short the rally in taker shipping by creating a situation of oversupply. We thus place the company in the Medium risk category with a stable outlook over the long term. The newbuild programme and strategic partnership with Statoil are key catalysts for the company as most of the newbuilds are already locked in for long-term charters at profitable rates.
Source: Drewry Maritime Equity Research
