DHT Holdings, Inc. Q3 FY2021 Earnings Call

Thank you. Good morning and good afternoon, everyone. Welcome and thank you for joining DHT Holdings third quarter 2021 earnings call. I’m joined by DHT’s Co-CEO, Svein Moxnes Harfjeld; and Wilhelm Flinder, Head of Investor Relations. As usual, we will go through some financials and some highlights before we open up for your questions. The link to the slide deck can be found on our website, dhtankers.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, dhtankers.com until November 10th. 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 market in general; daily charter rates; vessel utilization; forecasts of world economic activity; oil prices and oil trading patterns; anticipated levels of new building and scrapping; and projected dry dock 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. As you all know, we are still in a historically weak tanker market, which has impacted the results for the third quarter of 2021. Looking at the P&L highlights, EBITDA for the third quarter was $14 million and net loss came in at $21 million. The results include the gain of $1.6 million related to the sale of DHT Condor and a non-cash gain in fair value related to interest rate derivatives of $2.3 million. The Company continues to show very good cost control. OpEx for the quarter came in at $19.2 million, equal to $8,000 per day, while average OpEx year-to-date is equal to $7,800 per day. G&A for the quarter was $4.4 million. In the third quarter of 2021, the Company achieved an average TCE of $16,300 per day, while the average TCE for the first nine months of 2021 amounted to $22,400 per day. For the fourth quarter, we have booked income for 70% of the fleet at an average rate of $20,700 per day. This includes 25% of the fleet on time charters at an average rate of about $32,000 per day. Moving over to the balance sheet. The quarter ended with $64.5 million of cash. At quarter-end, the Company’s availability under both revolving credit facilities was $180.5 million, putting total liquidity at $245 million as of September 30th. Financial leverage is about 30% based on market values for the ships. And net debt per vessel was $17.7 million at quarter-end, which is well below current scrap value. Looking at the cash bridge, the quarter started with $52 million of cash and we generated $14 million in EBITDA. Ordinary debt repayment and cash interest amounted to $7 million. $10 million was used related to share buyback and dividends payment and $2 million was used for maintenance and scrubber CapEx. Changes in working capital amounted to $11 million. Proceeds from sales of vessels were $30 million. And the quarter ended with $64.5 million of cash. The change in working capital for the quarter is mainly a result of vessels on time charter being redelivered and bunkers being purchased back from charterers. And now, over to capital allocation. For the third quarter, a total of $10.1 million will be returned to shareholders. As previously announced, the Company bought back 1.23 million of its own shares at an average price of $5.47. The shares were retired upon receipt. In addition to this share buyback, the Company will pay a dividend of $0.02 per share for the quarter. It will be payable on the 23rd of November to shareholders of record as of 16th of November. And this marks the 47th consecutive quarterly cash dividend. Year-to-date, the Company is returning $42.7 million to shareholders, $13.5 million in cash dividends and $29.2 million in share buyback. With that, I will turn the call over to Svein.

Thank you, Laila. Here on this slide, we will offer an update on our cash breakeven levels. On the graph to the left, you see our cash breakeven levels for the fourth quarter. The full fleet needs to generate $15,800 per day, and our spot fleet $10,400 for the Company to be cash neutral during this period. On the similar illustration in the graph on the right, you will see that the full fleet needs to generate $14,200 and our spot ships $10,600 during the first half of 2022 for the Company to be cash neutral. This is the DHT way, a robust structure to protect the downside, without giving away the upside. Then, we’ll discuss our Dry Docking Program. Continuing our efforts from the two prior quarters, we have again taken advantage of the weak spot market to bring forward dry docks. During the third quarter, we recorded 85 off-hire days in connection with dry docks. We expect another 100 to 125 days during the fourth quarter. The most recent and current dry docks are extending in time as quarantine rules for ships and crew entering the shipyard we use in China have tightened, resulting in additional waiting time. Additionally, when vessels come out of dry dock, they are typically handicapped in the spot market for the first voyage and have to offer discounts, and possibly encounter waiting time to commence trading. Hence, our spot earnings these last quarters were negatively impacted. For the first three quarters, we’ve capitalized $33 million in dry dock installations of scrubbers on ballast water treatment ecosystems. Our team is doing great efforts, and we will by year-end have dry docked 50% of our fleet, making these ships ready for what we expect to be a better market next year. For next year, there are only three ships scheduled for dry docks. The way we’re positioning the Company is a reflection of our constructive view on the markets. On the left-hand side, we illustrate the time charter versus spot exposure for our fleet. You will note that the time charter book is coming off from what has been a very beneficial level, building market exposure into strengthening fundamentals. On the right, we estimate the discretionary cash flows in DHT at different rate levels. As an example, if spot earnings are $50,000 per day for 2022, we estimate the discretionary cash flow to be $296 million, equal to $1.78 per share. This reduced operational leverage and significant upside that we have put in place. So, to round it up, we have a large quality fleet, and a strong and healthy balance sheet with 30% interest-bearing debt to total assets on a mark-to-market basis. We have a consistent and what we believe to be a well-designed strategy matched with a proven ability to manage business cycles. We introduced our capital allocation policy from the second quarter 2015, and it has remained consistent. On the market, we believe that the worst is behind us and see a market recovery in the making. The recovery is at a measured pace with elements in the oil market that drive our constructive view. These elements are: one, the recovery in the global oil demand post the COVID shock, in particular related to increased mobility; two, crude oil inventories having been brought down to pre-COVID levels; and three, OPEC+ responding with additional barrels to the markets. The positive dynamics can, among others, be led to improved refining margins. So, we think we are in great shape and are attuned for recovery. And with that, we open up for Q&A.

Thank you. Our first question today comes from Randy Giveans of Jefferies. Please go ahead. Your line is now open.

Hi, team DHT. How’s it going?

Great. How is Texas?

All is well, despite the Astros last night. But, that’s okay. So, I guess, looking at slide six, you returned a little over $10 million to shareholders, right? And that’s despite negative earnings in 2Q, and obviously 3Q now. How is that amount decided on? And secondly, for the share repurchases, it looks like you repurchased almost $7 million there. So, how was that amount determined? And was that just a result of shares trading well below NAV at the time?

It’s not a fixed formula for this. And the buybacks are somewhat optimistic. At the same time, there are some very clear trading rules about how we can buy back our stocks in the market. And lastly, we are price sensitive. And this is what we thought we could meaningfully do at the time when the shares were trading at these levels. And we are very happy that we had that opportunity. The amount is somewhat less than what we did in the prior quarter. But I think, also now, everyone should not expect us to continue these buybacks as the shares are now trading in line with NAV more or less.

Got it. Yes. No, that was my follow-up there, so. But the $0.02 dividend, that’s really the expectation now until you get more meaningful profitability?

As you all know, we have a capital allocation policy of returning a minimum of 60% from ordinary net income to shareholders. And we have a history of paying $0.02, so that we repeated red numbers. And then, assuming now that’s the recovery that several people expect to be in front of us, then, of course, there is a potential for paying more than $0.02 by applying this formula.

Okay. And then second question, looking at your fleet, you’ve obviously gotten rid of your older ships now with the Condor sale complete. How is your fleet currently? Is there any appetite for maybe some charter-ins or secondhand acquisitions? Or at this point, with your rolling off time charters, are you pretty happy with your current kind of operational exposure into what should be a better market in 2022?

So firstly, we are not planning to sell additional ships at this side of the recovery. We spent a lot of time and effort now in dry docking ships as you’ve seen and getting these ships ready for a different earning environment. That’s what we’ve experienced this year. But, I think you should expect that during such a market or at the tail end of that, we will consider divesting some further tonnage. We acquired three young ships, five-year-old eco-ships with scrubbers earlier this year, and we expect to sort of try to acquire more, but the prices appreciate too quickly frankly. So, we felt that levels became too high to buy ships. So, we decided to take a step back. At the prices, modern ships are sort of held up. So, you should not expect us to acquire more and more ships at this point. When it comes to chartering in, we don’t like that for a few reasons. One is that whether it’s bareboat or time charter, it’s essentially 100% financing on assets, whether it’s short period or longer period. And it will also disturb our cash breakeven focus. It will certainly increase that meaningfully, if you were to do that. And lastly, when you time charter ships, you’re not in control of the technical management and the vetting system on the ships. And that’s something which is very important for us in serving our customers that we are in full control of what we do on the asset side and with the crew and everything. So, that’s not in the cards.

Got it. Well, that makes sense. Thanks and good to see VLCC rates getting some light there. So, hopefully that continues. Thanks again.

Your next question today comes from the line of Jon Chappell of Evercore ISI. Please ask a question.

Thank you. Good morning or good afternoon. First question is on the time charters. Obviously, you have a few rolling off now in the fourth quarter. And I understand nobody wants to re-up contract coverage when you’re still bouncing along the bottom, especially after a period of time, but you’ve done a pretty good job balancing the fleet and clearly the recovery in the spot market is taking longer than anyone expected. What’s the ability in the market right now for maybe shorter-term charters, 6 to 12 months? And what are the current levels out there, if any, relative to the spot market today?

Yes, that’s a good question, Jon. The short-term charters are quite similar to the spot market for longer voyages. Currently, an equivalent scrubber ship earns around $20,000 for long voyages, and the short-term charters are priced at a slight premium to that. However, we believe that the flexibility we forfeit by pursuing these charters doesn’t make much sense for us. For a 12 to 24-month charter for similar ships, pricing could be in the low $30,000 range, possibly around $33, $34, or $35. This is an improvement and suggests that some clients are anticipating future needs and want to secure vessels for their portfolios. We are not aggressively seeking these opportunities, but we do have some core customers who might be interested in renewing charters as they near expiration. We will evaluate these transactions when the time is appropriate. As a transportation service provider, it is crucial to maintain relationships with core customers who engage in repeat business. So, we will see, but this is typically our approach, and we've had many similar situations in the past.

Okay. I mean, $33,000 to $35,000 for that period, and considering that the recovery is taking much longer than expected seems like pretty good business. And of course, you don’t put the whole fleet away; at least it provides a bit of a buffer. This leads to my second question, which is more market-related. It seems like every quarter we discuss how things are going to improve and the fundamentals are getting better. However, the next quarter is still anticipated to be challenging. I’ve been expecting a recovery by now, especially with November here. Can you address why this is taking longer? And what gives you the confidence that we will soon reach a point where the market improves significantly enough to justify maintaining the spot exposure into next year?

I believe we have set more modest expectations for the market compared to others. Even during the last earnings call, we indicated that the recovery is progressing more slowly than many anticipate. The impact of COVID was severe, and we have not yet returned to pre-COVID oil consumption levels. According to various leading agencies, it may take until the end of next year to reach those levels again. In the meantime, the fleet has expanded, meaning there are more ships today than there were just before COVID. This has created an imbalance in the market, and scrapping activity has been rather quiet as many older ships are being used in less legitimate trades. Although scrapping has recently started to increase, with 17 ships removed from the fleet so far this year, some of these came from storage. We are also noticing that some ship owners are purchasing newer vessels to replace those storage units. While there is some adjustment happening, it is not sufficient at this stage. We view this entire recovery as a slow-moving process. Although we believe some improvements are on the horizon, there are currently no unexpected factors causing setbacks to recovery. The lifting of sanctions could significantly alter the situation, particularly if Iran fully re-enters the market, but this was anticipated for the second quarter of this year. Bears on Iran are now looking towards next summer, and while I can't provide any clearer insight, that remains a potential event that could lead to substantial changes.

Your next question today comes from the line of Omar Nokta from Clarksons Securities. Please go ahead.

Hey, Svein. I wanted to follow up on our discussion about Jon. You definitely sound more optimistic about next year compared to three months ago. You mentioned that DHT believes the recovery will take longer than many expect. In light of that, I wanted to understand how positive you are about the situation, considering that circumstances can always change. With OPEC+ planning to increase production by 400,000 barrels a day each month until next September or October, do you think we could see a recovery happening before the end of this production increase, or will we need to wait until next fall for a significant recovery? Any insights you can share would be appreciated.

I think, as I’ve commented, the recovery so far is measured and we expect it to continue to be measured for a little while longer. But, we now have for modern ships in the spot market, $20,000, maybe plus even. And at this pace, you will have sort of profitable levels coming out, not too far out. But, there are some smaller things happening in the market that will have an impact beyond just OPEC+ adding barrels. I guess, as you and most people have seen, the rocketing gas prices is now having some impact on what’s going on in the sense that the gas is also used by refineries to decentralize the crude that they consume. And as the gas is not very expensive, refiners are looking to buy more light suite to avoid the sort of medium to heavier sour stuff and use gas. And this type of oil is predominantly being loaded from the Atlantic. So, you see maybe some ton mileage expansion now just in sort of compared to what we have seen in the last 12 to 24 months. This is maybe a smaller item, but it is really all those things that we need, right, to sort of push the needle in the right direction.

Okay. Yes. Thanks for that. Because I did want to follow up, and I think you answered that to some extent. I was going to see if you have noticed from your vantage point if charters perhaps were acting any differently, especially with high energy prices and inventory is continuing to come off, especially with us approaching winter. I was going to see if you have seen any noticeable changes, whether they’re looking to take ships on charter, as Jon had sort of been asking about, or if they’re looking to fix ships on the spot market, maybe earlier than we’ve been used to seeing, anything there you can add?

There’s definitely more interest on the time charter front. So, that’s for real, and I think that’s the reflection of whether it’s being in its traders or real end users. So, they would like to have ships, so they need to have ships. And this is I think simply a reflection of their view of the market and the expected activity that they will have. So, that’s definitely happening. So, I think that’s sort of a leading indicator, if you like. The overhang of ships has reduced quite dramatically these last few months after OPEC started to add barrels. So, this means that the charters are now entering the market at a more normal pace, trying to fix ships. I think, earlier, they took their own sweet time when the overhang was much greater. So, there is a change in all this dynamic. But, my point is that it’s not going to be sort of rapid, but it is happening steadily and measured, and eventually, you come to the tipping point when you’ll get some traction on rates.

Yes. Very good. I’ll keep our eyes open for that tipping point. Thanks, Svein.

Thank you. Your next question today comes from the line of Magnus Fyhr of H.C. Wainwright. Please ask your question.

Yes. Thank you. Good afternoon. Just a follow-up question on the market sentiment. You mentioned that you would entertain some time charter from some of the key customers. Time charter coverage has been as high as 50% in the last 12 months. Is there any preferred level going forward as far as seeking? I mean, I guess we believe that the market probably has hit the bottom and we should recover going forward. Is there a preferred level to keep this lead from spot to maintain the upfront, or how would you structure some of those contracts?

We are straightforward businesspeople. We focus on the current situation. When rates are at significant levels, we aim to engage as much as possible in time charters. Last year, we secured many time charters at very favorable rates. This summer has been quite exciting. Therefore, you can expect that once rates reach meaningful levels again, and depending somewhat on the general market trends, we will look to increase our coverage once more. There is no set percentage to aim for. It's important to note that the time charter market for large ships is somewhat limited, with not a lot of business available across the entire fleet. Thus, it's essential to have customers in our portfolio who participate in time charters and offer us the chance for repeat business. We believe we are in that position. Once we see significant margins, we will actively seek to engage again.

Thank you. I have a question about the dry docking. You mentioned three ships going into dry dock next year. What are your thoughts on possibly moving those dates up? How are you planning to approach this?

So, the plan on the schedule is one for the first half and two in, I think, the third quarter. So, it could be that we, for some reason, have an opportunity to bring them forward, depending a bit on the market and all of that and yard capacity and equipment that’s going to be delivered and so forth. But, that’s a tentative schedule.

I guess, one final question, just on the cost side, have you seen any changes here? You mentioned that there’s an increase in time for dry docks. But in general, as far as the daily OpEx, do you see that kind of normalizing here, or are you seeing potentially more cost for COVID-related expenses?

I think we managed our OpEx side quite well during these times, but there has been additional cost and time related to crew changes, in particular, so. And this crew change story is still a very big challenge for the industry. I think, every ship owner has got a crew that is staying on board longer than originally planned or have to take some time and deviations into ports for crew changes is possible, and it depends on nationality. So, it’s still a very, very difficult task. And hats off to the guys we have that are running, and crewing. So, there’s marginal cost. But, as you see, Laila addressed, we have $7,800 year-to-date on our OpEx side. And that includes all the overhead cost of the shore-based staff as well related in the technical department essentially. So, I think that’s still a very good number.

No, I agree. Thank you for the flavor though. So, thank you. That’s all I have.

Thank you. Your next question today comes from the line of Ben Nolan of Stifel. Please go ahead.

I have one question regarding the recent market activity. There has been talk about potential consolidation among two of your competitors in the VLCC sector. I'm interested in your perspective, especially since you've engaged in similar activities with BW in the past. Do you believe there are advantages to economies of scale from either a shipping or capital markets viewpoint? Are you actively considering this, or are you more of an interested observer?

From an industrial standpoint, we believe we are adequately sized. Our customers are not requesting more ships or expressing dissatisfaction with our fleet size, which is certainly sufficient. We have a substantial presence in the market. Regarding debt financing, we are securing financing on terms that are equal to or potentially better than those of our peers, including larger firms. In terms of equity markets, our stock is performing favorably relative to its true value and is trading better than some larger competitors. We are not convinced that simply increasing size will resolve the issues at hand. We often note that the push for consolidation is primarily fueled by bankers seeking to earn fees, rather than being driven by shareholder demands. Our company has a strong group of owners, none of whom are urging us to grow just for the sake of it or to measure the economic impact of such a strategy. While there may be some advantages in general and administrative costs with size, those impacts are not the main focus for shipping companies. We have shown in the past, as mentioned, that we acquired Samco Shipholding in 2014 and a fleet from BW in 2017. We remain open to exploring valuable opportunities that would benefit DHT shareholders.

Okay. That is helpful and straightforward. I appreciate that you always provide clear information and make things easier for us. Thank you.

Thank you. We have one more question at this time. Your next question comes from Robert Silvera, Marine Surveyors. Please go ahead.

Hi. I’d like to talk a little bit about the debt and the fact that you guys have reduced the debt in a little over a year from over $900 million down to $525 million. If you see the market, which we’re anticipating, we’re at the bottom, it is going to turn up, and the profitability starts to get like it was in early 2020. Do you see, again, more aggressive debt reduction, or are you just satisfied with the normal amortization rate?

Well, I think, our actions in the past to do prepayments of debt to strengthen the balance sheet was, of course, a result of rewarding markets. And when we allocate capital, a good portion of it will go to the shareholders. We will then use the other portion to either invest when the time has been right or to reduce debt. And I think you should expect more of the same in the future. This business is certainly a very cyclical and volatile business. And I think it behooves the Company to have as strong a balance sheet as you can have and maybe even lower debt per ship than what we have today, to give you even more flexibility. So, I think that should be expected. Yes.

Wonderful. Yes, the year-over-year reduction in interest expense highlights the excellent job you all have done in anticipating and capitalizing on favorable conditions. I commend you for that. I also have a question regarding the significant increase in your consumable inventory, including fuels. Was this due to a decline in business activity, or did you foresee a rise in oil prices and choose to stockpile additional inventory?

That’s a very good observation. Essentially, it relates to bunkers. When we receive ships back from time charter, we need to account for the remaining bunkers on board. This affects our inventory and working capital. With greater spot exposure, oil prices can impact this as well, but we do not engage in speculation on bunkers. We do not purchase fuel oil or bunkers with the expectation that rates will increase, as the freight market for tankers is determined by world scale, which includes bunker costs. There is a strong correlation between that and freight levels. Therefore, we only buy bunkers when we fix the ship, and we do not hedge bunkers either.

Okay. Well, you ended up doing a real good job because it’s nice to have that extra, while the prices of oil have grown over $80 a barrel. Thank you. That’s all my questions. Congratulations on doing a real great job, especially continuing to reduce the debt.

Thank you, sir. Wishing you a good day.

Your next question today comes from the line of Chris Tsung of Webber Research. Please go ahead.

I apologize for asking if somebody asked earlier, I got dropped off the queue, or the call rather. But, were you guys able to break out the amount based on the spot for Q4 and what the rates were?

We can do that for you. So, for Q4, it’s 59% at $13,700 per day.

Thank you. And I see it in your press release, the $300 million from DNK for insurance. Can you explain what this is for? And how much we should anticipate for building tax, what the rough ranges would be?

So, this is sort of a mutual club, right? And they build up a capital base that belongs to its members. The club has decided that part of this capital should be then returned to its owners, if you like. So, it’s a capital reduction in the units, and we will be entitled to an amount in the range of $5.50 million to $6.5 million. We expect that to be received in the first quarter next year. So, we don’t think tax could be in the sort of 25% range. But all this has to be determined. So, that’s why we’re not more specific in the press release. So, don’t unrest us on the exact number, but it could be in that range.

Yes. No, I understand. That’s super helpful color. And I guess, this is like just a one-time payout. We shouldn’t expect this again anytime soon?

That’s correct.

Cool. And lastly, for the dry docking program, it looks like it’s about $3 million or so CapEx per vessel. Is that a good run rate for the 3 in Q4 and 3 in 2022?

I think, you can follow up offline with Wilhelm on that. So, the ships next year are a bit different vintage. There is less sort of equipment installation and stuff like that. So, feel free to follow-up directly with him.

Okay. Yes, we’ll do. Thank you so much. That’s it for me.

Thank you. This comes from the line of Michael Moscow of MRM. Please go ahead.

I appreciate it. Can you elaborate on when you mentioned that if they lift sanctions, it could change the landscape in what way? Additionally, I participated in a Capital Line conference with the tanker CEOs of Euronav, INSW, and Frontline, and they all anticipated that by the end of next year, VLCCs would be over $40,000, based on some of the points you highlighted in your press release. I would also like to hear your thoughts on that. Thank you.

So to your first question, today, Iran is selling a portion of their oil under the embargo, which means they have to sell it at a discounted rate and rely on ships willing to transport embargoed oil, paying extra for those vessels. These are the older ships involved in this trade. If sanctions are lifted, that oil will then be traded at market prices, and they will have access to shipping at those market rates as well. We believe the older ships currently in sanctioned trade will go out of business, benefiting the rest of the fleet, which is considered the normal fleet. As a result, we expect those older ships to no longer be part of the scene. The net outcome of this would be a smaller fleet and increased oil availability in the market, which is why we view this as a potentially positive development. Regarding your second question, I have 30 years of experience in this industry, and I am not ready to provide that figure.

You’re hesitant to give the number.

I will not provide a number. But, when we sort of give out these opinions on the direction of the market, that is a genuine belief. So, let’s see how it will play out.

Okay. I appreciate it. Thank you so much.

Thank you.

Thank you. It appears there are no further questions at this time. Svein, back to you.

Thank you very much to everyone for staying tuned on DHT, and wishing you all a good day ahead. Take care.

That does conclude our conference for today. Thank you all for participating. You may now disconnect.