Summary
- The global economy will move into negative growth in 2023 and this will start to show in the real economy in the early months of next year.
- For now, the oil market distortion together with the zero COVID policy easing will support the oil market.
- Tsakos Energy Navigation plays it safe with long-term charter contracts while at the same time opportunistically exploiting the high rates in the spot market.
- The next quarter is anticipated to be stronger than this one, as TCE average in Q3 was lower than most of the current rates.
- I continue to be long on the common shares but less risky investors should definitely take a look into the preferred shares of the company.
When I was writing an article about Tsakos Energy Navigation ( TNP ) in April, suggesting that the stock was a buy, I couldn't expect that it would become one of my top performers out there, having soared by more than 80% since. Today, I'm writing another article about the company, explaining the reasons why I believe that after this spectacular movement, there's still room for further price appreciation in the next few months and why investors should be aware of the risks beyond that point.
A few words on the recent oil market developments
As the war between Russia and Ukraine is raging, news came out a few days ago, about an EU and G7 imposed oil market cap, on oil imports from Russia. The price cap was set at $60 per barrel, meaning that EU countries could still import seaborne oil from Russia, but at a lower price than the imposed cap. But does this cap point make sense at this point?
As we can see in the graph listed below, a few days before the announcement, Urals crude oil, the main index tracking oil in Russia, was standing just above the $60 price point. We can also see a rapid decline, attributed to the announcement of the cap, or at least, to leaking of related information.
So, at this point, the situation seems like business as usual, as seaborne Russian oil could be imported by any shipping company around the world. Even if the oil price moves beyond the price cap point, Russia's oil exports are diversified across major non - G7 oil importers, such as China and India.
At the same time, China is starting to loosen up their strict zero COVID quarantine policy, especially after some rioting and protesting took places in the streets of Beijing and other major cities. This development supported oil prices from further decrease, as the global economic performance relies heavily on China's actions.
What is important to note, however, is the "protection and indemnity" insurance associated with the seaborne oil trade, provided mainly by firms located in the U.K., a member of the G7. The P&I insurance also falls under the price cap rule and is expected to limit tanker availability to Russia, resulting to an output decrease of 500k barrels per day, according to Rystad Energy . In addition, it is unlikely that financial institutions would like to engage in oil trading financing, with such a regulatory mess and risk getting caught between the lines of opaque international agreements. It's no coincidence that Turkey, all of a sudden, started requesting P&I clubs to vouch for the origin of the oil that gets moved through the Turkish Straits. That was a request that P&I clubs in London couldn't accept, causing oil tanker build - up in the area. The bottom line is that we will continue to witness Russia responding to the price cap in various ways.
Putting this picture into perspective: Tsakos Energy Navigation
The colorful situation described above could be good news for the oil tanker companies, as supply issues could boost oil prices. However, after several months of interest rate increases, in order to tame inflation, it seems that central banks are starting to achieve their target. Only after that, a nice recession will kick in, especially after the "brilliant" 2022 growth recorded, in relation to a mediocre 2021. Many investors have expressed their fears that the anticipated economic slowdown will be more than that. It will have the magnitude to spook the markets into a more bearish approach. Just imagine what is going to happen when the FED stops increasing interest rates, but NYSE - listed companies start to post negative earnings growth and unemployment to rise.
Tsakos Energy Navigation had the wisdom to secure long-term time charter contracts for their vessels, and that's usually a good thing. They continue to keep a small part of their operations exposed to the spot market, which is something that I also like.
Average time charter equivalent was approximately $27k per day, during the first 9 months of 2022. This figure is lower that the TCE figure recorded in Q3 2022, due to the tanker rate boom of the recent months. For the three months ended in September 2022, the company recorded a TCE figure of approximately $32k per day. While information about time charter duration and renewals are not currently available, it is safe to argue that the time charter orientation of the company will have secured some nice contracts for the next quarters.
As we can see in the table listed above, the Q3 2022 recorded TCE rate is lower than most of the current 1 - year time charter rates. This means that the company is off to another nice quarter that can push the share price even higher. The company's vessels are skewed towards the Aframax and the Suezmax categories, which have higher rates than their reported average.
What's not to like
However, the company's expansion and growth came at a price: leverage. Despite their best efforts to reduce debt, the company still owes $1.3 billion, which stands for a 105% debt to equity ratio. At the end of 2021, the company had a weighted average interest rate of 2.02%. As most of the company's debt is in a "3 or 6 month LIBOR plus margin" format, they will see their balance sheet deteriorating in the fourth quarter.
In that sense, I expect the company to continue to dilute their common shareholders, as they have been repeatedly doing in the past. In the following graph we can see how the company has been issuing new shares at a much higher rate than another tanker company, DHT Holdings (DHT). A silver lining to this situation is the skin that the company's management team has in the game. Their alliance of interest with that of common shareholders is very positive and something that you don't find every day.
Bottom line
I continue to be long in the company, although not with the same enthusiasm as before. While it is a matter of time for the global economy to turn into negative territory, the next quarter will also be strong, as 6-digit rates from the company's largest and LNG vessels will materialize into its books. However, for those who don't wish to get involved in the wider fluctuations and the dilution effect found in the company's common shares, preferred shares could be a nice option. The company's series E cumulative, redeemable and perpetual preferred shares are paying a brilliant 9.25% dividend (slightly more, to be precise) until May 2027. I would suggest such an option after the Q4 2022 results are published and incorporated into the common share price.
For further details see:
Tsakos Energy Navigation: The Party Will Continue For Another Quarter