Shipping concern Tsakos Energy Navigation Ltd. (TNP) recently posted Q1 results that were well below that of seemingly overly optimistic Street estimates, observes Jason Clark, value investor and contributing editor to The Prudent Speculator.
The marine shipper earned $0.12 per share, versus the $0.45 expected by analysts. Looking beyond the headline number, Tsakos incurred a $16 million fuel-hedging cost in the reporting period, which management says has already reversed itself.
Taking more than $0.16 of earnings per share from this charge into account, operating results appear quite strong.
Utilization of the fleet has approached 97% of late, as contango (the spot oil price is lower than the futures price which has generated an upward sloping forward curve) in the oil market has contributed to strong tanker rates for much of the year, and has allowed the company to enter two additional lucrative long-term charters.
Given confidence in recent and prospective business prospects, management has declared a special dividend of 2.5 cents to be paid in late June along with the regular 5 cent dividend declared back in March.
The company also plans to buy back $50 million of preferred equity in Q3 and has hinted at acquisitions coming down the pike.
We also note that shares will undergo a 1-for-5 reverse split on July 1. While we would typically look down on such an action (particularly for businesses in the shipping industry), management has stated its intentions for the split as an effort to drive interest in shares from the broader investment community.
Of course, this fails to fundamentally alter the value of the enterprise, although institutions are often unable to participate in issues trading at under $5 per share.
Shipping remains an inherently volatile business, and Tsakos certainly is a more-risky holding in our broadly diversified portfolios. That said we continue to like our smallish exposure to the name, given significant possible upside in the right conditions.
We also like management’s stated efforts to de-risk the capital structure through plans to reduce debt, while also managing business risk by utilizing long-term charters with profit sharing arrangements. Shares offer a go-forward dividend yield of 4.1%. We have adjusted our Target Price lower to $4.65.
