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Financial Analysis > Results - 2009
Operating and Financial Review & Prospects
The following discussion of our financial condition and results of operations should be read in conjunction with the 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, such as those set forth under “Risk Factors” and elsewhere in this annual report our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
As of April 15, 2010, 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, nine suezmaxes, thirteen aframaxes, six panamaxes, six handymaxes, eight handysizes and one LNG (liquefied natural gas) 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 2009
The year 2009 proved to be a challenging year for the global economy, shipping and world trade. There was a widespread fear that the global economy could sink into a depression of the scale of 1929. A sharp decrease in seaborne oil trade during this crisis, a second consecutive year of declining oil demand for the first time since the early 1980s, large cutbacks in OPEC output with a high compliance level, combined with fleet growth, pushed industry spot rates to levels near or below vessels’ operating expenses. This started gradually in the second quarter of 2009, and in the typically low demand period of the third quarter, spot freight rates reached their year lows. On a positive note, however, the oil price contango led to increased tanker utilization as part of the global tanker fleet was used as oil storage vessels through the year for both crude oil and distillates.
Our fleet achieved voyage revenues of $444.9 million in 2009, a decrease of 28.6% from $623.0 million in 2008, despite an increase in the average size of the fleet to 46.6 in 2009 from 44.1 in 2008, and an increase in fleet utilization from 97.3% to 97.7% over the same period. The decrease in revenue was due to the significant decline in rates. The average daily time charter rate per vessel after deducting voyage expenses, decreased to $22,329 compared to $34,600 in 2008. Voyage expenses decreased, despite an increase in operating days on spot and contract of affreightment voyages, because of lower bunker prices caused by reduced oil prices. Operating expenses increased by only 0.6% to $144.6 million due to the increase in the size of the fleet and the repurchase of two vessels previously chartered-in, while average daily costs per vessel fell by over 8% due to reduced repair expenditure. During 2009, eight vessels underwent dry-docking for survey purposes and expenditure incurred on routine repairs and maintenance during dry-dock, which is expensed immediately, was considerably reduced from 2008 as most work was performed on relatively new vessels, which are expected to have lower repair and maintenance costs.
Depreciation was $94.3 million in 2009 compared to $85.5 million in 2008 due to the net addition of vessels. Management fees totaled $13.3 million for 2009 compared to $12.0 million for 2008, an increase of 10.5%, due both to the increase in number of vessels in the fleet and the increase in monthly fees. General and administrative expenses were $4.1 million during 2009 compared to $4.6 million during 2008. A gain on the sale of one vessel in 2009 amounted to $5.1 million, compared to the sale of one vessel in 2008 with a gain of $34.6 million. The Company incurred impairment charges relating to the three oldest vessels in the fleet totalling $19.1 million. Operating income decreased to $72.4 million in 2009 from $278.8 million in 2008. Financing costs fell by 44.7% in 2009 to $45.9 million due to reduced interest rates and positive movements on non-hedging interest rate and bunker swaps. Net income was $28.7 million compared to $202.9 million in 2008. Diluted earnings per share was $0.77 in 2009 based on 37.20 million diluted weighted average shares outstanding compared to $5.33 in 2008 based on 38.05 million diluted weighted average shares outstanding.
Some of the more significant developments for the Company during 2009 were:
| • the delivery of the two aframaxes Ise Princess and Asahi Princess; • the sale of the suezmax Pentathlon and agreement to sell the sister vessel Decathlon and two aframaxes, Pentathlon and Marathon; • the agreements to build two suezmaxes for delivery in 2011; • the dry-docking of Delphi, Didimon, Promitheas, Vergina II, Ajax, Apollon, Artemis and Afrodite for their mandatory special or intermediate survey; • the buy-back of 245,400 common shares , and • the initiation of an at-the-market offering for up to 3,000,000 common shares , and • the payment to our shareholders a dividend of $0.85 per common share in April in respect of the fiscal year 2008 and $0.30 per common share in September, the first dividend with respect to fiscal year 2009. Total cash paid out on dividends amounted to $42.4 million. The Company operated the following types of vessels during, and at the end of 2009: |
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We believe that the key factors which determined our financial performance in 2009, within the given freight rate environment in which we 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 us 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) which ensured a stable cash flow while allowing us 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 weakened dollar and higher operating and fuel costs; • our ability to mitigate 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. |
We believe that the above factors will also be those that will be behind our future financial performance and will play an especially significant role in the current world economic climate as we proceed through 2010. To these may be added:
| • a reasonable recovery in the crude charter market; • the securing of a high level of utilization for our vessels (as at April 15, 2010, 70% of the operational days available for 2010, and 50% for 2011, 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; • the delivery of the two newbuildings that will join the fleet in 2010; and • the continued build-up of our cash reserves through operations, vessel sales and equity issuance. |
Looking forward from a 2009 background of lower oil demand levels, high crude inventory levels, the continued lack of clarity over oil production from Iran, Nigeria and Iraq, and continued discussion by the Organization of Petroleum Exporting Countries (OPEC) about production levels, there do now appear to be some more positive signs shrouded still in considerable uncertainty. Modestly rising oil demand and reduced inventory levels have nudged oil prices upwards and this may continue through 2010. Demand from China, India and other developing countries will continue to have a beneficial impact on transportation requirements for petroleum and its products, and a part of the feared extent of the increase in new vessel supply has been partly allayed by cancellations and delivery deferments and also by scrapping.
We expect that 2010 will also prove to be a challenging year for the tanker industry, albeit more favorable in terms of oil demand and vessel supply. Nevertheless, the current economic and financial crises, together with the forecasted increase in the size of the tanker fleet, will continue to dampen the potential for reviving the returns from the transportation of oil to the levels seen in previous years. However, there are positive signs. The governments of the world continue to make an effort to revitalize the world economy. The rising level of oil prices has stopped production cuts. New trading patterns with long-haul requirements will continue to absorb many of the new vessels to be delivered and we are beginning to see the phase-out of single-hull tankers accelerate.
Subsequent Events
On February 3, 2010, the Company signed addendums to the shipbuilding contracts for the two suezmax tankers still under construction as of that date, by which the contract price was reduced by $2.5 million each in return for an accelerated schedule of payment installments. On February 23, 2010, the aframax tanker Parthenon, recorded in the consolidated Balance Sheet as Held-for-Sale, was delivered to its new owners. On March 2, 2010, the suezmax tanker Decathlon, recorded in the consolidated Balance Sheet as Held-for-Sale, was delivered to its new owners. On March 12, 2010, our board of directors declared a dividend of $0.30 per common share to be paid on April 29, 2010, to shareholders of record on April 23, 2010. On March 24, 2010, the Company signed an agreement for the sale of the Hesnes for an amount of $7.4 million, before commissions and expenses. On April 8, 2010, the vessel was delivered to the buyers and related debt of $6,048 repaid. On April 9, 2010, the Company drew down $40.0 million on a 12-year term loan agreed in November 2009, relating to the delivery of the aframax Sapporo Princess delivered on April 14, 2010.
Chartering Strategy
We typically charter our vessels to third parties in any of three basic types of charter. First are “voyage charters” or “spot voyages,” under which a shipowner is paid freight on the basis of moving cargo from a loading port to a discharging port at a given rate per ton or other unit of cargo. Port charges, bunkers and other voyage expenses (in addition to normal vessel operating expenses) are the responsibility of the shipowner.
Second are “time charters,” under which a shipowner is paid hire on a per day basis for a given period of time. Normal vessel operating expenses, such as maintenance and repair, crew wages and insurance premiums, are incurred by the shipowner, while voyage expenses, including bunkers and port charges, are the responsibility of the charterer. The time charterer decides the destination and types of cargoes to be transported, subject to the terms of the charter. Time charters can be for periods of time ranging from one or two months to more than three years. The agreed hire may be for a fixed daily rate throughout the period or may be at a guaranteed minimum fixed daily rate plus a share of a determined daily rate above the minimum, based on a given variable charter index or on a decision by an independent brokers’ panel for a defined period. Many of our charters have been renewed on this time charter with profit share basis over the past two years. Time charters can also be “evergreen,” which means that they automatically renew for successive terms unless the shipowner or the charterer gives notice to the other party to terminate the charter.
Third are “bareboat charters” under which the shipowner is paid a fixed amount of hire for a given period of time. The charterer is responsible for substantially all the costs of operating the vessel including voyage expenses, vessel operating expenses and technical and commercial management. Longer-term time charters and bareboat charters are sometimes known as “period charters”. We also enter into “contracts of affreightment” which are contracts for multiple employments that provide for periodic adjustments, within prescribed ranges, to the charter rates. At various stages during 2009, six of our vessels also entered into and operated within a pool of similar vessels whereby all income (less voyage expenses) is earned on a market basis and shared between pool participants on the basis of a formula which takes into account the vessel’s age, size and technical features. Previously, none of our vessels had operated in a pool since January, 2007.
Our chartering strategy continues to be one of fixing the greater portion of our fleet on medium to long-term employment in order to secure a stable income flow, but one which also ensures a satisfactory return. This strategy has enabled us to level the effects of the cyclical nature of the tanker industry, achieving almost optimal utilization of the fleet.
In order to capitalize on possible upturns in rates, we have chartered out several of our vessels on a basis related to market rates for either spot or time charter. As of April 15, 2010, we have 40 of our 46 vessels managed on time charter or other form of period employment, ensuring that at least 70% of 2010 availability and 50% of 2011 availability is already fixed.
Our Board of Directors, through its Chartering Committee, formulates our chartering strategy and our commercial manager Tsakos Energy Management implements this strategy through the technical manager, TST. They evaluate the opportunities for each type of vessel, taking into account the strategic preference for medium and long-term charters and ensure optimal positioning to take account of redelivery opportunities at advantageous rates.
The cooperation with TST enables us to take advantage of the long-established relationships they have built with many of the world’s major oil companies and refiners over 40 years of existence and high quality commercial and technical service. TST manages our vessels of the Company plus another 26 operating vessels, mostly container and dry cargo vessels, but also some single and double hull tankers. Apart from the customer relations, we are also able to take advantage of the inherent economies of scale associated with a large fleet manager and its commitment to contain running costs without jeopardizing the vessels’ operations. TST provides top grade officers and crew for our vessels and first class superintendent engineers and port captains to ensure that the vessels are in prime condition. It is expected that TCM will undertake the management of our vessels from mid-2010, while TST will continue to provide commercial services, primarily the chartering of our vessels.
