DHT Holdings, Inc. Q2 FY2021 Earnings Call

Thank you for your patience. Welcome to the Second Quarter 2021 Earnings Conference Call for DHT Holdings, Inc. All participants are currently in a listen-only mode. Following this presentation, we will have a question-and-answer session. Please note that this call is being recorded. We have three speakers today: the co-CEOs, Svein Harfjeld and Trygve Munthe, along with our CFO Laila Halvorsen. I will now hand it over to our first speaker, CFO Laila Halvorsen. Please proceed.

Thank you. Good morning and good afternoon, everyone. Welcome and thank you for joining DHT Holdings' Second Quarter 2021 earnings call. I'm joined by DHT's Co-CEOs, Svein Harfjeld, and Trygve Munthe. As usual, we will go through the financials and some highlights before we open up for your questions. The link to the slide deck can be found on our website, dhtanker.com. Before we get started with today's call, I would like to make the following remarks. A replay of this conference call will be available at our website, dhtanker.com, until 08/17. In addition, our earnings press release will be available on our website and on the SEC EDGAR system as an exhibit to our Form 6-K. As a reminder, on this conference call, we will discuss matters that are forward-looking in nature. These forward-looking statements are based on our current expectations about future events, including DHT's prospects, dividends, share repurchases, and debt repayment; the outlook for the tanker markets in general; daily charter high rates and vessel utilization; forecasts of world economic activity; oil prices and oil trading patterns; anticipated level of new buildings and scrapping; and projected drydock schedules. Actual results may differ materially from the expectations reflected in these forward-looking statements. We urge you to read our periodic reports available on our website and on the SEC EDGAR system, including the risk factors in these reports, for more information regarding risks that we face. Looking at the P&L highlights, EBITDA for the Second Quarter of 2021 was 21 million and net income came in at 0.8 million. The result includes the profit of 13.6 million related to the sale of DHT Lake and DHT Raven, a non-cash gain of 3 million related to refinancing, and a non-cash gain in fair value related to interest rate derivatives of 2.2 million. OpEx for the quarter was 19.6 million, equal to $7,800 per day. G&A for the quarter was 4.7 million. In the second quarter of 2021, the Company achieved an average TCE of $19,500 per day, while the average TC for the first half of 2021 amounted to $25,500 per day. In a historically very difficult and challenging tanker market, we are pleased to have recorded positive numbers for both the second quarter and the first half of 2021. Moving over to the balance sheet, the quarter ended with 52 million in cash. At quarter-end, the Company's availability under both the revolving credit facilities was 182 million, putting total liquidity at 235 million as of June 30th. We have continued to strengthen the balance sheet with the refinancing of the Nordea Credit Facility, and the prepayment down during the quarter. Financial leverage is about 30% based on market values for the ships and net debt per vessel was 17.6 million at quarter-end. Looking at the cash bridge, the quarter started with 54 million in cash and we generated 21 million in EBITDA. Ordinary debt repayment and cash interest amounted to 6 million. 29 million was used related to share buyback and dividend payment, while 17 million was used for maintenance and scrubber CapEx. Changes in working capital amounted to 18 million. Proceeds from the sale of vessels related to debt repayment was 51 million, with 55 million issued in connection with the refinancing. 93 million was used to prepay long-term debt, and the quarter ended with 52 million in cash. With that, I will turn the call over to Trygve.

Thank you, Laila. Switching now to capital allocation. For the second quarter, a total of 25.8 million will be returned to shareholders. As previously announced, the Company bought back 2.2% of the outstanding shares during the quarter, for a total consideration of 22.5 million. In addition, the Company will pay a dividend of $0.02 per share for the quarter. It will be payable on the 26th of August to shareholders of record on the 19th of August. With that, the Company has now paid dividends every quarter for 11.5 years. We wanted to provide you with a little update on the fleet side as well. Again, as previously announced, we bought and took delivery of 2 modern scrubber-fitted eco-ships during the first half: the DHT Harrier and DHT Osprey. We paid 68 million per ship and note that broker value assessments are now some 10% higher. We also sold our 3 oldest ships, all built in 2004, during the spring. The Lake and Raven were delivered during the second quarter, and we recorded a 13.6 million gain on these sales. The DHT Condor was delivered to its new owners in July, and we expect to book a profit of about 1.5 million on that sale. On the next slide, let us then provide you an update on what has been going on regarding the liability side of the balance sheet during the quarter. As previously announced, we have refinanced the old Nordea facility with a new and expanded Nordea facility. The new facility has a firm commitment of 316 million, with the addition of a 250 million accordion. The new loan carries a margin of 1.9%. It has a DHT-style 20-year repayment profile, a 5.5-year tenor, and carries the normal DHT covenants. Additionally, and importantly, we were able to continue to benefit from having prepaid all regular installments for 2021 and 2022 under the old facility. The only installments we pay from now until the end of 2022 on this facility are 2.5 million per year for each of the two new acquisitions, the Harrier and the Osprey. During the second quarter, we extended our runway on low cash break-even rates by prepaying all the 2022 installments under our other large credit facility, the ABN Amro loan. In a minute, Svein will provide more color on our very low cash break-even levels for the rest of this year and next. From the table on this slide, you can see that we have 536 million in bank debt comprised of 2 relatively large syndicates and 2 smaller or lighter loans. Further, we currently have 182 million in available revolver capacity. We have a mere 5 million in regular installments for the second half of this year and no more than 10 million for all of next year. Finally, you will note that we have no refinancing needs until the fourth quarter of 2023. As you can see, we continue to enjoy strong support from our banking partners, something that was clearly demonstrated by the terms of this refinancing, which in fact were the best we've achieved in our 11 years at the helm of DHT. With that, I will pass it over to Svein.

Thank you, Trygve. In the next three slides, we will discuss the employment of our fleets concerning drydocks and cash breakeven levels. On the first page, you will see the expected ratios of spot and time short-term employment during the last two quarters of 2021. For the third quarter, we have covered about 42% of our fleet on time charters at an average rate of $27,500 per day. Some of these time charters are short in nature, as we consider a decent opportunity offering premium earnings to the stock markets. Thus far, for the third quarter, we have booked income for 64% of the fleet at an average rate of 22,100 per day. For the fourth quarter, we have some 23% of the fleet on time charters at an average rate of about 32,100 per day. We don't expect to enter into additional time charters in the near term as we don't consider a combination of currently available rates and durations to be compelling. As many of you have noted a few quarters back, we started to take advantage of the weak spot market to bring forward drydocks. During the second quarter, we recorded about 100 days off-hire in connection with drydocks. We expect another 80 to 100 days during the third quarter, with an additional 40 to 60 days in the fourth quarter. The work to be done during this period in the second half includes the installation of ballast water treatment systems and scrubbers. This will also mark the end of our scrubber retrofit program for now. Taking our scrubber fleet to 17 out of 26 ships. A key benefit to all these efforts is that we have only 70 to 90 planned off-hire days for all of 2022. As such, we are positioning our fleet to be ready on the dance floor at a time when one should expect much healthier freight markets. Our keen focus on cash breakeven levels is critical. The time charters we have in place, in combination with debt repayments that we've made, ensure we enjoy very robust cash breakeven levels for our fleets. It applies both for the fleet as a whole and the spot fleet specifically. As you will see from the graph on the left from the slide, the full fleet needs to generate 16,600 per day. Our spot fleet is 10,200 per day for the Company to be cash neutral for the second half of this year. On a similar illustration in the graph on the right, you will see that the full fleet needs to generate 14,100 per day, and our spot ships need 10,006 during the first half of 2022 for the Company to be cash neutral. The key drivers behind these numbers are the prepayments of debts that have been made with only 10 million in scheduled repayments for the net for the year and very limited maintenance CapEx reflecting only three ships planned for drydocking. We think these numbers stand out as very robust, protecting the downside without giving away the upside. We are constructive on the markets but we think the recovery could come a bit later than what most people suggest. Oil inventory levels have been coming down, and OPEC Plus is gradually increasing supply. However, COVID still impacts the demand picture. This happens at a time when the fleet is growing because new ships are being delivered without the retirement of older ships. It's tough out there. In all its simplicity, there's too little cargo and too many ships. That being said, the longer this drags out, the faster and more brutal the recovery could be. Let's discuss how we are positioned. 1. We have renewed our fleet this year by buying two modern quality ships and selling our three oldest ships, all at good prices in our view. 2. We secured a new financing package at attractive terms with our supportive universal lending banks. 3. We have a strong balance sheet with leverage at 30% paired with a healthy liquidity position. 4. We enjoy very low cash breakeven levels for our fleet for both this and next year. In sum, we are an excellent safe haven, and we are all working hard to control what we can control and are executing on opportunities the markets present. With that, we open up for Q&A.

Thank you. We will now take our first question from Randy Givens at Jefferies. Please go ahead; your line is open.

How are you Svein, Trygve, and Laila, how is it going?

Good, thanks. How is Texas?

Excellent. All well, a little warm, but everything is good down here. A couple of questions for me, starting with your fleet here. You recently sold the three oldest VLCCs, and you bought these two modern VLCCs all this year. How do you feel about your fleet currently? And then you mentioned you're not looking to do any time charter outs, but is there an appetite for time charter ins to grow a little bit more exposure?

I think as we've said many times before, in general, we're not entertaining time chartering in. There are a few reasons for that. One, it is essentially 100% financing. It will negatively impact our cash breakeven levels. Also, we like to have full control of the technical operations, so the ships under our control that they use to service our customers. So time chartering typically hasn't been something we’ve done.

And then in terms of additional asset sales or modern purchases?

On the sell side, we have no intention of selling any of the ships on this side of the recovery. As we have discussed in the past, the appreciation of secondhand values happened a little quicker and faster than we had expected. We think that we've gotten to a level where we're actually quite pleased with the fleet that we have. We really do not currently have any intentions to buy or sell. So it's a whole territory for us and runs the 26 vessels we see as well as we can.

Okay. And then looking at that capital allocation slide, I know you've been pretty committed to that 2 cent dividend, regardless of earnings. Just also looking at the share buyback. Very good use of cash there. You returned the 225 to shareholders buying 3.7 million shares. What was the thinking behind that? How did you get to that calculation? And how much more in share repurchases are you looking at for the remainder of the year?

As we've said before, we are not regularly doing buybacks. It's a couple of things that need to be in alignment. We find that the NAV is on its way up and that we see a disconnect between share prices and NAV; that’s typically when we have bought back shares over the years. We felt that after we acquired two ships at the beginning of the year, then prices really took off, and as we just said, we weren't too intrigued by the second-hand opportunities. But the share price hadn't really accelerated to the same extent. So we thought that buying our own shares made sense. As far as forward appetite, that's going to be decided on those same factors, but it could very well be that we will continue to buy some, but there is no target that we want to spend x million dollars or anything like that, so it's purely an opportunistic approach from our side.

Got it. Sounds prudent. And quickly, quarter date guidance on just the spot vessels. Do you have that number at the rates that you've booked so far for a spot on 3Q?

It's below one-third of the spot fleet, and that's at 10,006.

10,6. All right. Well, hey, thank you so much.

Thank you.

We will now take the next question from the line of Omar Nokta from Clarkson Securities. Please go ahead, your line is now open.

Thank you very much. Good afternoon, everyone. I want to follow up on Randy's question about time-charters. Given the extreme fluctuations we've experienced over the past two years, it has certainly benefitted you to have several of your ships on time charter that you secured last year. In the last quarter, you earned 10,000 on the spot market, but your overall fleet was closer to 20. Looking ahead, while I realize there may be limited immediate opportunities, what percentage of your vessels do you envision having on time charter in the long run for DHT?

We don't have a specific percentage that we target, but we look at the nominal numbers. Obviously, last year, our numbers were very attractive, so we did as much as we could. Some of these charters this year have been more of an alternative to trading in the spot market. In the next recovery, you should expect us to do little time charters, and when numbers are very healthy, we'll do as much as we can. It's not a defined percentage, as the guidance is just what makes good economic sense.

That's fine. Okay, that's clear. I have a follow-up to the previous discussion points. Recently, especially with the Delta variant, there seems to have been some unexpected delays in the tanker recovery, at least based on stock performance. Given the order book, it is quite tight with little availability for tankers potentially coming in 2024 and really in 2025. This creates a positive outlook as you mentioned earlier, particularly after the upswing when rates improve. I know you are comfortable with your current strategy, but how do you view capital investment? When do you think it will be appropriate to invest, considering that 2022 could see a healthier market and possibly a robust market through 2023 and 2024 and beyond? Some factors could come from the supply side. How do you feel about deploying capital then? You made a purchase in 2016 earlier this year. What do you consider the ideal conditions for investment?

As we've also said earlier, for us to invest, the ships have to be of an equal design that means built late '15 and younger. We felt from a cash return point of view, that's 5-year-olds or really the sweet spot. The fuel economics of a 5-year-old and a 1-year-old are basically the same. We're very happy with those investments. Keep in mind that in the recovery when it happens, this Company will churn out a lot of money with the 26 ships it already has. It's important for us when we invest to also look at the required rates over the remaining life of the ships that we buy, not just what you can earn in 12, 24, or 36 months. This is why we took a step back once asset prices ratcheted up much quicker than we had expected in the spring. If opportunities arise at levels that look too favorable, we're certainly open to considering it. We're not against buying more ships, but there have to be levels that we think will represent good investments over the remaining life of the ship.

Got it. Thanks. Thanks for that, I will turn it over.

We will now take our next question from the line of Chris Tsung from Webber Research. Please go ahead. The line is now open.

Good afternoon, everyone. How are you?

Hello. Yes, go ahead.

Got it, sorry. Thanks. I guess it's a two-part question regarding scrubbers. What sort of spreads are you guys seeing between a scrubber and non-scrubber fitted vessel? Secondly, with the sales that you guys announced on the 2004 vessels, we all have scrubbers on that. So is that a requirement to sell vessels?

To answer the latter part first, there have been ships sold, not from us, but they were without scrubbers in the market. There is interest in that as well. However, these ships are primarily coming out of Japan with more basic specifications and are usually being acquired by private owners. There was specific interest in our ships, possibly due to their maintenance record. An industrial buyer purchased these ships, and they will utilize them for their own transportation needs. Currently, the annual benefit of a normal ECO-ship to discover is about $2 million over the year, so you can do the rest of the math yourself.

Thank you. To follow up on the second part of my question, could we consider whether you might sell a vessel? I understand you are not planning to sell any more vessels and have halted your scrubber program at 17. However, if you were to contemplate selling, could it involve any part of your fleet, regardless of whether it has a scrubber or not?

When you run a tank company, essentially everything is for sale. It all depends on the price. It's not carved in stone that we only sell the oldest ships or only those with scrubbers or without them. It is where we think it benefits the shareholders and where it makes sense to us. However, traditionally, we have been selling from the older end of the fleet. You will note that all of our older ships are scrubber-fitted, or will soon be scrubber-fitted. Hopefully, that adds some color to your question.

Yeah, that's perfect. Thank you all. I'll turn it over.

Thank you.

We will now take our next question from the line of Jon Chappell from Evercore. Please go ahead. Your line is now open.

Hey, everyone, this is Sean Morgan filling in for Jon Chappell this morning. It seems that you've signed some extended contracts recently since the Q1 results. I'm curious if we could get the types of rates those contracts are being signed at and whether we should use the trip over figures for the one-year or if the extension rate is higher than the well-time charters from last year.

It makes sense. I'm not going to disclose the rates of the particular charters, but I think you should relate to the numbers we have disclosed now on what's the average share for the straight of fleets in each quarter.

Okay. Thanks. And then on the breakeven slide, I think that's interesting. You'd be able to reduce the maintenance CapEx per year for the coming quarter, but is there any ability to offset some of the OpEx costs, or are those pretty efficient at this point in terms of just reducing the breakeven even further?

We have a long-term view of the way we operate our ships. The amount we spend on OpEx is independent of what type of markets we're in. You can see that we run this quite competitively and cost-efficiently. As Laila said, OpEx for the quarter was $7,800 per day per ship, and we find that to be quite sharp and competitive. But to your question specifically, we don't think there's any room to cut in OpEx just to obtain a lower cash breakeven.

Yeah. Okay. Thank you.

You're welcome.

We will now take our next question from the line of Ben Nolan from Stifel. Please go ahead. Your line is open.

Thanks. I wanted to get back to scrubbers, but maybe from a different perspective. It sounds like you're done here at 17. Is that simply a capital allocation decision that you're preserving capital? It's a challenging market; you don't have as many dry docks coming beyond this quarter? Or is it the ships that don't have scrubbers that are sufficiently efficient enough so that you don't feel like they would benefit enough?

The latter part of your question is correct. These are eco-ships, so they consume much less fuel than the more mature end of the fleet. That means the payback will be longer, and the investment is not OpEx compelling. We're pleased with how we have set it up now. Older ships got scrubbers, and then there are some eco-ships that don’t.

Okay, so those more modern ships probably never will have scrubbers, or at least not anytime soon. Is that fair?

That's correct.

Okay, and then getting back to the cash breakeven. First, it's nice that you've been able to retool the debt and very little amortization associated with that. But just thinking through, as we hopefully get into a better market, perhaps at some point next year. The low cash breakeven is a pretty easy bar, and looking beyond that, assuming that you are generating substantially more cash than is needed to cover that debt. Is there a need to pick that amortization back up to a little bit of a higher level and maybe a little bit more concerning debt repayment? Or do you imagine that, should cash flow be available, it would be available to distribute to shareholders in one form or the other?

There's no need to ramp up that amortization, so we are free to do whatever we want with the available cash flow once the market recovers. But I think it's premature today to indicate what we're going to do once the market returns to healthy numbers. What we enjoy is to have the freedom to choose what we think is the right thing to do when that time comes.

Keep in mind that our loan facilities are straight-line amounts. We need to select then to prepay the scheduled amounts for a particular period to improve the position of the Company. It's not because we have non-amortizing debt for this sort of a wall of debt coming at some point in the future.

Sure. Okay. No, I understood. I appreciate it. Thank you, guys.

Also, our capital allocation is a minimum of 60% from ordinary net income to be distributed to shareholders. Obviously, if cash flows are phenomenal, the Company can consider sorting of use of that capital allocation policy, right?

As you saw for the second quarter.

(Operator Instruction) And we will now take our next question from the line of Ronald Silvera from Marine Surveyors. Please go ahead. Your line is now open.

Thank you for taking my call. I truly appreciate what you all have accomplished. This has been an incredibly challenging quarter. I find it quite impressive that over the past two years you have reduced your debt from over 900 million to a current level of 536 million. This is an outstanding achievement in such a tough market. I wonder what your earnings would have looked like this quarter if you still had around 900 million in debt; I doubt they would be anywhere close to your current figures. Looking ahead, I know you've been buying back shares, and I would recommend that you also consider selling some $5 options. While this may not generate a significant amount of money, it will provide some income. This could be particularly beneficial if implemented for next January. You have enough cash set aside to manage any options you sell, which would help lower your costs on repurchases and support your ongoing share buyback strategy. Overall, I believe the way you have managed this company is a textbook example of best practices. That's my suggestion.

Well, thank you for your kind words. We certainly recognize that option market as something we can also get into. We've discussed this in the past, but overall, we find that the liquidity may not be what it needs to be for us to do something there, but we appreciate your input.

You don't have to do a lot. But it just shows that you can do some, and I would much rather see you build your cash for the opportunities that may come because, as you said, we will probably go through a long, tough period before we get into a great market as we had in early 2020. I'm sure like to, as a shareholder for many years now, see that happen.

I think we have prepaid all regular installments on the two large facilities through 2022, so we do not expect to make additional premium payments soon. We feel that we have a significant runway of 18 months here with unusually low cash break-even levels, and we're certainly expecting the market to come back to more normal and healthier levels within that timeframe. Currently, we do not have any intention for additional prepayments.

Okay. Thank you. Well done, guys.

Thank you.

We will now take our next question from the line of Magnus Fyhr from Wainwright. Please go ahead. Your line is now open.

Hi. Good afternoon. Just two questions. You've been extremely disciplined in your capital allocation strategy, and you also mentioned that asset values have depreciated real faster than you had thought. Is it fair to assume that you would rather be buying back stock in your own Company than buying secondhand vessels as long as the arbitrage is as wide as it is today?

What we did in the second quarter was sort of buying ships and our own ships, right? So they were certainly cheaper than what was available in the market. But the levels are less compared to buying one or two or three ships. We are fairly agnostic in general, but ideally, we would like to have the opportunity to buy 1 or 2 or 3 more ships when the opportunity arises.

In the business we are in, over time, you could argue that it's not a phenomenally high-end margin business. We think it's paramount that you buy right. By saying 'buying right,' it's being disciplined, as you phrased it, Magnus.

Yeah. That leads me to the second question. Some of your competitors have been buying the new ships with dual-fuel capability. How do you feel about your fleet? You have a modern fleet, and how do you feel like you're positioned for the new regulations and your appetite for pursuing any of these types of new builds?

We feel that we are in excellent shape. We have a good fleet, and we're well-positioned for the changes in the regulatory framework that are coming up over the next few years. So we will be able to meet that. We're quite confident in that. We're not looking to contract new builds at this juncture for two reasons: one, prices right now are just too high; two, there is a lack of clarity on the technology going forward. We are of course staying well-tuned to the developments and we might think differently.

Very good. Thank you.

Thanks.

If there are no further questions, I would now like to hand the call back to the Company. Please go ahead.

Thank you very much to all who showed interest in DHT and have a good day.

Thank you for participating. You may disconnect.