TNP - Tsakos Energy Navigation

[VAL9000]

TNP - Tsakos Energy Navigation (aka TEN) is an oil tanker owner and operator.  They operate in both the charter market and the spot market.  Their customers are primarily oil companies.  They are timidly entering into the LNG transportation market.

 

I haven't had much time to look at this, but I think we might be hitting the right timing to start looking seriously at the tanker market.  Recently, TNP hit an 8 year low shortly after cutting their dividend.  Here are some numbers:

 

- Market cap: 230mm

- Current assets: 290mm

- Book value: 946mm

 

With ship owners, the value of the assets on the books and the actual value of the assets tend to deviate quite considerably in lean years and in fat years.  So I think the huge book value disconnect is probably warranted based on asset prices.  However, TNP's true value comes from its earning potential from these vessels.  TNP looks to be chartered out for about $1.1bn in revenue from charters lasting 1-15 years.  This represents about three years of revenue already booked and contracted.  The upside above this are the vessels that haven't been chartered and operate in the spot market / future charter opportunities.

 

Other factors that could give this investment lift:

- Newbuilding in this sector has dropped from 27% of current fleet to 11% (tigher future supply)

- The macro view is improving quickly - China's overall activity seems to have a measurable impact on oil transportation demand (greater future demand)

- OSG, a competitor, recently declared bankruptcy (lowered competition)

- Banks aren't interested in investing in shipping (lowered competition, higher barrier to entry)

- They're run out of Greece, which has an overly negative view attached to it (psychological advantage)

- Cash raises are looking good: Dividend was just cut, which protects cash but tends to punish stock price in the short term.  Also they are working on selling 2 older vessels which puts their fleet in a more competitive position, cuts unnecessary cost, and raises cash.

 

My thinking is..  1.1bn offers a lot of downside protection.  The biggest threat to this business today isn't competitors, substitutes, or suppliers.  The biggest threat is demand, which can only be measured as overall economic activity.  If overall economic activity drops, today's charters and cash levels protect on the downside.  If economic activity improves, then the spot market vessels will reap excess gains.

 

Things I have thought of but haven't resolved:

- Quality of charter counter-parties

- How growing North American oil production impacts tanker demand long term

- They're talking about introducing some MLP structure which requires a lot of research and could mess up the economics of the investment

- Lots of finance things to dig through.  These ship owners don't appear to be regulated much and use all kinds of financial hocus pocus.  It can be figured out, but at what cost.  SSW was relatively straightforward and still took a while to wade through.  I've heard less great things about Greek owners.

 

Has anyone done any DD that they're willing to share?

 

Disclosure: no position today, but am thinking hard about it.

[watsa_is_a_randian_hero]

Hi

 

I owned TNP from 2003 to 2007.  I got lucky on both ends.  I have followed as it as dropped.  I like the management here, but am concerned the leverage gives a good chance of sinking them. 

 

when I looked at them last it was oct.  I valued based on 2 scenarios.  Scenario 1 they go bk and the equity is worthless.  Scenario 2 I used the EBITDA multiple they had when their EBITDA maxed out in 2006 (6.5x).  I simply took the ratio of EBITDA/ships they had in 2006 and applied it to 51 ships and rounded down, and assumed EBITDA reaches 300mm by 2016.  That gives value of 1950 in 2016.  Assumed capex interest and div between now and then of 376, and an adj future value of 2326.  Subtracted net debt of 1293 to get an adj 2016 equity value of approx 1 billion.  discounted back at 20% to get current equity value of $8.56 per share.  At the time, it was trading at $5.65 and I didn't think this was enough upside given the downside is 0. 

[no_free_lunch]

I remember reading that Greek shippers do not pay income tax.  Looking at their income statement this seems to be true for TNP.  From my basic research about 15% of shipping is based out of Greece so perhaps they have a small competitive advantage as a result.  I am just not sure what the tax rate is for shipping companies in other countries.

[watsa_is_a_randian_hero]

I remember reading that Greek shippers do not pay income tax.  Looking at their income statement this seems to be true for TNP.  From my basic research about 15% of shipping is based out of Greece so perhaps they have a small competitive advantage as a result.  I am just not sure what the tax rate is for shipping companies in other countries.

 

While their operational headquarters is out of Greece I believe their legal headquarters is located Bermuda.