Earnings Call Transcript - DHT Q2 2023

Laila Halvorsen, CFO

Thank you. Good morning and good afternoon, everyone. Welcome, and thank you for joining DHT Holdings' second quarter 2023 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 on our website, dhtankers.com until August 16. In addition, our earnings press release will be available on our website and on the SSE EDGAR system as an exhibit to 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. DHT continues to show a solid balance sheet represented by low leverage and significant liquidity. At quarter end, financial leverage was about 18% based on market values for the ships. And net debt was just above $11 million per vessel. The quarter ended with total liquidity of $359 million, consisting of $131 million in cash and SEK 228 million available under our revolving credit facility. Now over to the P&L highlights. It was a strong quarter with robust spot rates for the VLCCs, and we achieved revenues on a TCE basis of $113 million and EBITDA of $90 million. Net income came in at $57 million, equal to $0.35 per share. Reported vessel operating expenses for the quarter were $19.7 million, and G&A was $4.5 million. Included in the OpEx number for the quarter were some advanced costs for spares and consumables associated with ships that have been in the order in connection to some nonrecurring items. The vessels in the spot market earned $64,800 per day, and the vessels on time charters made $36,200 per day. The weighted average TCE achieved for the quarter was $56,300 per day. Earnings were impacted by 61 scheduled off-hire days in connection with the installation of exhaust gas cleaning systems for 3 vessels and unscheduled off-hire mainly related to the repair of a metal. On this slide, we present the cash flow highlights. We started the second quarter with $117.5 million in cash, and we generated $90 million in EBITDA. Ordinary debt repayment and cash interest amounted to $13.6 million, and $38 million was allocated to shareholders through the cash dividend pertaining to the first quarter of 2023. In addition to the cash dividend, we also allocated $9 million to shareholders through share buybacks during the quarter. $20 million was invested in our fleet with $1.8 million in maintenance CapEx, $8.6 million for installation of exhaust gas cleaning systems, and $9.5 million through a deposit for the acquired vessel. The quarter ended with $130.6 million in cash. Switching to capital allocation. In line with our dividend policy to pay out 100% of net income to our shareholders, we will pay $0.35 per share as a quarterly cash dividend. The dividend will be payable on August 30 to shareholders of record as of August 23. This marks the 55th consecutive quarterly cash dividend, and the shares will trade ex-dividend from August 22. In addition to the cash dividend, we repurchased 1.1 million of the company's shares during the quarter for a total consideration of $8.9 million. The average price for the shares was $8.25 per share, and DHT's policy is to retire the shares upon receipt. With that, I will turn the call over to Svein.

Svein Moxnes Harfjeld, CEO

Thank you, Laila. We have finalized an agreement to acquire a 2018-built B2C vessel for EUR 94.5 million. This ship has been constructed to high specifications and includes a large deadweight capacity along with an exhaust gas cleaning system. We expect this addition to enhance our earnings and improve our fleet efficiencies, which includes metrics like our AER and EEOI. We capitalized on the recent dips in the freight market and completed our last retrofitting projects for exhaust gas cleaning systems this quarter, meaning all our vessels are now equipped with these systems. After the quarter, we established a 10b5 program which may allow us to buy back shares, leading to an acquisition of 250,000 shares at $8.46 each. We took delivery of the newly acquired vessel last week, now named DHT Appaloosa. This vessel was financed using available liquidity, but we have secured a commitment for a new secured credit facility of $45 million, which we plan to utilize in the third quarter. This facility has a DST-style structure comprising a 20-year repayment schedule and a 60-year tenure, priced at the sulfur plus a margin of 180 basis points. In terms of a brief fleet update, the DHT Appaloosa was delivered last week and is currently undergoing a first special survey in dry dock. We have four time charter contracts that are either concluded or are set to conclude this quarter. Both the DC Mustang and the DSC Stellan have returned to our fleet. The DSD Cote is expected to return later this quarter, and the DHT Amazon contract will end in Q3 or early Q4. Subsequently, we will have four vessels on time charters and 20 ships available, which we anticipate will perform well in the freight market. This quarter, we plan to dry dock four vessels, three of which were moved up from their scheduled surveys in the fourth quarter. We believe we are strategically taking advantage of the current freight market to prepare these vessels for future opportunities, thus we do not have any dry docks planned for the fourth quarter. Moving to our third quarter outlook, we expect 530 days to be covered by our term contracts at an average rate of $3,500 per day. We anticipate 1,560 spot days for the quarter, with around 1,090 of those days, or about 70%, already booked at an average rate of $46,300 per day. Currently, this indicates combined bookings covering 78% of the total days for the quarter, yielding weighted average earnings of $42,800 per day. You can compare these spot booking figures to our estimated spot P&L breakeven of $25,000 per day for the third quarter, which will help you model net income contributions based on your assumptions for the unbooked spot segment. So far this quarter, the market is performing better than the expectations for a typically weak third quarter. The accompanying graph shows that the recent dips this year are higher than the seasonal lows observed over the past five years. Additionally, the increase in transportation distances is driven by current seaborne crude volumes, which are at the upper end of historical ranges. This indicates to us that the market is balanced to tight and can quickly respond to rising freight rates. Currently, the market is slightly lower than at the beginning of the quarter and is predominantly moving sideways. A vessel equipped with an exhaust gas cleaning system presently commands around $30,000 for a round trip in the East and approximately $40,000 per day out of the U.S. Gulf, maintaining robust breakeven levels. The estimated P&L breakeven for the fleet in the second half of the year is about $27,000 per day. When accounting for our fixed income, the P&L breakeven for our spot fleet is approximately $25,900 per day. The slight increase in the spot P&L breakeven for the second half compared to the full year is due to having fewer vessels on time charter contracts. For the remaining months of the year, we estimate the cash breakeven for the entire fleet to be $19,200 per day, while spot vessels need to generate $15,400 per day for the company to reach cash neutrality. When comparing these figures to our competitors, keep in mind that our cash breakeven calculations include all legitimate cash costs—operational expenses, general and administrative expenses, maintenance capital expenditures, cash interest, and debt amortization. This provides a buffer of approximately $8,500 per day between cash breakeven and net income breakeven for the fleet in the second half of the year. This discretionary cash flow will be allocated for general corporate uses, and we recognize that you are familiar with financial nuances. However, this landscape is genuinely noteworthy and deserves consideration. The order book for new VLCCs stands at just 1.9% of the sailing fleet, which is minimal. When you consider that 30% of the current fleet is over 15 years old and 14% is over 20 years, the limited new supply becomes even clearer. From a shipowner's perspective, the outlook is compelling, especially as approximately 90 ships will be reaching 20 years by the end of 2025. Year-to-date, there have been eight vessels contracted, which include two declared options from earlier in the year and six new contracts announced this summer. There are also letters of intent for additional ships, but these are contingent on financing and operational commitments. In the secondhand market, there has been significant interest from Asia in older ships in recent years, but now there is a noticeable shift towards younger vessels. Many of the older ships previously acquired are facing increased scrutiny during port inspections and by end-users. This has led to a considerable surplus of older vessels available for sale, which may result in diminishing demand. As previously mentioned, some of these older vessels may be phased out of operations, likely reducing the sailing fleet. This supply trend could provide a substantial advantage for our business. In summary, we believe our vessel supply picture is exceptionally positive. While OPEC+ production cuts are not typically favorable for tanker markets, there are side effects that may cushion the current downturn and pave the way for a stronger recovery. The tightening implied balances in the oil market have compelled refiners to procure crude from farther away, particularly Asian refiners sourcing from the Atlantic. This increases transportation distances and is a significant factor in this year's higher low points compared to expectations. The production cuts have also prompted refiners to decrease inventories. Assuming the agency's forecasts for increased output hold true, there will be not only a need to meet demand but also potential stock replenishment. It's important to remember that our core business involves transporting supply, and during periods of supply surplus, tanker markets can face delays in response. With refining margins increasing once again, we expect this to bolster refinery activity, which will subsequently elevate product tanker rates, ahead of crude tanker rates. To conclude this call, in the wise words of allowing for variations, we advise you to stay calm and invest in tanker stocks. Operator, please proceed.

Frode Morkedal, Analyst

Thank you. I would like to hear your thoughts on the VLCC spot market. Specifically, where do you see the additional demand for VLCCs coming from going forward? Obviously, we'd have the potential for reversal in OPEC volumes, but one reason for growth in the past year has been in the U.S. Gulf, right? And it seems to be a clear trend of more VLCC taking U.S. crude into Europe. Do you have any thoughts on this going forward? Maybe you see a potential shift in this trade towards Asia?

Svein Moxnes Harfjeld, CEO

You're right, there's been more transporting crude from the U.S. into Europe in the past 1.5 years. And I think we have expectations that, that will continue. And these barrels have, to a great extent, substituted Russian barrels from the Black Sea and the Baltic. But also it's in combination with increased production in the U.S. And whether the U.S. guys and the traders are selling to Europe or to Asia is also somewhat driven by the level of backwardation and pricing. And now also, of course, with higher interest rates, when you transport longer, there are more costs associated with the trade. So oil price pricing has to sort of support those differences. But as I mentioned earlier in the call, we do see a clear sign that China, in particular, are sourcing more oil now in the Atlantic. It's not only U.S. growth that's so important here; it's also Guyana and Brazil, in particular, which have increased their production. So all this combined is really expanding transportation businesses.

Frode Morkedal, Analyst

Okay. That's good. On the bigger picture, I guess one topic we haven't talked about in a long time, I guess, is the energy transition and peak oil demand. And I saw that the IEA had a report in June, this 5-year outlook report where they basically forecast a slowdown in oil demand starting next year and a peak before 2030. And I guess the key issue for tankers is trading distances, right? So what's your perspective on this broader topic? And do you think it has any influence on the sentiment and investment decision today?

Svein Moxnes Harfjeld, CEO

I think to answer your last question first, I do think it has an impact on investment decisions because it adds a level of uncertainty on the longer-term future of the market. So people are a bit more hesitant to deploy capital. But it's not only about expansion of ton miles, but it's also about how much of the total demand is satisfied by seaborne crude. And as we've shown here in the slide, seaborne is now sort of at a 43 million barrel a day level where the fiber average is around 4.5%. It's really to understand where the future oil is going to come from, and is the depletion steeper on non-seaborne crude production or is it deeper on what is seaborne production? We are working hard to understand this picture, and we have a particular project in place to try to rise up a bit on this. If it's successful, we will have some more meaningful details on this later in the year. But we do have a suspicion that seaborne will uphold better than the general production level and thereby support transportation. Maybe all of this is sort of right that the fleet might shrink over the next few years. But I think when it comes to peak demand, it depends who you talk to — we see ranges from sort of peak demand in 2028 up to 2055. So it depends who you ask, and you believe, and what is behind that analysis? And are these views loaded or not by business agendas? So I think it's hard to just pick one estimate and say this is the estimate. I think some people in the oil industry are suggesting that IEA is a bit on the conservative side, and they are being challenged on the reviews that it's maybe politically correct to some extent in support of a green transition rather than being actual real numbers in what we expect will happen.

John Chappell, Analyst

Thank you. Good afternoon. In just keeping on your topics from your closing remarks, there's seasonality and then there's also Saudi cuts. Can you estimate how much of the recent weakness, obviously, with the higher floor is associated with the cuts? And as we think about your comment about moving supply, even if demand were to recover in the fourth quarter as it typically does seasonally, if the Saudis were to hold back increasing production for whatever the reasoning is, do you think there'll be a more muted winter season? Or does the change in trade flows associated with what's going on with Russia still provide upside?

Svein Moxnes Harfjeld, CEO

This is a complex question. From my perspective, I should acknowledge that I'm not an oil analyst. However, it seems clear that Saudi Arabia's primary aim is to achieve higher prices. Currently, prices are in the '80s, and if they continue to limit barrel production while demand forecasts for the fourth quarter look promising, oil prices could surge. This, in turn, could boost our demand as well. It's uncertain how everything will unfold, but it appears they are aiming for higher prices and will increase oil offerings as real demand materializes. While the precise outcome regarding timeframes remains to be determined, it seems their goal is to maximize revenue. At the moment, the revenue increase seems more beneficial than any volume loss. Assessing how much of the current market dip is linked to these production cuts is challenging, and quantifying it correctly is difficult. Interestingly, we've gathered that Saudi Arabia consumes close to 7,000 barrels of oil daily for energy, particularly for air conditioning during their hot summer months. This year, they seem to have purchased a notable quantity of discounted Russian fuel oil for their energy use, which might be allowing production cuts to be under 1 million barrels per day. Some estimates suggest actual cuts might be more in the range of 650 to 750 thousand barrels. This indicates a potential discrepancy of 25% to 35%. Ultimately, we'll have a clearer picture later on, as it's difficult to acquire all this information in real-time. These are the main components of the situation.

Omar Nokta, Analyst

Thank you. Good afternoon. I just wanted to ask maybe just a bit more on the market and say the VLCC supply side of things. In the release, you mentioned that ship brokers are noting that maybe 15% to 18% of the fleet is trading in the shadow markets. That's a pretty sizable 100, 150 VLs. Just wanted to see if you had any color on how this compares to what was in the shadow fleet maybe at the start of the year and perhaps how it looked pre-Ukraine war.

Svein Moxnes Harfjeld, CEO

I think the Ukraine war is now 2 years back. We estimated the VLCC fleet in the shadow trade to be sort of around 60 ships. So it's a meaningful increase. In addition to this, of course, you had a lot of Suezmax and Aframaxes also now being employed in the shadow fleet. So overall, the shadow fleet has grown meaningfully. I think an interesting aspect for this, in our view, is that these two markets do not operate in the way that ships can sort of move from one market to another, which would be very efficient. So they tend to stick to their own markets because it's basically very hard to switch and then go back. This has reduced productivity of the fleet. So we think this, in a way, is a positive. You're right, it's a big number. And at least for now, it will stay. We think it's not only Russian barrels, of course; Venezuela has increased a bit of their production. Iran has also increased production, and this is also going on transport. So that's sort of the 3 main oil suppliers utilizing these fleets.

Omar Nokta, Analyst

Okay. Thank you for that. And I guess that you mentioned, obviously, we've seen that rates have thus far in the third quarter, even though they're softer, they're at a higher floor, presumably then this 2-pronged VLCC market, I guess, plays a role as well and that you have a dislocated fleet that is contributing to the higher realized averages?

Svein Moxnes Harfjeld, CEO

Yes, of course. But let's not forget that state; they do serve a purpose. They do transport oil to refiners that is being consumed, right? So they sort of - they're working. It's not like they're doing some secret business, which is totally outside the global oil market.

Omar Nokta, Analyst

Yes, yes. And then maybe just a follow-up, kind of separately, you mentioned what we're seeing in the new building market and how the fleet is getting older. The replacement orders that we have seen thus far are nowhere near enough to offset the declining age. We've seen the orders now they're going out to '27. Prices are fairly expensive, but just wanted to hear kind of what's your view for DHT in terms of new buildings. Does placing an order make sense to you for DHT?

Svein Moxnes Harfjeld, CEO

No, we have no plans to pursue new buildings. I think there are sort of two key elements to that, maybe three. One is price, as you said. The other is that if we were to invest, like we just did, we like to have assets in the water that can make money now. The delivery in 2026 or into '27 is way out. So you end up having a lot of debt capital on your balance sheet, and that's not a very efficient use of money, we think. But also, of course, the last component here is what are the future fuels? People talk about this and that being ready, but that's not a big chunk of CapEx. The big CapEx will come when you need to add fuel tanks and fuel delivery systems on boarding ships. We don't think there is clarity on this yet. It's not a question of whether you like one fuel model, but it's also to have credible views of production capacity levels for these fuels and at what price. Will there be other industries that will compete with the maritime industry in buying these fuels that can impact the price? An example is the Redlon report that seems quite confident that the agriculture industry will definitely be a competitor for green fuels. What will that do with the price once it hits the market in volume? So then you need to have some confidence in all this, right? And LNG, okay, it's maybe a transitionary fuel takes, call it, 20% of the carbon footprint over the ship, but it's not enough to meet their longer-term objectives. This, I think, is not holding just us back from ordering but also a lot of other people. But again, to answer your question, we have no plans for new buildings.

Chris Tsung, Analyst

Hi, good afternoon. How are you?

Svein Moxnes Harfjeld, CEO

Good, thank you.

Chris Tsung, Analyst

I wanted to ask for that new vessel financed for $45 million in line with the HT cell financing. And just working back, does that imply an expected remaining life of 18 years to this 5-year vessel tree for total 23? Is it slightly longer than average? How would this vessel be depreciated, and does that change the useful life for the vessels in the fleet?

Svein Moxnes Harfjeld, CEO

Our depreciation policy is to depreciate vessels up to the age of 20. So when we talk about the repayment profile, we have negotiated with all our banks, our facilities that the repayment profile of the loan is also up to year 20 to maximize the commercial life of the ship. The loan of 45% since the ship is 5 years old has a 15-year sort of profile, sort of 3 million per year in amortization, right? But it's a 6-year tenure. So after the 6th year, there will be a balloon equal to 6 years' time, 3 million. So that's how we put the financings together.

Chris Tsung, Analyst

All right. Thanks for the clarification. And just one follow-up on your buyback. How much is left on the share buyback program?

Svein Moxnes Harfjeld, CEO

We put in place in March a $100 million buyback program. So we have only spent a little bit of it. So if there are opportunities down the road, when there are dislocations on how we are trading in the stock market compared to where we think the business should be valued, then we have ample capacity to utilize that.

Operator, Operator

Thank you. There are no further questions at this time. So I'll hand the call back to Svein for closing remarks.

Svein Moxnes Harfjeld, CEO

Thank you very much to all for listening in on DHT. Thank you, and we wish you all a great day ahead. Thank you.

Operator, Operator

This concludes the conference call. Thank you for participating. You may now disconnect.