Taking a Gander at Tsakos Energy Navigation Preferred Shares
By: Tim McPartland,
We follow all ocean shipping companies so when we got a note on the preferreds shares of Tsakos Energy Navigation (NYSE:TNP) from our reader Alan we decided to take a fresh look at the shares. It should be clear that we have no interest whatsoever in the common shares, but there are 3 issues of perpetual preferreds outstanding that may have some possibilities.
TNP is a tanker company with a current fleet of 50 vessels which includes 1 LNG carrier and a few shuttle tankers. Additionally, there are 13 new builds on order and most of the time it is the new builds that get the shippers in trouble. On a historical basis most of the shippers have shown no ability to restrain supply and as supply increases day rates fall eventually causing bankruptcies. This has been most obvious in the bulk shipping sector where many companies have gone broke with more filings on the way soon.
Taking a quick look at the financials of Tsakos we are surprised to see that the company has over $300 million cash in the bank (as of 9/30/2015)–a enviable position for a ocean shipper, even a tanker company. This cash balance is up from a $214 million bank balance as of 12/31/2014. On the other hand they have debt of $1.37 billion of the balance sheet. While this is down from $1.48 billion as of 12/31/2014 it is still a considerable amount of debt and only a well managed company can carry this level of debt successfully if we hit an economic downturn or, in the case of TNP, if crude oil production should turn down sharply. While we don’t expect either of these to happen in the next couple of quarters it is difficult to see beyond this time frame. Fortunately TNP is blessed with the ability to negotiate very low interest rates on their debt–our quick glance shows their interest rates on average are less than 4%.
Looking further into the financials it is clear that low crude prices with very high production has provided a jackpot of earnings for TNP. Net income has exploded higher to over $118 million in the last 9 months compared to $20 million in the same time frame last year. Even with this huge jump in net income the company has been very conservative with the common stock dividend paying just 6 cents/share in each of the last 3 quarters while net income was a cumulative $1.28/share. This conservative common stock dividend treatment is music to the ears of preferred stock buyers.
With the above in mind let’s take a look at the 3 outstanding issues of preferred stock for TNP. We have laid them out in the chart below. Please notice that we have a column titled “penalty rate start”. 2 of the 3 issues were issued with dividend rate step ups penalty rates in the event the company fails to redeem the shares by a given date. Note that the issue without the penalty rate clause trades 6-9% lower than the other 2 issues.
Tsakos is not the first company to use penalty rates as part of a preferred stock offering and historically shares that are subject to penalty rates after a certain date trade closer to par ($25) than shares that are not encumbered by potential penalties. Essentially the shares trade in a similar fashion to a “term preferred” as it is assumed that the company will redeem the shares prior to the penalty rate kicking in since the penalty is steep. In the case of TNP the penalty rate is equal to 1.25 times the coupon (the interest rate paid on the preferred shares). Using the B series shares as an example the penalty rate to be paid to the stock holder after 7/30/2019 would be 1.25 times 8% meaning the new rate is 10%.
The last item that needs to be touched on again is the subject of new builds. The company has commitments to pay over $800 million more for the new builds and as mentioned at the top of this page it is the new builds that can sink a shipping company. If day rates head lower as new ships are coming from production it can be a messy situation. Fortunately Tsakos has secured long term contracts on the new builds and has secured financing for most of the ships.
You can peruse the companies website here for incremental information on the company.
We will be doing a bit more research on the company this coming weekend and assuming we find no major surprises will be adding shares of the B series to our buy list for early next week. While the B shares have the lowest current yield of the 3 issues they also have the earliest penalty rate date and we want the shortest possible duration.