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The oil and gas shipping industry continues to face challenges. Port congestion, geopolitical disruptions and inflation are among them. Still, he appears to be dealing with outside pressure as borders continue to reopen. Tsakos Energy Navigation Limited (New York Stock Exchange: TNP) may find new opportunities as demand for energy and petroleum products grows. In this global context, it continues to capitalize on the modernization and expansion of its fleet. It may offer more growth potential, allowing it to accelerate its rebound. Meanwhile, the stock price is in a strong downtrend, making it a good deal for many investors.

Business Performance

The last two years have been difficult for Tsakos Energy Navigation Limited. In the second half of 2020, it appeared that the demand for energy sources had passed its peak. Business leaders thought it would take longer to bounce back if it was still possible. In turn, oil and gas companies have been hit by lows in demand and prices. Restricted product shipments due to restrictions and geopolitical tensions have further weighed it down.

But in just over a year, this pessimistic vision seemed premature. The industry is now geared towards another uptrend. As such, the trend is another peak-to-trough-to-peak cycle. The same logic applies to TNP which also shows a slight rebound from its previous performance. Oil demand is expected to exceed pre-pandemic levels, putting more pressure on drillers and haulers. Fortunately, TNP is not far from market trends. In its latest report, its capacity utilization is 96.1% compared to 91.1% in the 4th quarter of 2020. It shows that demand and supply for the oil and gas it transports are rebounding. Therefore, the continuous modernization of the fleets and the expansion of its operations are timely.

Its operating income of $139.13 is 5.3% year-over-year growth from Q4 2020. It shows a gradual recovery since its slowdown in the second half of 2020. Also note that Q1 and Q4 are the typical highs of company, also illustrated by its revenues. Indeed, the gloomy atmosphere that has gripped its operations over the past year is turning into glimmers of hope. But of course, inflationary pressures continue to build. Despite everything, the company demonstrates effective management of its assets, keeping its expenses stable. In addition, its non-essential operations are more viable. Excluding impairment charges, the core business for the quarter will remain viable, given the 0.22 EBITDA margin. Its net operating cash flow of $16.64 million is higher than in the 4th quarter of 2020 and the 1st quarter of 2021. This shows that the adjustments of its main activities lead to more cash inflows. In this context, the company proves its continuous rebound, allowing it to maintain and expand its operations.

Operating revenue

Operating revenue (Market watch)

EBITDA margin

EBITDA margin (Market watch)

Operating cash flow

Operating cash flow (Market watch)

In addition, it is accelerating the modernization and expansion of the capacity of its fleet. Earlier this year, he already started his move with the order of four feedermax. All are bi-fuel and powered by LNG. TNP is known to focus more on time charter than spot markets. Currently, the majority of its fleets are time chartered. Daily Time Charter Equivalent or TCE amounts to $16,891, ie 8% more than in the previous quarter. There is no further news yet as the company has yet to release its 1Q report. But in the first table below, it is obvious that his TCE exceeded the average specific traditional cultural expressions. In the second table we can see the average time charter TCEs. Its current prices are well below the market average except for its Suezmax with $22,907 TCE.

Spot rates

Spot rates (Hellenic News)

Charter on time

Time-Charter (Hellenic News)

Time-Charter and Spot

Time-Charter and Spot (Tsakos power point)

More importantly, its still relatively young LNG could boost its performance. It plays a more vital role as the geopolitical tension in the eastern part of Europe ensues. We should note that most parts of the region are heavily dependent on natural gas from Russia. In the middle of the war, there is a great void that requires replacements. That’s why there are now more opportunities for the United States to supply LNG. The same goes for Tsakos, which continues to see its demand and prices increase. It benefits from solid fundamentals of the oil market in Europe. Thus, the increase in the prices of its oil and gas remains reasonable. It can also track the massive increase in the estimated market for TCEs, as shown in the second chart. Once the old TC contract expires, it can still increase its rates so that growth can accelerate.

Compared to its competitors, Tsakos shows a similar trend. It holds a market share of 8.4%, which is well above 7.2% in the comparative quarter. Some notable peers of its size include Ardmore (ASC) and NGL (NGL). At the same time, revenue growth is reasonable compared to the market average. As such, he remains one of the leading figures in the industry.

Market share

Market share (Market watch)

This year, we expect more attractive growth prospects. Zacks reckons sales are as high as $588 million. My estimate is lower, but also shows a potential increase of $552 million. It is in line with the average growth of recent years and quarterly values. I think that’s a conservative estimate, given the inflationary pressures. But of course, it may still exceed our expectations, given the opportunities, especially in Europe. Its expansion could become another main engine of growth.

Operating revenue

Operating revenue (Zacks and author’s estimate)

How Tsakos Energy Navigation can support its growth

Tsakos Energy Navigation Limited is showing a more attractive outlook, given its continued rebound. It can still be gradual due to various factors. Yet the opportunities she sees amid the war in Ukraine are leading to a larger market. It also gets the chance to raise its rates, which are still lower than TCE’s recent estimates. Many recent studies reflect a 3.5%-5.6% increased demand for tankers. Other estimates show crude oil demand per day could rebound to 99-104 million barrels. This still makes sense, given the shift of Russian oil and gas to other suppliers as demand grows. Meanwhile, Asia begins to increase its imports.

Crude oil demand per barrel

Crude oil demand per barrel (Statist)

Even better, the expansion and modernization of its fleets is timely and relevant. A few days ago, he received the fourth DP2 shuttle tanker that he had ordered at the start of the year. In addition, it plans to further expand its fleet of LNG carriers. In fact, it has a new order for LNG carriers, which is under construction in addition to the three existing LNG carriers. It can also target mergers and acquisitions, which are in line with its objective. Currently, it has a diverse fleet of 72 vessels supplying energy products to the market.

In addition, debt reduction is an integral part of its strategies. From 2016 to 2021, the reduction continued although the rate of decline varied. To $1.37 billion, borrowing is already more than 20% lower than in 2016. It is also below 12% in 2020, showing that deleveraging has accelerated over the past year. The combination of expansion and debt reduction is a good strategy to support growth. As you can see, cash levels are lower as the business grows and repays borrowings. Modernization, expansion, effective asset management and financial leverage are essential to its success.

Cash and cash equivalents and borrowings

Cash and cash equivalents and borrowings (Market watch)

Stock price valuation

The share price of Tsakos Energy Navigation Limited has seen a strong downward trend over the past month. This may suggest that it has already reached its resistance. To $8.65, it has already been discounted by 33% from its peak price. It’s also well below pre-pandemic levels, showing it’s a bargain. With its P/B ratio of 0.16, the price shows potential undervaluation. The value remains low at 0.18 even if the PTBV is used, since it is capital intensive. It also has the lowest ratio among its close peers.

PB report

PB report (Yahoo finance)

When it comes to dividends, the company may not be consistent. But, he expects to pay $0.10 per share. To be fair, owning preferred stocks may be more attractive, given the dividends per share of $0.58. It is much higher and more consistent than ordinary dividend payments. To better assess the price, we can use the DCF model

DCF model

FCFF $19,133,000

Cash and cash equivalents $132,000,000

Borrowings in progress $179,000,000

Perpetual growth rate 4.80%

WACC 12%

Common and preferred shares outstanding 41,000,000

Share price $8.65

Derived value $9.90

EV/EBITDA

EV $1,690,000,000

Net debt $1,244,000,000

Share price $8.65

Common and preferred shares outstanding 41,000,000

Derived value $10.86

Both models affirm the potential undervaluation. There could be a 15-26% upside over the next 12-24 months. As such, price is a good entry point.

Conclusion

Tsakos Energy Navigation Limited is on course for a strong rebound. It remains viable, given its continued strategies of expansion, modernization and reduction of borrowings. Growth prospects are attractive as demand for oil and gas grows. But, the stock price is not adhering to sound fundamentals, making for a bargain. The recommendation is that Tsakos Energy Navigation Limited is a buy.