With broad markets trading at rich valuations, it is relatively difficult to find stocks that still offer value and potential upside. A good strategy is to look for quality names in sectors that are depressed or have been depressed in the recent past. The broad energy sector offers several value picks.Â
Tsakos Energy Navigation Ltd. (TNP, Financial) is one of the largest independent transporters of crude oil and petroleum products.
As of May 2017, the company had a pro-forma fleet of 65 vessels, of which 25 vessels have ice-class capabilities. The company’s average vessel age is 7.4 years, compared to the average world fleet age of 10.2 years.
Tsakos Energy is up 1% year to date. I believe the stock is attractively valued and the sideways movement is an accumulation opportunity.
Attractive breakeven cost
For tanker companies, one of the key risk factors is high fluctuations in spot rates as it impacts per-ship, per-day earnings. For companies that have a low breakeven cost, the economics are still attractive when spot rates or time charter rates are relatively lower.
For Tsakos Energy, the company’s time charter equivalent per ship per day was $20,917 for first-quarter 2017. The company’s operating expense per ship per day, however, was $7,584 and the vessel overhead cost per ship per day was $1,139. With total cost of $8,723, the company’s breakeven levels are attractive and allow robust EBITDA generation even in relatively depressed day rates.
To put things in perspective, Tsakos Energy generated EBITDA of $61.6 million and operating cash flow of $54.4 million at 97% vessel utilization. I am focusing on day rates as spot rates for oil tankers have declined, resulting in sharp declines for stocks like Teekay Tankers (TNK, Financial), among others. The key point is that even at current day rates, the company’s cash flows are likely to be robust.
Strong backlog
Another important reason to believe Tsakos has upside from current levels is the company’s current backlog commitment with quality clients. As of May 2017, the company has secured contracts for 50 vessels with average employment duration of 2.5 years. The secured contracts provide revenue visibility of $1.4 billion, which is likely to keep cash flows robust in the coming quarters.
Further, it is important to note the company’s biggest clients are Cheniere (LNG, Financial), Chevron (CVE, Financial) and Statoil (STO, Financial). Upon delivery of nine new Aframax vessels, the company’s largest client will be Statoil.
The point here is the blue-chip customer base ensures strong revenue visibility. As these companies expand their liquefied natural gas and oil tanker operations, Tsakos has a lot of potential ahead.
Healthy industry outlook
While there can be short-term fluctuations in time charter or spot rates in the oil tanker market, the long-term outlook for the industry is robust. This is reason enough to believe Tsakos Energy is worth buying at current levels for long-term investors.
To put things in perspective, China and India have a combined population of 2.5 billion. Both countries are significantly lagging behind in terms of per capita consumption of oil annually. Compared to 22 barrels of per capita consumption annually for the United States, the number stands at three barrels for China and one barrel for India.
I am not suggesting these two countries will reach 22 barrels per capita consumption in the next five or 10 years. Even if consumption doubles from current levels, however, the demand for oil and oil tankers will be significant. Therefore, for long-term investors the depressed stock price is a buying opportunity.
Conclusion
Tsakos Energy has been paying regular dividends, which is another reason to remain invested in the stock. While the stock performance has not be good in the last 12 to 15 months, I do not see that as a concern since the company is gradually expanding its fleet and has decent financials.
Tsakos Energy is worth holding for the next 12 to 24 months as it can deliver strong returns. With this view, exposure should be considered at current levels.
Disclosure: No positions in the stock.
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