Tsakos Energy Navigation Remains A Buy After Q3 Earnings In A Red-Hot Tanker Market (NYSE:TNP)

A few days ago, Tsakos Energy Navigation (NYSE:TNP), also simply known as TEN, reported its Q3-2023 earnings. Results were in line with market expectations with the company reporting a net profit of 83 cents per share. In this article, I will provide an overview of TEN’s Q3 earnings and I will explain why I believe that the company is still worth a buy recommendation. Indeed, oil tanker rates – the main driver of TEN cash flows – are expected to remain at high levels, ensuring profitability and good performance.

If you are interested in oil tanker companies, I also cover the following stocks: Scorpio Tankers, International Seaways and Teekay Tankers.

About the stock

The stock is currently trading at $19.5/share, equivalent to a market cap of $580 M. Since the beginning of the year, TEN has gained about 24% in value with the 52-week maximum reached at $24.5 on March 2023. The 52-week minimum was reached in January 2023 at $15.3/share. Currently, the stock is trading at about +4% from when I wrote my last article about TEN.

Q3-2023 results

As mentioned before, Q3 earnings were quite in line with what analysts were expecting. Revenues for the quarter declined 17% year-on-year, from $224M to $187M due to two different dynamics. On one side, the average Q3 TCE day rate dropped by 2%, from $32.0k/day in Q3-2022 to $31.3k/day in the last quarter, on the other hand, there was a year-on-year decline of 9% on the total operating days, from 5,678days in Q3-2022 to 5,138 in Q3-2023. The decline in total operating days is explained by a lower number of vessels in operations: from 65 vessels in 2022 to 58 in 2023.

If we compare Q3 revenues with the previous quarter (Q2-2023) one can see that revenues are still down by about 16%, but, in this case, the main decline driver is represented by the drop in TCE Rates, from $38.3k/day in Q2-2023 to $31.3k/day.

Looking at the operating expenses, total OpEx was down 14% year-on-year (at $133M) mostly due to the lower voyage expenses (-35% y-o-y or -$19M) and the lower charter hire expenses (-32% y-o-y or -$3M).

Overall, EBIT was positive at $53M, down 21% year-on-year and down 36% quarter-on-quarter. Similar are the dynamics for the net income, positive at $31M, and down 39%y-o-y and 50% q-o-q.

For the Q3 results, the company provided a synthetic cash flow statement from which we can understand that cash flow from operations generated in the first nine months of the year was $303M, driven by net income. Cash flow from investing was negative at -$54M while cash flow from financing was negative at -$165M.

Overall, net debt stands at $1.16 bn, down 8% year-on-year.

Tsakos fleet growth program

Leveraging the strong demand for second-hand vessels, TEN has started a program of fleet growth whereby 8 first-generation vessels were sold, and 8 new-generation vessels were ordered.

In September and October 2023, the first two (out of four) LNG-powered Aframax tankers were received and immediately commenced their operations. Below, it is possible to see the schedule of the next new vessel deliveries.

Market outlook and why I believe that Tsakos is a BUY

The tanker market is going through a period of unprecedented structural health that will support TEN in generating strong FCFs that can be used to reduce leverage and remunerate shareholders, besides supporting stock price growth.

The tanker day rates are mostly dictated by the imbalance between the demand and supply of oil tankers: the wider the gap between demand and supply, the higher the rates will be.

Currently, demand and supply are very far and are likely to remain like this for the next quarters.

On one side, oil demand is expected to increase driven by countries such as China and India: the IEA forecasts a potential 1 million oil barrels of extra demand for 2024. This increase in demand is coming from countries that are net importers of oil and will have to be fulfilled by net exporters such as the USA or Western African countries: in other words, this means that the demand for oil tankers will increase as well due to higher oil demand and longer average voyages. In addition, oil supply is also critical for the EU which is no longer importing oil via pipe from Russia but is now getting oil supply via tankers from the USA, Africa and the Middle East.

On the oil tanker availability side, the growth is not on par with demand growth. Order books are at historically low levels with about 350 new tankers that will enter the worldwide fleet in the next three years and about 2,000 new vessels to be produced in the next 15 years. However, in the same time period, something like 5,300 vessels are expected to stop operations due to their age and environmental requirements.

Therefore, I believe that the oil tanker demand/supply imbalance is here to stay for the next years.

Focusing on the short-term, according to many business reports, oil tanker rates for Q4-2023 are soaring again and are expected to be well higher than Q3-2023.

Analysts’ view

Since the TEN’s trading volume is not very high, the stock is currently covered only by one equity analyst who, however, has a very positive view of the company. His/Her rating is “strong buy”, and the target price is $28/share, about 42% more than the current price.

Relative valuation

In order to understand a potential valuation for TEN, I performed a relative valuation using the peers highlighted in the table below.

Then, for each of the peers, I calculated the normalized EPS and I plotted it versus the current stock price. The table below shows the results. As one can see, TEN is below the regression lines (R squared of 0.77) that implies the stock is undervalued versus peers. Using the regression line formula, and the normalized income of TEN, I calculate a potential target price of $35.6/share, that would imply an upside of 81% versus the current stock price. Obviously, this is a very high potential stock price increase that could be realized only in a theoretical optimum case. Assuming that only 50% of the potential $16/share increase in price ($35.6 minus current price), then the new target price would be $27.6/share with a potential upside of 41%.

Risks

Investing in oil tanker companies can provide high returns but the investors should always be aware of the potential risks that, in this business, might not be straightforward.

The first risk that comes to my mind is associated with a potential drop in tanker rates with a subsequent drop in company profitability. However, I believe that this scenario is quite unrealistic since it would need a strong decline in oil demand and excess availability of tankers.

Other risks that should be considered are the environmental risk associated with potential damage due to leakages of ship incidents or piracy risk (i.e.: hijacking). However, these risks are covered by proper insurance contracts that mitigate the potential financial damage associated with the event.

Conclusion

Overall, I believe that TEN is a buy. The company has a sound balance sheet and is deleveraging its debt. The oil tanker market dynamics are favorable and are likely to stay for the next quarters, ensuring that companies such as TEN will generate high cash flows. In addition, the relative valuation shows that TEN is currently undervalued if compared to peers. The new long-haul trade routes, orderbooks at very low levels, and the lack of shipyard capacity for new vessels will support the growth of TEN.