2023-11-15 23:42:57 ET
Summary
- Tsakos Energy is one of the leading companies in the crude and product tanker industry. It has 58 vessels at an average age of 10.5 years.
- TNP's capital structure remained unchanged for the last five years. The company has $1.59 billion in total debt and $530 million in cash.
- TNP's gross profit margin is in the highest percentile in the industry. Despite the improved profitability, ROE and ROTC figures are in the lower percentile.
- TNP distributes dividends with adequate yield at 2.48% (TTM) but does not have a stock buyback program.
- The company is undervalued compared to its historical multiples - EV/Sales, EV/EBITDA, and Price/FCF. Considering the red flags, I give TNP a hold rating for now.
Introduction
Tsakos Energy ( TNP ) is one of the leading companies in the crude and product tanker industry. The company is run by its founders, who own a large portion of the shares through Tsakos Foundation and Tsakos Energy management. The company has a diverse fleet of crude and product tankers. Fleet average age is 10.5 years, and utilization rate is 94.2% in 3Q23. Only 10.4% of the vessels have scrubbers.
Financially, the TNP performance has improved YoY, measured by revenue and EBITDA. However, in the last few quarters, the results have been erratic. TNP management successfully reduced company debt from $1.75 billion in 2016 to $1.59 billion in September 2023. The company's returns and margins are among the best in the industry. Despite declining profitability, QoQ's gross and EBITDA margins have grown since 2021.
The company is valued at a solid discount using Price to Book, EV/Sales, and EV/EBITDA. It is cheaper than its peers and its historical multiples. In my opinion, one of the reasons is the lower number of vessels equipped with scrubbers compared to other companies in the industry. Despite the attractive price and firm performance, I give TNP a hold rating. The primary reason is the lack of scrubbers.
Recap on tankers' demand and supply
Before describing TNP's fleet, let's recap why I expect the day rates to grow. The supply side is affected by an aging fleet, record low order book and limited shipyard capacity. The demand side is affected by geopolitical dynamics, resulting in longer voyages and India and China's role as growing economies. I will use two charts to argue my thesis. The first is from the last TNP presentations and shows the current demand per capita by country.
China and India combined have more than 30% of the global population. However, the oil consumption per capita is significantly lower than in developed economies and Thailand. If Chinese oil consumption per capita reaches Thailand's level of 7 barrels per capita, it means 38% growth from current levels (13 Mbps). Imagine what will happen when India's oil consumption per capita equates to the Chinese. The higher the oil demand (in Asia), the higher the tanker demand. Adding geopolitics to the formula, we have a recipe for rising day rates in the long term.
The following chart represents the global fleet age by tanker type.
Aframax vessels older than 20 years represent 40% of the global fleet. VLCC and Suezmax vessels older than 20 are 22-23% of the fleet. As I argued in my articles on Frontline ( FRO ) and Scorpio Tankers ( STNG ), an aging fleet combined with a low order book and declining shipyard capacity will further the day rates.
Tsakos Fleet
Knowing demand and supply dynamics, let's see how the TNP fleet is positioned.
The company owns 58 vessels with an average age of 10.5 years. The fleet is very diverse, having 3 VLCCs, 14 Suezmax, 22 Aframax, 8 Panamax, 2 Midrange (MR), 4 Handysize (HM), 3 LNG tankers and five shuttle tankers. I think the TNP fleet is too diverse, including too many vessels. I prefer STNG or the Frontline approach, focusing on one or two types of ships. Every type of tanker has distinct specifics which do not apply to all. Knowing them in detail gives the company an operational edge over its competitors.
Aframax tankers represent the most significant part of the fleet, 37%. The average age of Aframax ships is 7.2 years. The second largest group is Suezmax, 24%, with an average age of 12.5 years. The lack of scrubber-equipped vessels is disappointing. Only six ships have an Exhaust gas cleaning system (the technical name for scrubber) installed.
Let's look at the utilization rate and day rates for QoQ and HoH.
2Q23 day rates were $38,353 versus $29,278 in 2Q22. TC fixed-rate/TC variable rate over the quarters has increased from 105% to 148%, meaning TC with fixed rates contributes more to the company's bottom line. The utilization rate has been stable across the quarters, fluctuating in a narrow range of 93.4%-95.3%. The company did not sell or purchase any vessels for the same period.
TNP balance sheet
Let's start with the big picture: how TNP developed through the years. The table below shows a few metrics, such as Vessel net book value, Net Debt, Revenue, EBITDA, etc.
A few points are worth mentioning. TNP kept adequate debt levels across the cycle while maintaining sufficient cash. The company has considerably improved its profitability since the bottom in 2019/2020. Over the years, TNP gradually increased its fleet size. 2004, the company had 27 vessels, while in 2023, 58. Vessel netbook has been stable for the last four years, though it remains much higher than the company's market cap.
Debt and interest coverage
TNP has $1.59 billion in total debt and $530 million in cash. Ardmore Shipping ( ASC ) has $50.76 million cash and $102 million debt. At first glance, it looks better because ASC has a 0.5 cash/total debt ratio, while TNO has 0.33 cash/total debt. Both companies have a similar market cap but a smaller fleet (27 vessels). Digging deeper, TNP liquidity is much better if you divide cash reserves by the number of vessels or cash vs market cap. TNP has $9.13 million cash per vessel, while ASC has $1.88 million.
The chart below shows that TNP's capital structure remained unchanged for the last five years.
Total Liabilities/Total Assets changed in narrow limits between 52-56%. Total debt to equity and total debt to capital has been stable, too. Interest coverage measured with EBITDA - CAPEX/Interest expense has improved since 2021.
Profitability and dividends
Since 2021, TNP has improved its margins and returns.
Its Gross profit margin is among the highest percentile in the industry. Return on Equity ((LTM)) is 26.2%, and Return on Total Capital (LTM) is 7.87%. Despite the improved return, those figures are in a lower percentile. For reference, ASC has 28.5 ROE and 14.4% ROTC.
TNP FCF Yield at 12.8% is good but not impressive, though CAPEX/Revenue is among the highest in the industry.
TNP distributes dividends with adequate yield at 2.48% ((TTM)). The chart below shows the history of dividend payments.
Even during difficult years, the company paid dividends. For comparison, ASC dividend yield is 7.4%, TNK is 1.44%, and HAFNF is 17.72%. Investing in shipping stocks carries significant risk, and I would like to see higher compensation in the form of dividends or an active buyback program. TNP does not have a tradition in share repurchase.
Valuation
As I pointed out earlier, TNP is deeply undervalued compared to Vessel's net book value. TNP's market cap on November 15 was $644 million, while its net book value is $2.54 billion, or the price to NAV is 24%. Besides that, the TNP price to book is 0.41. Simply put, we pay less than $0.5 for every dollar of company assets.
The next step is to compare TNP with its historical multiples: EV/EBITDA, EV/Sales, and Price/Free Cash Flow.
TNP trades at 1.36 Price/Free Cash Flow, 1.81 EV/Sales, and 3.46 EV/EBITDA. The five-year average values are 2.57 Price/FCF, 2.6 EV/Sales, and 8.15 EV/EBITDA. The peak levels reached in 2014 are 29.6, 4.1, 13.4. TNP current multiples are much lower than its 5Y average and peak levels., TNP stock price must double to reach its 5Y EV/EBITDA. Similar is the case looking at EV/Sales and Price/FCF. Of course, I do not forget that EBITDA is the denominator, and we can get high multiples by squeezing the company's profitability.
It's time to see how TNP ranks against a few competitors: ASC, Teekay Tankers ( TNK ), and Hafnia Limited ( OTCQX:HAFNF ).
With 1.8 EV/Sales, TNP is the second most expensive next to HAFNF. Using EV/EBITDA, TNP ranks with ASC at second/third place with 3.46. TNP leads with the lowest Price/Free Cash flow multiple at 1.36.
Looking at Price to NAV, current vs historical multiples, and comparing with its peers, TNP is deeply undervalued.
Price Action
TNP stock price is close to its previous peak at $24.0. The SQN indicators remain in a neutral regime.
The next significant resistance is the $24.0-$24.2 price level. The price is above 36 monthly simple average ((SMA)) but is not extended much. A confirmed breakout above $24.2 adds credibility to my bull thesis. Until then, I prefer to wait because the risk-reward ratio is not in my favor.
Risks
As pointed out in my previous articles, the geopolitical risk benefits the tanker companies. Longer voyages and rising rates, while the cost remains relatively stable, result in growing profitability for the industry.
The US probes 30 ship management companies for suspected Russia oil sanctions violations. The names of the companies are not disclosed. I assume all significant players in the industry, including TNP, will be questioned. There is always a risk that TNP management will be found involved in operations breaching the sanctions.
A similar scenario developed in 2019 when COSCO subsidiaries were sanctioned for transporting Iranian oil. Suddenly, the supply of tankers shrunk, and day rates moved up. I would be surprised if TNP is involved in the sanctions breaching activities. However, I expect at least one tanker company to be engaged in such operations. Simply put, the COSCO scenario might repeat, boosting day rates further north.
Financially, TNP is a stable company stiffed with cash to maintain its operation and to meet its debt obligations. Yesterday, the markets were in a joyful mood due to improving CPI and declining bond yields. The market participant will continue to revert cash flows into the market darlings, MAG7 and NASDAQ. Tangible assets industries will remain abandoned while we have (potential) Christmas rally. This, in general, is not negative; it gives opportunities to build a position at lower prices in excellent companies.
Investors Takeaway
TNK is a good company with robust financials and a diverse fleet. The company has sufficient cash to cover its debt obligations and finance its operations. TNP margins are above the average for the tanker industry. However, the returns rank in the lower percentiles. The lack of a purchase program or higher dividend yields is disappointing. TNK has 58 vessels of various types. The average age of the ships is 10.5 years. Another red flag is the low % of the fleet has scrubbers, 10.4%. TNK shares trade well below its NAV and Price to Book. The company is undervalued compared to its historical multiples EV/Sales, EV/EBITDA, and Price/FCF. Considering the red flags, I give TNP a hold rating for now.
For further details see:
Tsakos Energy Navigation: When Having A Diverse Fleet And Robust Financials Is Not Enough