Tsakos Energy Navigation (NYSE:TNP) is a notable medium-sized tanker company that possesses a fleet of 66 vessels encompassing various types such as modern VLCCs, Suezmax, Aframax, Panamax, Handysize and handymax tankers, LNGs, and shuttle tankers. Currently, they stand out as one of the most intriguing options among tanker stocks. From a fundamental standpoint, they are undeniably undervalued. Nevertheless, concerns have been raised regarding their management and their willingness to distribute their recent profits
TNP: The stock and the balance sheet
The current share price is just over $18/share; giving a market capitalization of $534 million.
TNP’s stock is up 60% over the last 12 months, so it has done well of late. However, over the last 5 years, it has been the definition of ‘dead money’.
This is a summary of their balance sheet.
They also have about $375m in preferred shares, which I’m counting as debt.
So to purchase the company you pay $530m, and in exchange, you get:
– their current fleet, plus newbuilds
– cash of $475m;
– liabilities of $1.75bn + preferred of $375m
-> Net liquid assets of (cash minus liabilities) of $1.65bn
In aggregate, the cost of the fleet is then $2.18bn
It is worth pointing out that they have $475m in cash, which gives them a massive amount of flexibility.
TNP: The company
Tsakos Energy Navigation (TNP) boasts a diverse fleet of 66 ships, including one additional option. In terms of earnings, they generated $168 million in Q1, with $95.35 million after excluding gains from ship sales, equivalent to approximately $3 per share. Adding back depreciation, their Q1 cash flow would be around $130 million. Factoring in preferred dividends and interest rate costs, TNP’s adjusted earnings would amount to approximately $160 million. With an enterprise value of $2.18 billion, owning the entire company could yield returns of over $600 million per year or recoup the investment in just four years. Considering TNP’s efforts to reduce debt and preferred shares, as well as fleet expansion, the time to recover the investment could potentially decrease further. Overall, TNP appears to offer excellent value on an enterprise value basis.
Previous quarters
TNP is considered inexpensive in the current market conditions, with a potential PE ratio of less than 2 if their earnings of $3 per quarter persist. They have shown strong performance, with Q4 earnings reaching $3.17 per share and over $6 per share for the full year of 2022. This indicates a PE ratio of slightly above 3, which is deemed cheap. TNP is utilizing their earnings to reduce debt, which suggests a potential reduction in the PE ratio going forward. Overall, based on their current PE ratio range of 2-3 and their efforts to decrease debt, TNP is perceived as offering good value.
TNP’s fleet
Tsakos Energy Navigation (TNP) possesses a fleet of 66 vessels, including 9 new builds with 7 of them already secured by long-term contracts. Their primary focus lies in the Suezmax, Aframax, and panamax segments, while also diversifying with shuttle vessels. The fleet has an average age of around 10 years, which is reasonable considering their operational lifespan of approximately 25 years. This mixed fleet approach reduces the risk associated with any particular sector’s underperformance. TNP benefits from a guaranteed revenue backlog of $1.6 billion, equivalent to about 1.5 years of revenue, providing significant value regardless of market conditions. Although no specific net asset value (NAV) estimate is provided, some estimates suggest TNP is trading at a 50% discount, indicating the potential for the stock price to potentially double.
Will management reward you?: And their actions
Dividend policy
TNP’s dividend policy is new but low. They pay $0.30 every 6 months, so $0.60 for the year. That works out at about 3.3% based on the current share price.
This is low. It’s a fraction of their recent earnings. But… TNP has debt and a new build program. So this isn’t a bad thing, in my opinion.
Special dividend
TNP has told us they’ll consider a special dividend in 2023… If market conditions remain constructive. I think they’ll do this and the market will (presumably) react positively.
Debt/Preferreds
TNP has committed to retiring $88m of their preferred shares in July. This will save the company $7.7m per annum. That is a great use of their capital.
In addition, when they can, they are reducing their debt.
Selling ships
They sold ships in Q1. And they reported a gain of $81m accordingly. This could imply management is not simply trying to grow their fleet (and their management fees)… but is instead trying to maximize the overall profit.
These are all positive actions. None of these suggests a weak management team. In fact, if anything, they suggest a positive management team looking to grow the company over the medium to long term. In most other industries, a company of this type would be rewarded!
Buybacks
The one item TNP is not currently doing is share buybacks. In fact, in recent quarters, they even issued shares! Until they have a cleaner balance sheet… I don’t see TNP buying back stock.
Risks
Risks face all companies. Personally, I think investors can de-risk by purchasing shares:
– in a number of companies (diversifying)
– in companies that trade cheaply
The primary risks that face TNP:
- recession. In the event of a recession, demand for oil (both clean and dirty) will reduce dramatically.
- OPEC actions. OPEC could, of course, reduce the supply of oil (with the aim to increase the price). This would reduce demand for TNP’s ships, and their earnings power
- management actions. Management could, of course, take actions to enrich themselves over common shareholders. But recent actions do not suggest this to be likely.
Summary
The future is not guaranteed. I think TNP is a very cheap play on the tanker space. Unlike International Seaways (INSW) or DHTankers (DHT) or even Euronav (EURN), TNP is not currently returning capital via large dividends or stock re-purchases. But they are using their excess capital to reduce debt/preferred. Which should ultimately be to your benefit.
And they’re likely going to announce a special dividend later this year. If it is around the $1 mark (or 1/3rd of one quarter’s earnings!) they’ll be paying a dividend of ~ 8%.
It’s impossible to keep everyone happy. But if management stays the course here… I think we can all be happy with future growth in this stock price.
I think management will use 2023 to repay all of their preferreds, increase their cash hoard, and pay a special dividend.
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Source: Seeking Alpha
