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

A few days ago, Tsakos Energy Navigation (New York Stock Exchange:TNP), also simply called TEN. Announcement of 2023 Q3 earnings. Results were in line with market expectations, with the company reporting net income of 83 cents per year. share. In this article, I’ll provide an overview of TEN’s Q3 earnings and explain why I think the company still deserves a buy recommendation. Indeed, interest rates on oil tankers, the main driver of TEN cash flow, are expected to remain high, ensuring profitability and good performance.

If you’re interested in oil tanker companies, we also cover stocks such as Scorpio Tankers, International Seaways, and Teekay Tankers.

About inventory

The company’s stock currently trades at $19.50 per share, representing a market capitalization of $580 million. Since the beginning of the year, TEN’s value has increased by approximately 24% in 52 weeks. The highest price reached $24.5 in March 2023. The 52-week low reached $15.3 per share in January 2023. The stock is currently trading at around +4%. When I wrote my last article about TEN.

Third quarter 2023 results

As mentioned earlier, third-quarter earnings were broadly in line with analyst expectations. Revenue for the quarter was down 17% year over year, from $224 million to $187 million, due to two different drivers. On the one hand, average TCE daily rates in the third quarter decreased by 2% from $320,000/day in Q3 2022 to $313,000/day in the previous quarter; Decreased by $9. The percentage of total business days increased from 5,678 days in the third quarter of 2022 to 5,138 days in the third quarter of 2023. The decrease in total operating days is explained by a decrease in the number of vessels in service: from 65 vessels in 2022 to 58 vessels in 2023.

Comparing Q3 revenue to the previous quarter (Q2 2023) shows that revenue is still down approximately 16%, but in this case the main decline is from the TCE rate of $38,300. is represented by a decrease in His daily amount for Q2 2023 will be $313,000/day.

Looking at operating expenses, total operating expenses were down 14% year over year ($133 million), primarily due to lower voyage expenses (-35% year over year or -$19 million) and charter rentals. This was due to a decrease in expenses (-32% YoY). or -$3 million).

Overall, EBIT was positive at $53 million, down 21% year over year and down 36% sequentially. Net income trends were similar, at $31 million, positive but down 39% year-over-year and 50% sequentially.

For its third quarter results, the company provided a synthetic cash flow statement. This shows that the operating cash flow generated in his first nine months of this year was $303 million by net income. Cash flow from investing was negative by $-54 million, while cash flow from financing was negative by $-165 million.

Overall net debt was $1.16 billion, down 8% from the previous year.

Tsakos Fleet Growth Program

Capitalizing on the strong demand for second-hand vessels, TEN has launched a fleet expansion program, selling eight first-generation vessels and ordering eight new-generation vessels.

The first two (of four) LNG-fueled Aframax tankers were received in September and October 2023 and immediately began operating. Below you can check the delivery schedule for the next new ship.

Market outlook and why I think Tsakos is a buy

The tanker market is undergoing a period of unprecedented structural health, which will not only support share price growth, but will also help TEN generate strong FCF that can be used for deleveraging and shareholder compensation. Probably.

Tanker daily rates are primarily determined by the imbalance between oil tanker demand and supply. The larger the gap between demand and supply, the higher the price.

There is currently a wide disconnect between supply and demand, and this is likely to continue in the coming quarters.

Meanwhile, oil demand is expected to increase by countries such as China and India. The IEA predicts that in 2024 there will be an additional demand of potentially 1 million oil barrels. This increase in demand has come from net oil importing countries and will continue to do so. must be met by net exporters such as the United States and West African countries. In other words, this means that due to increased demand for oil and longer average voyages, the demand for oil tankers will increase as well. Moreover, oil supplies are also important to the EU, which has stopped importing oil via pipes from Russia and now gets its oil supplies via tankers from the US, Africa and the Middle East.

In terms of oil tanker availability, the growth is not equal to the growth in demand. Orders are at historically low levels, with approximately 350 new tankers expected to join fleets around the world over the next three years and approximately 2,000 new tankers to be produced over the next 15 years. However, over the same period, some 5,300 ships are expected to be taken out of service due to age or environmental requirements.

Therefore, we believe that the imbalance in supply and demand for oil tankers will continue for several years.

Focusing on the short term, According to many business reportsoil tanker rates in the fourth quarter of 2023 are on the rise again and are expected to be significantly higher than in the third quarter of 2023.

Analyst’s view

TEN doesn’t have a lot of trading volume, so only one equity analyst currently covers the stock, and that analyst has a very positive view of the company. He rates the stock a “strong buy” and has a price target of $28 per share, about 42% above the current price.

Relative evaluation

To understand TEN’s potential valuation, we performed a relative valuation using its industry peers highlighted in the table below.

We then calculated the normalized EPS for each peer and plotted it against the current stock price. The results are shown in the table below. As you can see, TEN is below the regression line (R-squared of 0.77), suggesting the stock is undervalued relative to its peers. Using the regression line formula and TEN’s normalized earnings, we calculate a potential target price of $35.6 per share. This represents an 81% upside to the current share price. Clearly, this is a very high potential stock price increase that can only be realized in the theoretical optimum. Assuming only 50% of the potential upside of $16/share ($35.6 minus current price), the new target price is $27.6/share, giving a potential upside of 41%. Masu.

risk

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

The first risk that comes to my mind is related to the potential decline in tanker freight rates and the associated decline in corporate profitability. However, I believe this scenario is quite unrealistic as it would require a significant reduction in oil demand and overutilization of tankers.

Other risks to consider are environmental risks related to potential damage from ship accident leaks and piracy risks (e.g. hijacking). However, these risks are covered by appropriate insurance policies that reduce the potential financial damage associated with the event.

conclusion

Overall, I think TEN is a good buy. The company has a healthy balance sheet and is debt free. Oil tanker market trends are positive and likely to continue over the next few quarters, and companies like TEN will certainly generate strong cash flows. Furthermore, relative valuations indicate that TEN is currently undervalued compared to its peers. New long-distance trade routes, very low order levels, and a lack of shipyard capacity to build new ships will support TEN’s growth.