Financial Analysis > Results - 2008

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors our actual results may differ materially from those anticipated in these forward-looking statements.

Overview
As at March 31, 2009, we operated a fleet of 46 modern double-hull tankers providing world-wide marine transportation services for national, major and other independent oil companies and refiners under long, medium and short-term charters and one LNG carrier. Our current fleet consists of three VLCCs, ten suezmaxes, eleven aframaxes, seven panamaxes, six handymaxes, eight handysizes and one LNG carrier. All vessels are owned by our subsidiaries. The charter rates that we obtain for these services are determined in a highly competitive global tanker charter market. We operate our tankers in markets that have historically exhibited both cyclical and seasonal variations in demand and corresponding fluctuations in charter rates. Tanker markets are typically stronger in the winter months as a result of increased oil consumption in the northern hemisphere. In addition, unpredictable weather conditions in the winter months tend to disrupt vessel scheduling. The oil price volatility resulting from these factors has historically led to increased oil trading activities. Changes in available tanker capacity have also had a strong impact on tanker charter markets over the past 20 years.

Results from Operations in 2008
The year 2008 proved to be one of the strongest in the past ten years in terms of crude tanker rates, with significant increases over average rates achieved in 2007. As a result, those operators with crude tankers enjoyed good earnings, achieving marked increases over 2007, especially during the second and third quarters when markets traditionally suffer a seasonal downturn. The tanker fleet saw little or no increases in the number of suezmaxes and VLCCs, while the number of aframaxes and panamaxes increased by approximately 5.5% and 7.6% respectively. However, long-haul transportation of crude continued to increase for much of the year as a result of increased OPEC production, especially from Saudi Arabia, which more than absorbed the impact of the increased number of crude tankers. Increased oil imports into China not only from the Middle East but also from West Africa and Venezuela gave an additional boost to long-haul routes. The number of product carriers increased more significantly which contributed to keeping product carrier rates relatively flat during 2008, as in 2007, although there was some improvement in rates towards the end of the year.

There was no growth in world oil demand. Indeed, demand fell fractionally by 0.4% compared to a 1.1% increase in 2007, much of the decline occurring in the latter part of the year as the international financial crisis developed further into a worldwide economic crisis resulting in a steep decline in the growth of oil demand despite falling oil prices. But even earlier in the year the increasing price of oil was at last having a negative impact on oil demand having been surprisingly price resistant in previous periods.

The decline in U.S. demand by nearly 5% especially contributed to the overall decline, having the greatest consumption per capita, although continued growth in developing nations, including China, offset much of the impact of this decline. The combination of lower oil demand yet higher oil production in the first half of the year followed by falling oil prices leading to sharply reduced oil production quotas by OPEC later in the year, inevitably resulted in a growth of crude inventories to exceptionally high levels by the year end.

The US Dollar, the functional currency for many shipping companies, remained weak for much of the year against other major currencies and in particular the Euro, against which it suffered a further 7% fall compared to 2007, despite a period of strengthening in the second half of the year. By the end of the year, impacted by the financial crisis and remedial interest rate cuts, the US dollar again started to decline against the Euro negatively impacting those maritime companies which have significant expenditures in Euro. The fall in short and long term interest rates, while being a welcome reduction in financing costs, had a reduced benefit for the many companies that had previously attempted to protect themselves against rising interest rates by fixing rates through hedging interest rate swaps.

Our fleet achieved voyage revenues of $623.0 million, an increase of 24.5% from $500.6 million achieved in 2007 due partly to the increase of the average size of the fleet to 44.1 from 41.7. More importantly, the average daily time charter rate per vessel after deducting voyage expenses, increased to $34,600 compared to $29,421 in 2007. Voyage expenses had increased, despite a fall in operating days on spot and contract of affreightment voyages, because of higher bunker prices caused by increasing oil prices. Operating expenses increased by 32.7% to $143.8 million due to the increase in the size of the fleet and an increase in costs mainly due to crew wage increases and the appreciation of the Euro against the US dollar. During 2008, seven vessels underwent drydocking for survey purposes and considerable expenditure was incurred on routine repairs and maintenance which was expensed immediately.

Depreciation was $85.5 million in 2008 compared to $81.6 million in 2007 due to the net addition of vessels. This was offset by the impact of a change in the scrap price, used for estimating the residual value of vessels in the calculation of depreciation, from $180 per lightweight ton to $300. The effect of this change in estimation was to reduce depreciation by $5.3 million in 2008. Management fees totaled $12.0 million for 2008 compared to $9.8 million for 2007, an increase of 23.1%, due both to the increase in number of vessels in the fleet and the increase in monthly fees. General and administrative expenses were $4.6 million during 2008 compared to $4.4 million during 2007.

Capital gains on the sale of one operating vessel was $34.6 million, compared to the sale of three vessels in 2007 with total gains of $68.9 million. Operating income increased to $278.8 million in 2008 from $249.7 million in 2007, an 11.7% increase. Financing costs increased by 7.1% in 2008 to $82.9 million. Despite a fall in total loan interest due to reduced interest rates, non-cash negative movements on non-hedging interest rate swaps contributed to the overall increase in finance costs. Net income was $202.9 million, compared to $183.2 million in 2007, a 10.8% increase. Diluted income per share increased to $5.33 in 2008, based on 38.05 million diluted weighted average shares outstanding, from $4.79 in 2007, based on 38.23 million diluted weighted average shares outstanding.

Liquidity and Capital Resources
Net cash provided by operating activities was $274.1 million during 2008 compared to $190.6 million in the previous year, a 43.8% increase. The increase is mainly due to the increase in revenue generated by operations. Total expenditure during 2008 on dry-dockings amounted to $11.4 million compared to $9.7 million in 2007.

Net cash used in investing activities was $164.6 million for the year 2008 compared to $375.6 million for 2007. During 2008, the Company took delivery of four new tankers and repurchased the suezmaxes Decathlon (Cape Baker) and Pentathlon (Cape Balboa). Total payments for the above deliveries plus upgrade work on other vessels amounted to $223.3 million. Installments amounting to $3.5 million were also paid on vessels under construction compared to $111.1 million paid in 2007. The anticipated payment schedule on the four vessels under construction as at December 31, 2008, is $109.0 million in 2009 and $85.2 million in 2010. In 2008, net sale proceeds from the sale of the aframax tanker Olympia in the first quarter of 2008 amounted to $62.1 million. In 2007, the Company sold three vessels with net sale proceeds amounting to $142.4 million.

Net cash derived from financing activities was $21.2 million in 2008 compared to $191.9 million cash in 2007. Proceeds from new bank loans in 2008 amounted to $168.1 million compared to $342.3 million in the previous year. Scheduled repayments of debt amounted to $44.4 million in 2008 compared to $59.4 million of scheduled repayments and $26.6 million of debt prepayments in 2007. At December 31, 2008, the Company had outstanding debt of $1,513.6 million. The average debt to capital ratio was 62.4% by December 31, 2008 or, in net of cash terms, 56.9%. In terms of liabilities against assets at fair value, our leverage at December 31, 2008, was 47.8%, well below the loan covenant maximum of 70%. All other bank covenants have also been met as at December 31, 2008.

During 2008, the Company repurchased 392,400 shares at a cost of $12.2 million. Also in 2008, the Company repurchased 812,700 shares as treasury stock at a total cost of $21.9 million. At December 31, 2008, 286,000 of those shares were granted to employees as part of a stock compensation plan.

A cash dividend of $0.90 was paid in April 2008 representing the final dividend for the fiscal year 2007 and a $0.90 dividend was paid in October 2008 as the first dividend for the fiscal year 2008. In total, the two dividends amounted to $67.2 million. A final dividend of $0.85 per share for the fiscal year 2008 will be paid on April 30, 2009. The dividend policy of the Company is to pay between 25% and 50% of the net income in any given year, payable in two installments.

We believe, given our current cash holdings ($340 million at March 31, 2009) and the number of vessels we have on time charter, that even if there is a further major and sustained downturn in market conditions, our financial resources, including the cash expected to be generated within the year, will be sufficient to meet our liquidity needs through January 1, 2010, taking into account our existing capital commitments and debt service requirements.

Significant Events and Factors affecting 2008
Some of the more significant developments for the Company during 2008 were:

• the delivery of the two panamaxes Selecao and Socrates, and the two aframaxes Maria Princess and Nippon Princess;
• the repurchase of the suezmaxes Decathlon and Pentathlon, sold five years previously as part of a sale and lease-back deal;
• the sale of the aframax Olympia with a gain of $34.6 million;
• the dry-docking of Maya, Inca, Marathon, Victory, Parthenon, Hesnes and Andes for their mandatory special survey;
• the buy-back of 392,400 shares for cancellation and 812,700 shares as Treasury Stock (of which 286,000 were utilized on the vesting of restricted share units), and
• the payment to the Company’s shareholders a dividend of $0.90 per common share in April in respect of the fiscal year 2007 and $0.90 per common share in October, the first dividend with respect to fiscal year 2008. Total cash paid out on dividends amounted to $67.2 million.

We believe that the key factors which determined our financial performance in 2008, within the given freight rate environment in which the Company operated, were:

• the diversified aspect of the fleet, including our acquisition in recent years of purpose-built vessels to access ice-bound ports and carry LNG (liquefied natural gas), which allowed the Company to take advantage of all tanker sectors;
• the benefits of the new vessels acquired in recent years in terms of operating efficiencies and desirability on the part of charterers;
• our balanced chartering strategy (discussed further below) including our continued move towards more time charters with profit-share, which ensured a stable cash flow while allowing the Company to take advantage of the buoyant freight market;
• the long-established relationships with our chartering clients and the development of new relationships with renowned oil-majors;
• the continued control over costs by our technical managers despite pressures caused by a weakening dollar and higher operating and fuel costs;
• our control over financial costs by negotiating competitive terms with reputable banks, and protecting interest rate levels through swap arrangements;
• our ability to manage leverage levels through cash generation and repayment/prepayment of debt;
• our ability to reward our shareholders through a dividend policy which is linked directly to the profitability of the Company;
• our ability to raise new financing through bank debt at competitive terms despite the current tight credit environment, and
• the sale of vessels when attractive opportunities arose.
  

Prospects for 2009
We believe that the above factors will also be those that will be behind the future financial performance of the Company and which will play an especially significant role in the current world economic climate as we proceed through 2009. To these may be added:

• a relatively active charter market in comparison to other sectors of the shipping world and compared to historical levels;
• the securing of a high level of utilization for our vessels (as at March 31, 2009, 66% of the remaining operational days available for 2009, and 42% for 2010, excluding expected new deliveries, have secured employment);
• the continued appetite by oil majors to fix forward on medium to long term charters at economic rates which are still higher than the historical average, although for shorter periods due to the uncertainty caused by the global financial crisis;
• the delivery of the four newbuildings that will join the fleet in 2009 and early 2010 (two of which are to be delivered during the remainder of 2009), and
• the repurchase of common shares at favorable prices. During the first quarter of 2009, we bought back 231,100 shares as Treasury Stock under a fixed repurchase plan at a total cost of approximately $3.8million.