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David Sun

TNP AT A GLANCE

P/E ► 3.14 AVG EV/EBITDA ► 6.28 AVG ROA ► 11.5% AVG ROE ► 23% AVG Debt to Equity ► 1.86 AVG Current Ratio ► 1.96 AVG Interest Coverage Ratio ► 3.46 AVG

 

 

 

 

 

 

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Tsakos Energy Navigation Limited (NYSE: TNP) is a tanker company that transports crude oil and petroleum. In the beginning of 2008, the company had an operational fleet of 43 vessels, nearly half of which were specially strengthened to be able to sail through icy waters. This special ice certification allows TNP to take advantage of the growing number of exports from the Baltic Sea.^[1]

Although the Baltic states are not important energy consumers or producers, together they occupy a key transit location for Russian oil exports. The Russian crude oil pipeline system is connected to three ports on the Baltic Sea: Latvia's port of Ventspils, Lithuania's port of Butinge, and the Russian port of Primorsk. Oil exports are a critical factor underlying Russia's recent economic growth,^[2] and a key bottleneck for this growth is the availability of viable export routes. The flagship Port of Primorsk, near St. Petersburg, transited 1.3 Million barrels per day (bbl/d) of crude oil in 2006, or roughly 19% of Russia's net exports that year, and the U.S. Department of Energy expects that number will grow to 3 million bbl/d as new pipelines to the port come online.^[3] Because the Baltic sea is 45% covered in ice during winter months, only ice-capable ships such as those owned by Tsakos are able to transport this Russian oil.

From 2005 through early 2008, the number of tankers and the overall tonnage available to transport crude oil grew faster than world oil demand, driving down the spot rates for tanker services. TNP, however, generates more of its revenue from long term contracts than its competitors and as a result, has continued to grow both revenue and net income over the same time period.

[edit] Company Overview

TNP's fleet consists of 19 crude oil transport vessels and 23 petroleum product carriers as of March 2008.^[4] All of these ships are double-hulled, making them less vulnerable to oil spills than single-hulled ships. Additionally, 23 of the vessels in the fleet have some kind of ice class rating, meaning that they are able to navigate iced-water. (This will let TNP take advantage of increasing cargo from the Baltic Sea area.) The company has also taken care to lower the average age of its fleet from 7.5 years in 2004 to 4.5 years as of March 2008. The size of the fleet over the same period has increased from 2.92 million Deadweight tonnes to 4.63 million deadweight tonnes. ^[5][6]

Charters:

• Tankers operating on time charters are chartered for several months or years. For instance, as of October 2007, the company had already secured over two years of employment for its 38 vessels at the time.^[7]
• Vessels on period employment are normally operating in a pool or contract of affreightment (which means they are under control of some other charterer). These contracts have periodic adjustments that let the company take advantage of favorable rate trends.
• Spot market operations are usually single voyage charters that last up to several weeks. This market is very competitive, has highly volatile rates, but is also the most lucrative way for TNP to make money.

The chart below breaks down TNP's fleet deployment. TNP's strategy has been to aim for a balance of fleet deployment so that the company will be able to take advantage of high rates through the spot market and period employment while also maintaining a steady cash flow from its time charter activities.^[8][9]

TNP's vessels operate all over the world. A map of operations as of March 31, 2007 can be found on page 22 of the company's 2006 annual report.

^[10]

^[11]

[edit] Trends and Forces

• The world's tanker supply is growing more quickly than demand. From Q4 2004 to Q4 2007, the carrying capacity of the world tanker fleet rose 18% to 395 million deadweight tonnes while global oil demand grew 3.5% to 87.2 million barrels a day. During the same period, rates in the spot market for an Aframax vessel (a typical mid-sized tanker) fell 50% to $41,000 per day.^[12] While many of its competitors, such as GMR, TK, and FRO showed noticeable declines in revenue and net income during these years, TNP, which derives ~42% of its revenue from time charters, was able to continue to expand both its revenue and net income. ^[13]

• TNP's ice fleet allows it to take advantage of exports from the Baltic Over half of TNP's fleet consisted of Ice class vessels at the end of 2007. Building and acquiring these ice-strengthened vessels typically costs between $1.5 and $2.5 million more than standard vessels^[14] since ice-class vessels have special hulls and engines. TNP's large fleet of ice class vessels leave it well positioned to take advantage of increasing exports from the former Soviet Union. Net exports from the FSU increased from 7.81 to 9.00 million barrels per day from 2005 to April 2007, and in particular exports from the Baltic rose from 1.59 to 1.70 million barrels per day in the same period.^[15] TNP's ice class fleet, these new exports are an opportunity particularly suited for the company.

• The growth of liquefied natural gas (LNG) trade is a lucrative sector that TNP is not invested in. While TNP is a player in LNG shipping, it currently only has one vessel in its fleet for this purpose and does not have any newbuildings (as of March 2008) to increase this number. Between 1996 and 2006, world gas consumption has grown at a rate of 2.5% annually^[16] and will increase more as Asian countries such as Indonesia substitute away from increasingly expensive crude oil and towards natural gas. In the Asian-Pacific, gas-fired power plants also happen to be more efficient than oil-fired steam power plants while reducing dependence on imported oil and burning hcleaner.^[17] Up to 2008, TNP has taken a cautious approach to LNG expansion and has even considered exiting the sector in spite of world growth in trade.^[18]
• TNP's high debt leave it vulnerable to changes in interest rates and foreign exchange rates. As of the end of 2006, TNP had $55.3 million in fixed rate debt and $1.07 billion in variable rate debt.^[19], meaning small changes in interest rates can have a significant impact on TNP's interest payments. High interest rates also make otherwise lucrative vessel purchases less rewarding.

• Exchange rates make doing business more expensive Changes in exchange rates - namely, a weakening dollar - also negatively impact TNP since some of its expenses are denominated in other currencies. For instance, in 2006, euro expenses made up about one-fifth of the company's total expenses.^[20]

[edit] Competitors

Some of TNP's major competitors include:

• Frontline is a crude oil shipping company that operates 83 vessels worldwide and has a total tonnage of approximately 19.35 million dwt.^[22]
• Overseas Shipholding Group is a U.S. based tanker company that transports crude oil, petroleum product, and liquefied natural gas internationally. Domestically, it also operates a U.S. Flagged fleet^[23]..
• General Maritime Corporation is a U.S.-based crude oil transportation company whose fleet is made up of 18 double-hulled vessels that the company wholly owns. Its total capacity is 2.4 million dwt^[24].
• Teekay Corporation provides international transportation for crude oil and petroleum products, and operates approximately evenly in the charter and spot markets. It manages a total capacity of 19.3 million dwt^[25].

TNP distinguishes itself from its competitors by maintaining a fleet that is diverse and largely capable of traveling through icy waters. Its chartering strategy also ensures that the company will maintain cash flows even in down-cycles for the tanker industry. Like its competitors, it is constantly expanding its fleet.

Note that dwts measure shipping capacity.

[edit] Footnotes

1. ↑ U.S. Department of Energy, Energy Information Administration, "Baltic Sea Region Country Analysis Brief."
2. ↑ The IMF and World Bank suggest that in 2005 the oil and gas sector represented around 20 percent of the country’s GDP, generated more than 60 percent of its export revenues (64% in 2007), and accounted for 30 percent of all foreign direct investment (FDI) in the country.
3. ↑ Department of Energy, Energy Information Administration, "Russia Country Analysis Brief," Proposed Oil Pipeline Routes and Pipeline Expansion Projects, April 2007.
4. ↑ TNP Fleet List
5. ↑ TNP Annual Report, Page 14-15
6. ↑ TNP Fleet List
7. ↑ TNP Q3 2007 Earnings Report
8. ↑ TNP Strategy
9. ↑ TNP Annual Report 2006, Page 27
10. ↑ Google Finance: TNP Balance Sheet
11. ↑ TNP 2006 10-K, page 21
12. ↑ Teekay's Q4-2007 Tanker Market Report and Teekay's Q4-2004 Tanker Market Report
13. ↑ TNP 2006 20-F, Page 6
14. ↑ The Hindu Business Line, Increase in oil moved from ice-bound regions
15. ↑ FSU Net Exports of Crude & Petroleum Products
16. ↑ Liquefied Natural Gas
17. ↑ Energy Market Authority - LNG
18. ↑ TNP 20-F, Page 12
19. ↑ TNP 20-F Report, Page 88
20. ↑ TNP 20-F, Page 88
21. ↑ Federal Reserve Release
22. ↑ FRO 2006 10-K, page 26
23. ↑ OSG 2006 10-K, Page 9
24. ↑ GMR 2006 10-K, Page 16
25. ↑ TK 2006 10-K, Page 17