DHT Holdings, Inc. Q4 FY2022 Earnings Call

Thank you. Good morning and good afternoon, everyone. Welcome, and thank you for joining DHT Holdings fourth quarter 2022 earnings call. I'm joined by DHT's President and CEO, Svein Moxnes Harfjeld. As usual, we will go through 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 February 16. 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 as detailed in our financial report. 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. Our balance sheet is in excellent shape. The quarter ended with $126 million of cash. And in addition, the company's availability under our revolving credit facilities was $234 million, putting total liquidity at $360 million as of December 31. Financial leverage is about 19.4% based on market values for the ships. And net debt per vessel was $11.8 million at quarter end, which is significantly below current scrap values. Reflecting on the strong freight market and our competitive cost structure, EBITDA for the fourth quarter was $95.4 million with net income at $61.8 million, equal to $0.38 per share. OpEx for the quarter was $19.9 million and included some periodical variations, mainly related to stores and spares. G&A for the quarter came in at $2.8 million. In the fourth quarter, the vessels in the spot market earned $63,800 per day and the vessels on time charter made $36,100 per day. On average, the achieved TCE for the quarter was $56,900 per day. The first three months of 2022 was more or less breakeven. Our net income for the full year came in at $62 million, equal to $0.37 per share. DHT continues to show a very stable and competitive cost structure, and OpEx for the year was $73.8 million, equal to an average of $8,250 per day for the fleet. On the next slide, we present the cash bridge for the quarter. We started the quarter with $65.7 million of cash and we generated $95.4 million in EBITDA. Ordinary debt repayment and cash interest amounted to $9.5 million, $4 million of new debt was issued in connection with the refinancing and $7.5 million was allocated to shareholders through the dividend payment. In December, we prepaid $23.7 million of long-term debt and the quarter ended with $125.9 million of cash. In the fourth quarter, we entered into a $37.5 million refinancing of DHT Taiga with Credit Agricole. The facility is repayable in quarterly installments of $625,000 per quarter with a final payment of $22.5 million in addition to the last installment in December 2028. The new loan bears interest at a rate equal to SOFR plus 205 bps, which is equal to LIBOR plus 179 bps. As mentioned on the previous slide, in December, we prepaid $23.7 million under the Nordea credit facility. The voluntary prepayment was made for all regular installments for 2023 and reduces the company's cash breakeven levels for the year. In January, we entered into a $405 million secured credit facility, including a $100 million uncommitted incremental facility. The new facility will refinance the outstanding amount on the ABN AMRO credit facility and is secured by 10 of the company's vessels. The facility is repayable in quarterly installments of $6.25 million, equal to $625,000 per vessel with maturity in January 2029. The new loans bear interest at a rate equal to SOFR plus 190 bps, which is equivalent to LIBOR plus 164 bps. As I mentioned, refinancing of the Credit Agricole and the ABN AMRO credit facilities are in line with DHT-style financing, which includes a 20-year repayment profile and a 6-year tenor. Subsequent to these refinancings, DHT's weighted average cost of outstanding debt and revolving credit facilities is equal to LIBOR plus 177 bps. With that, I will turn the call over to Svein.

Thank you, Laila. We announced our new dividend policy last year. With our strong balance sheet and low newbuilding CapEx, we simply think our new dividend policy could distribute 100% of net income to be a good business. And as promised in our last earnings call, we are showing you the money. Based on the '22 fourth quarter financial results, we will pay $0.38 per share as a quarterly cash dividend on February 24 to shareholders of record as of February 17. In connection with our new dividend policy, we will on a regular basis inform the market on how much our ships have made on a time charter equivalent basis. This advice will be released shortly after every quarterly close, so well ahead of our quarterly financial results. Additionally, we will at the same time advise of bookings made to date for the subsequent quarter. The purpose is to be transparent and to guide on our ships' earnings, thereby assisting you all in setting our expectations for our financial results. We are here updating you on our bookings to date for the first quarter of '23. As you will see, we expect 510 days to be covered by our term contracts at an average rate of $33,900. We expect to have 1,390 spot days for the quarter, of which about 66% has been booked at an average rate of $56,400 per day. Combined, and as of today, this indicates bookings of 75% of the total days at weighted average earnings of $48,400 per day. In the last line, we are estimating the spot P&L breakeven for the first quarter, allowing you to model a net income contribution based on their own assumptions for the unfixed spot days. You saw a dip in the freight rates towards the end of last year and there were decent resistance levels reflecting on the underlying market balance. Based on what we see now, we expect rates to improve for the balance of the quarter. We think our plan for guiding will make good sense in relation to our new dividend policy. On this slide, we are sharing our estimated breakeven levels for the year of '23. The estimated P&L breakeven for the fleet as a whole is about $27,200 per day. This includes the increased annual depreciation of $7.2 million related to our retrofit program for exhaust gas cleaning systems. When adjusted for the fixed income that we have, the P&L breakeven for the spot fleet is about $25,400 per day. The estimated cash breakeven for the fleet as a whole to be $18,100 per day with the spot ships requiring to make $14,200 per day for the company to be cash neutral. Keep in mind that our cash breakeven numbers include all true cash costs, i.e., OpEx, G&A, maintenance CapEx, cash interest and debt amortization. This illustrates a headroom of about $9,000 per day between cash breakeven and net income breakeven levels for the fleet with these potential cash flows being allocated to general corporate purposes. Here, we provide you with an update on our project to retrofit the remainder of our fleet with exhaust gas cleaning systems. We have to date completed 2 of the retrofits and have 2 currently at the yard. Another 2 will enter the yard later this quarter and the final 2 early in the second quarter. The project is developing according to plan, both from a cost perspective and in terms of planned days for the ships. The fuel spreads are holding up well, resulting in premium earnings for the ships with systems installed. We are not facing any operational issues and are pleased with our decision to fit the last decks of our ships with these systems. Following this, our entire fleet will be fitted with exhaust gas cleaning systems. Additionally, these ships are attracting increased interest from customers for long-term charters. There are very favorable fundamentals in our markets, and we expect this to have legs resulting in good earnings from the tanker sector. We see the early innings on the impact of China's reopening. The size of the announced second batch of crude oil import quotas for refiners in China suggests expansive domestic demand requiring increasing refinery runs. Non-OPEC supply is growing, supporting longer haul transportation. Additionally, geopolitical events are disrupting certain trades, reducing the productivity of the larger fleets. This disruption is not expected to disappear anytime soon. And as we all know, there's hardly any new supply of ships coming in. The VLCC order book now stands at 2.2% of the sailing fleets. The older part of the fleet is growing quickly with about 14% of the fleet being older than 20 years of age and 30% being older than 15 years. These numbers will expand rapidly over the coming years and at the time when regulatory requirements are expected to result in reduced speed for a good part of the fleet. An increasing number of ships are engaged in trades either partly or fully sanctioned. This fleet is also referred to as the shadow fleets. Although these ships currently serve a purpose in the greater market, we find it hard to believe that they will stay in business over time or ever return to the compliant markets. We believe this could be viewed as the new scrapping in due course and our expectation is that the fleet will start shrinking over the next couple of years. So going forward, our plan is clean and simple. You should expect continued strong discipline in executing our business model and strategy. We have a great team of people in a no-nonsense company culture, all focused on delivering safe, reliable services to our customers and strong results for our shareholders. We are tuned for rewarding times with the quality of fleet and ships all in the water, a rock-solid balance sheet, premium revenue generation and a low cost structure. We think returning 100% of net income to shareholders to be fair and square and good business. And with that, we open up for questions.

So I noticed you had a debt capacity this quarter by $100 million. So could you talk about a bit your leverage position? And in general, would you be willing to increase debt on your existing ships to pay for the extra portion on potential new investments?

So our investment strategy is very much countercyclical. And by building the balance sheet that we have done and likely we'll continue to do, this of course, forced the company to have investment capacity when we find the time to be right. And the sort of core of this is that we should hope and want to expand at the right time organically, i.e., without having to rely on new or external capital to do it. So if we can have a balance sheet that has the capacity to invest, those investments will be highly accretive to our owners. So that is the simple plan.

And a small follow-up. You still have a few older vessels in your fleet which has seen quite a significant increase in volume. So how do you look at these assets today and how is your decision process in making divestment decision now?

I think it's unlikely that we will divest additional ships at this juncture. These ships are really high quality ships. They are used to service our customers. They make good earnings. And we expect them to continue to make good earnings in this tanker market going forward. So they are not sales candidates anytime soon.

Two quick ones for you, Svein; one on DHT-specific and one on the broader market. Just to DHT, to be clear, I think the payout ratio is perfectly clear and makes a ton of sense given your balance sheet and where we are in the cycle right now. But does that make fleet expansion and/or modernization kind of a mutually exclusive decision or do you still have the capabilities whether it's through adding finance or the part of the cash flow and not the net income that you're not paying out to consider that?

Well, 2 things to that. I mean, this is a very relevant question. So of course, our balance sheet with the current leverage ratio has the capacity to increase the debt level, if you like, to make investments. But we do find that the current asset prices are sort of too high to our liking to invest. So there is no sort of immediate urge to do that. But in due course, that is the way we are building investment capacity. As we also tried to illustrate on the deck, there is a meaningful difference between net income and breakeven and cash flow breakeven. So we will be able to continue to build some level of funding that can be used for either investments or even further deleverage if we have to. So let's see how all that plays out. But the size of our balance sheet is quite meaningful. And I think you should expect us to have the capacity to make a splash, if you like, when the time is right and then there's more also clarity on ship designs.

On the market, this cycle is unique; typically, VLCCs lead the recovery in both timing and magnitude, but that hasn't occurred this time. Given that a significant portion of the ton mile expansion has been driven by midsize vessels and considering OPEC's ongoing cuts this year, what is your outlook on the historical relationship between VLCCs and midsized crude as we move into 2023 and beyond?

These past nine months have been frustrating, especially for a company focused solely on VLCCs. However, I believe that over time, the situation will tend to stabilize, as transportation costs are important for our customers. While it may not be a quick solution and smaller ships might still have an advantage in the near term, it's important to remember that VLCCs transport nearly 50% of seaborne crude. A significant portion of the new oil entering the market this year is located in the Atlantic and is primarily for large clients, particularly new refineries in China. We don't expect this oil to be diverted to smaller ships, as that would be inefficient and cause issues at ports, including delays and congestion. There seems to be a strong preference among major clients to continue using larger ships. It is challenging to predict when conditions will return to normal. As I've mentioned, we don’t anticipate the current disruptions to resolve immediately; they are expected to last a little longer. However, this doesn’t mean that profitability will be hindered. For instance, in the first quarter, we secured contracts well above $100,000 a day. I believe this can continue, and the smaller asset class is not holding us back.

Just wanted to follow up maybe on Jon's question. We've seen some fits and starts of the VLCCs over the past 6 months or so; a strong run-up in the fall, a pullback here back in December, January and some momentum in the past couple of weeks. Can you maybe just give us a backdrop of what's been driving some of this volatility in your eyes? And then what you think is in store for this market over the next few months? Just some big picture perspective.

I believe some of the volatility was linked to imports to China and China's crude buying in the fourth quarter. However, we see this situation improving. In the last couple of weeks, the rates have increased by over 10 work scale points and continue to rise. The cost for shipping to the Far East has also increased by at least $1 million and is still on the upswing. This activity is largely driven by crude purchases in anticipation of China reopening. The quotas for crude oil imports and refined oil exports are both significantly strong, though there is some imbalance favoring imports. This suggests that there is an expectation for domestic demand in China to grow substantially, which we believe will continue to push rates for large ships higher.

You mentioned the Atlantic Basin earlier, and the SPR was a significant driver of volumes late last year, but we haven't observed any real SPR releases this year. Is that impacting VLCC cargo demand out of the U.S. Gulf, or has it not yet led to any reduction in volume?

It is expected to have a positive impact up until the beginning of the fourth quarter, but U.S. production is anticipated to rise. Europe is taking in some of those additional barrels in Very Large Crude Carriers. Previously, these were shipped on smaller vessels. As a result, several of our ships are trading to Europe with multiple port discharges. Therefore, it's not solely about the Strategic Petroleum Reserve; there is demand for that order and production is increasing, though not substantially. Brazil, the North Sea, and Guyana are all experiencing growth, so there are other regions involved, not just the U.S.

And just touching on West Africa, that was a bit of a laggard last year. Although there's been some positivity recently, are you seeing any increase in volumes in that region?

Mostly, it's been sort of sideways. I think they certainly have the potential to ramp things up if they can, for a lack of better word, get back together on many fronts. So there's still a lot of sort of disruptions and difficulties there, but they have the ability within OPEC quotas to increase production. And I think where the oil prices are, they have all the commercial incentives to make it happen as well. So we can only assume that they are working on trying to make it happen. So yes, let's see.

I wanted to just touch on your retrofit program. It looks like you were able to complete 2 of the 8 and you have a few more now entering Q2. I was just curious, is this a function of where the spot market was in Q4, availability at the yards to retrofit these vessels, lining downtime with their dry docking schedule? Just trying to get a sense of what's going on there.

So you have this spot on. So of course, the rates were very strong in the fourth quarter. So we had the opportunity to take ships to the yards in November, if we wanted to, but we decided to push it back. And these voyages are quite long, so you do quickly go a couple of months out or 3 for your sort of next position. So 2 completed sort of in the first half of January. We have 2 in the yards now that will come out shortly. And then another 2 going in, in sort of early March. And the last 2, we expect early on the second quarter. And as I said, the timeline is according to plan. We plan for 30 days per ship. We're probably slightly improving on that, but that's sort of early days. We don't see really any challenges with the yard in terms of capacity to get these things done. So it's not driven by that in terms of yard capacity.

I noticed that there seems to be a consensus view that the tanker fleet is shrinking, as you mentioned earlier. What would it take for you to consider investing in fleet expansion? Additionally, would you prefer newbuilds or purchasing used vessels?

If we decide to purchase ships, they need to be eco-designed, specifically those built in 2015 or later due to their better fuel efficiency compared to older models. We will also consider new builds, but we need more clarity regarding the future fuel types in our sector before making any orders. We are not in a hurry to place any orders right now, and we would prefer prices to be more favorable before investing our capital. Currently, we have 23 ships operating, all generating profits, and the company is expected to be profitable based on most earnings forecasts, so we will continue steadily.

I was just wondering, you said in your comments that you see an increase in interest for your vessels that you fit to discoveries for period business. Are you contemplating to do additional term business or are you happy with the mix that you have between spot and term at present time?

No, it's part of our plan to build more fixed income. And because we want to build that book in a measured way and take one step at a time and liquidity is not sort of super deep, but there is an increasing number of clients now asking for term contracts and the tenants are also getting longer and rates are going up. So you should expect us to eventually build more fixed income. But there has to be the right ships, the right counterparty, the right structure, the right money and all of that. So it's not as quickly done as fixing a spot ship.

And any guidance in terms of what would be your ideal mix in terms of the sense of capacity and duration?

So I'll give you a simple answer. So the higher the rates are moving, the more we will be willing to fix for longer. So we are sensitive to the money, right?

And I wanted to compliment you, we consider ourselves long-term investors. And I watched a few years ago when your long-term debt was over $900 million. And because of the way you run the company and the rates that surged back aways, you've brought it down to about $300 million, under $400 million, which I think is an amazing achievement on your part of good management. We as shareholders look at the $0.38 dividend and the fact that it's 100% of the earnings as a nice and generous on your part, but we would personally like to see you issue like half of that dividend and the rest of it go again to prepayment of debt, because of the things that are going on in the interest rate markets, I don't see interest rates going down, particularly in a hurry again and that this company gets stronger and stronger with the minimum of debt, minimizing the debt, and it will put you in that position you spoke of strategically to move when the time seems right to move, because you have a rich cash position and a balance sheet with very, very little debt. So that's where we're coming from. And is there any chance that you would shift to a position of increasing the debt reduction rate?

We have a fresh dividend policy that we announced last year. We have carefully considered how to approach this, particularly in light of our comfortable capacity to continue reducing our debt. In the recent report, you can see that in addition to distributing 100% of our net income, we also made an extraordinary prepayment of all the amortization for one of our largest facilities at the end of the fourth quarter. This is part of our ongoing effort to improve our balance sheet. Additionally, there is about a $9,000 daily difference between our P&L breakeven and our cash breakeven, translating to around $70 million annually, which can vary based on our operational days and docking schedules. This capital will be used for general corporate purposes, including potential investments or further debt prepayments. This year, our cash flow breakeven includes ordinary debt repayments of $30 million. We aim to manage this wisely. While there are various approaches, we believe we have found a good balance between enhancing our balance sheet and rewarding our shareholders.

I agree that you've done a wonderful job. I'm just encouraging you to reduce the dividend a bit and focus more on debt reduction, as I believe it will benefit us in the long run. The share price is likely to increase with lower debt. Additionally, I have a question regarding your mention of a parent. I wasn't aware that we had a parent company, and I would appreciate it if you could provide more details about that reference in the report.

In this context, DHT Holdings, Inc. is the parent. So it's no other parent. It's DHT Holdings, Inc.

Thank you for the clarification. Well, just keep on doing the great job that you've been doing. We've been with you for years and we're really pleased. I think you're one of the best crude oil shipping companies in the world in my opinion and in the company's opinion.

I don't mean to get into a debate with the prior caller, but you rightfully point out that you have $125 million approximately in the depreciation expense, non-cash, which is available for debt repayment and/or purchase of new ships. And so there's plenty of debt capacity if you pay out 100%. My question has to do with the policy itself. When the announcement was originally made, it was effective immediately. If all things change, if it were to change to something other than 100%, would that change also be effective immediately or would that change be announced and effective after a 6-month period or a 12-month period or a 24-month period or some other timeframe? So the question is really, if it were to change, could it be done effectively immediately?

That's a good question. I believe that for any changes to this new policy to occur, there would need to be significant strategic shifts or major transactions that require a different approach. If that happens, we should notify the market and our stakeholders well in advance, possibly starting next week. Our goal has always been to create a company that can reward stakeholders through dividends, which also involves maintaining lower leverage. This is a key principle for us, as we aim to be a stable company that provides visibility to our owners. In the past, someone mentioned that they appreciated our consistency in delivering what we promised, and we've taken that to heart.

I'd like to go back quickly to the dark or shadow fleet. What do you estimate the size of that fleet is? And presumably, we define it as ships owned by Russian interest. And can you comment, and perhaps it's speculation, towards the longer term ramifications of this ownership. Do you believe that they will behave in the marketplace like someone who is a commercial operator or do they have a little different agenda that may cause them to ultimately make the market tighter, worse? Can they weaponize this ownership of critical world infrastructure?

That's a complex question. There are some nuances regarding the shadow fleet. You have the trade that is fully sanctioned, which involves transporting crude from Venezuela and Iran. Then, there's the partially sanctioned, or self-sanctioned, transportation of Russian crude oil. In the last six to nine months, we've observed a considerable amount of funding being directed to companies in Dubai, whether they are Russian-owned or not. The source of these funds is crucial for us to understand the dynamics at play. We believe that many businesses purchasing older ships are financed by Russian capital in various forms. They acquire these ships to transport Russian crude oil, often at a significant premium, allowing them to earn more than compliant market prices. This creates a strong commercial incentive for them to engage in this practice. I'm not aware if they have any political or military agendas linked to this. Earlier this week, one of the largest trading firms suggested that the shadow fleet could be expanding toward nearly 600 ships, including not just VLCCs, but also Suezmaxes, Aframaxes, and product tankers carrying refined goods. They are likely monitoring this situation closely to avoid becoming involved in any undesirable circumstances. This issue is indeed becoming significant, and it's possible that the policymakers who established the current sanctions anticipated this outcome as a form of collateral damage while attempting to restrict these countries' oil-related revenues. However, there are several flag states that register many of these ships, and we doubt whether they are effectively monitoring compliance with laws and regulations. There's a lot of unclear activity happening. We can only hope that the politicians who initiated these sanctions will also address these complexities, as there are safety concerns. For instance, having a large oil tanker with two million barrels operating near populated areas, such as the Singapore Strait or the West Indian Coast, raises safety issues. Unfortunately, it may take a serious incident for this situation to gain the attention of policymakers.

There seems to be no further questions at this time. So we'll hand back for closing remarks.

So thank you very much to all for following DHT, and we wish you all a good day.