2023-08-14 12:26:30 ET
Summary
- Tsakos Energy Navigation is a profitable company heading into a multi-year upcycle.
- However, its shares trade at 0.35x NAV due to management issues.
- I believe that a special dividend and/or buyback program may be on the horizon, which will lead the stock to re-rate.
Introduction
Tsakos Energy Navigation ( TNP ) is a speculative play on a potential multi-year upcycle for oil tankers. The company has been trading at ~0.35x P/NAV despite two quarters of strong earnings with more to come, and a record cash balance of nearly $500m. Management disappointed investors last quarter with a small dilutive offering and a pitiful dividend. Despite that, I believe that it presents an asymmetric bet on management following up with a special dividend and buybacks in the coming earnings release.
Industry Overview
The tanker industry is poised for years of strong earnings ahead as the orderbook has fallen to the lowest levels in decades . Supply continues to be restricted by high prices and low yard capacity , with earliest delivery dates in late 2026 to early 2027. Should oil demand meet forecast expectations or scrapping of old vessels resume, this imbalance will lead to volatility and high rates for vessel owners.
This is my second article covering tanker companies, for good reason. I believe that the supply and demand set-up will lead to multiple years of strong earnings for all owners. I highly recommend you read my previous article on Okeanis Eco Tankers ( OKENF ) for a more comprehensive explanation on the supportive macro factors and the industry.
Business Overview
TNP has been a mainstay of the tanker industry for decades – in fact, the company is celebrating its 30 th anniversary as a public company in 2023.
Fleet and Charter Profile (Tsakos Energy Q1 2023 Presentation)
It owns and operates a diversified fleet with an average of 10 years. Besides crude tankers, it also owns a fleet of product tankers, shuttle tankers and LNG carriers.
The company adopts a more conservative strategy than its peers, choosing to employ the majority of its vessels on time charters with profit sharing components than maximizing spot exposure.
In Q1 2023 , the company reported an extremely strong TCE of $41.8k/d, up 112% on Q1 2022’s TCE of $19.7k/d. This compares favorably against its cash breakeven levels of around $24k/d on average, leading to net income of $167.9m or $5.69/share in the period. It also announced that it would be redeeming $88m of its Series D preferred shares, alongside a charter backlog of $1.6bn.
That said, the shares tumbled upon the release of their Q1 2023 earnings – owing to some questionable things that management did (and is somewhat known for). Which brings me to my points…
TNP could start rewarding shareholders soon
It would be foolish not to consider management quality when discussing TNP. After all, it has garnered somewhat of a negative reputation for not placing minority shareholders’ interests at heart. This says a lot considering the shipping industry has left many with sour tastes in their mouths, so here’s a quick recap of what led the stock to sell off in Q1 2023.
The company inexplicably used its ATM program (subscription required to access link) to issue shares, diluting the stake of minority shareholders. This happened all while shares traded at less than half of NAV – a cardinal sin that shipping investors frowned upon. There was no compelling reason to do this, and it made investors question management as stewards of their capital.
TNP disappointed with its dividends at the end of such a profitable quarter, choosing to pay out just $0.60/share across two payments. This comes up to a pitiful 3% yield, when tanker peers were issuing special dividends to reward their shareholders. While the company touts its strong dividend paying history as a plus, I believe investors were hoping for more considering its cash balance of $475m.
It also pales in comparison when it comes to transparency. Other tanker companies have beefed up their investor relations departments, even getting on Twitter to engage with investors. The company does nothing of that sort and has not even made known the date of their Q2 2023 earnings release (it is the 10 th of August and many tanker companies have already reported).
This has led to TNP being one of the most undervalued shipping companies on a P/NAV basis, coming in at roughly 0.35x against the average of 0.85x. I strongly believe that investors have made their case and management could announce a special dividend and buyback program in the upcoming earnings call. This would undoubtedly cause the stock to re-rate closer towards the peer group and is a strong near-term catalyst in my opinion.
Multiple levers to pull on, and the cash to do so
Given all that management has done (or not done), the silver lining is that they have many options to demonstrate they have learnt their lesson.
The simplest, and most direct method is to issue a special dividend to make up for the last quarter. A quick calculation shows that TNP has more than sufficient free cash on hand to atone for the small dividend announced earlier this year.
Free Cash Flow Available for Distribution (Author's Representation)
After accounting for all debt and capital commitments for the rest of 2023, I find that there is still $260m of cash available for distribution. That amounts to $8.60/share. While the company obviously won’t and shouldn’t pay out everything, there is significant cash on the balance sheet to do so.
The company could also opt to fix its dividend policy to offer more transparency to shareholders. Its peers have mostly fixed dividends as a percentage of earnings and have been correspondingly rewarded with higher P/NAV multiples. Alternatively, TNP could announce a buyback program and go through with it. There is nothing more accretive than repurchasing your own shares when they trade at such a low valuation.
As a shareholder, I would also like to see TNP improve its investor communications. That might not be a strong near-term catalyst but should close the valuation gap somewhat going forward.
Chartering strategy is conservative yet profitable
I also believe that investors overlook the fact that TNP is a very profitable enterprise, with a sound chartering strategy against its breakeven levels. Regardless of how management has treated shareholders, they have been running a tight ship in their organization.
It currently has 45 (77%) vessels with secured revenue contracts and 31 vessels (53%) with spot exposure. The percentages do not add to 100% as some vessels are on time charters with profit sharing, hence some overlap. 6 out of its 8 vessels under construction also have long-term charters attached to them, significantly de-risking the purchase costs.
Fleet Breakeven Levels (Author's Representation from TNP Q1 2023 Presentation)
Looking at their latest investor data kit and the charters they currently have, I find that the secured revenue components alone nearly cover the entire fleet breakeven. The 18 profit-sharing vessels and 14 vessels on spot charters merely need to generate $140k/d for TNP to turn an operating profit. This should not be a problem in any market, let alone the upcycle we are headed towards.
Valuation
TNP owns a large fleet of vessels which have seen market values appreciate significantly over the last year, in part due to inflation as well as a strong rate environment. I believe that this should act as a floor for its share price.
To estimate the current market value of its fleet, I used Compass Maritime’s weekly market report as a guide and arrived at a rough estimate of $3.09bn for its vessels.
NAV Estimate (Author's Representation)
According to my rough estimates, a fair price for TNP if it were run perfectly would be around $61.41, giving it nearly 180% upside from today’s share price of around $22/share.
But we know that is unlikely to play out, so here are my share price estimates under different scenarios with room for error on the vessel values.
NAV Scenario Analysis (Author's Representation)
While this represents a wide range of possible values, it also demonstrates how asymmetric the return profile is from here. A very pessimistic view of asset values declining 15% and a P/NAV of 0.30x, assuming management does not reward shareholders, results in a -38% decline in share price.
On the other hand, should management become more shareholder friendly, my base case calls for a re-rating of the stock to 0.6x NAV. I recognize that investors are unlikely to view TNP as favorably as they do other tanker companies, hence the slight discount to peer averages of 0.85x NAV. This scenario results in a 67% increase in share price to $36.85, which in my opinion still understates the true value of TNP’s assets.
Risks
Global oil and gas demand, sanctions, and the OPEC+ cuts are all headwinds that TNP faces as a business. However, I think that the company’s conservative chartering strategy should help it weather any downturns better than peers operating 100% on spot. While vessel values could still come down, it poses a smaller risk to TNP which is already trading at a depressed multiple compared to the other tanker companies.
Management remains the biggest unknown here. Investors are reliant on management to become more shareholder friendly to unlock value. There is no way of predicting how they will react to investors’ demands and I believe it is a risk that investors must contend with in this investment.
Recommendation
TNP is simultaneously a play on the multi-year tanker upcycle and a call option on management. It is a profitable, cash generating enterprise with a sound chartering strategy and diversified fleet of vessels. It trades at ~0.35x P/NAV, significantly lower than peers, as management has not been the friendliest to shareholders in the past.
That said, there are multiple ways management could surprise investors in the upcoming earnings call. I believe that TNP could pay off in an asymmetric manner as valuations have been depressed and asset values should act as a backstop, as long as you size your position appropriately.
For further details see:
Tsakos Energy Navigation: Call Option On Management