Earnings Call Transcript - DHT Q1 2022

Operator, Operator

Good day and thank you for standing by. Welcome to the DHT Holding’s Q1 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speakers today, Laila Halvorsen, CFO, and Svein Moxnes Harfjeld, CEO and President of the company. Please go ahead.

Laila Halvorsen, CFO

Thank you. Good morning and good afternoon, everyone. Welcome and thank you for joining DHT Holdings first 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 May 17th. 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 reporting. 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. The company continues to show a very strong and healthy balance sheet and the quarter ended with $58.6 million of cash. At quarter-end, the company's availability under both revolving credit facilities was $476.8 million, putting total liquidity at $235 million as of March 31. Financial leverage is about 30% based on market values for the ships and net debt per vessel was $17.8 million at quarter-end, which is below the current scrap price. Looking at the P&L highlights, EBITDA for the quarter was $14.4 million and net loss came in at $17.3 million. The results include the non-cash gain and fair value related to interest rate derivatives of $7.9 million. The company continues to show very good cost control with OpEx for the quarter at $18.3 million, equal to $7,800 per day per ship. G&A for the quarter was $6.8 million and includes non-recurring accruals related to the retirement of the previous co-CEO. In the first quarter of 2022, the company achieved an average TCE of $17,100 per day. For the second quarter of 2022, 69% of the available days have been booked at an average rate of $24,800 per day, and 59% of available spot dates have been booked at an average rate of $19,900 per day. On the next slide, we present the cash bridge for the quarter. We started the year with $60.7 million of cash and we generated $14.4 million in EBITDA. Ordinary debt repayment and cash interest amounted to $7.2 million or $3.3 million was allocated to shareholders through dividend payment, and $2.3 million was used for maintenance CapEx. Changes in working capital amounted to $4.5 million and we ended the quarter with $58.6 million of cash. As you all know, despite the very challenging freight market, we did not earn any cash. Switching now to capital allocation, the company will pay a dividend of $0.02 per share for the quarter. It will be payable on May 26 to shareholders of record as of May 19. This marks the 49th consecutive quarterly cash dividend. And for the three remaining quarters of 2022, we estimate cash G&A of $3.3 million and non-cash G&A of $0.8 million on average per quarter. Following the sale of DHT Hawk and DHT Falcon, depreciation for the three remaining quarters of 2022 is estimated at about $31.5 million on average per quarter. After scrubbers will be fully depreciated at the end of 2020, we expect annual depreciation for 2023 to be about $100 million. With that, I'll turn the call over to Svein.

Svein Moxnes Harfjeld, CEO

Thanks, Laila. We have entered into an agreement to sell the DHT Hawk and DHT Falcon, with the delivery set to take place during the second quarter. The price is $78 million for the pair and compares favorably to the combined price of $98 million that we paid for them some eight years ago. The fleets are expected to generate about $12 million in combined profits and they will repay the remaining outstanding debt of the vessels, amounting to about $13 million in total. Following these sales, the average age of our fleet will be reduced and our AER and EEOI metrics improved. On this slide, you will find an update on our cash breakeven levels for the remainder of the year. As per usual, all crew cash costs are included in our presentation, i.e., OpEx, debt amortization, interest, G&A, and maintenance CapEx. The numbers are best in class, requiring a rate of $15,100 per day for the fleet as a whole. Importantly, $8,500 per day for the spot ships specifically in order for the company to be cash neutral for the remaining three quarters of 2022. On this next slide, we wanted to share an observation of the peer group within large tankers. As you will see, there's a distinct change in the development of financial leverage within this group. DHT is represented by the green line and has the lowest financial leverage. As you will recall during the last chapter, not only did we return significant moments to shareholders through quarterly cash dividends, but we also invested in the balance sheet and reduced interest-bearing debt by about 60%. Despite the recent tough markets, we have retained our balance sheet strength. You could also note that we have no newbuilding CapEx commitments. Our takeaway here should simply be that DHT has the strongest balance sheet in the group. I will now offer some commentary on the markets. We believe a market recovery is underway, but it's delayed and troubled by COVID in China and geopolitics generally impacting macroeconomics. Admittedly, and given all the noise, it is very difficult to predict the near-term freight markets. But trying to look through all this noise, we see fundamentals developing towards what we expect to be common rewarding markets for large tankers. While inventories are low, and are likely more pronounced as energy security is increasingly becoming an issue. OPEC is so far sticking to its plan, but underperformance by the respective members, alongside the much-talked-about Iran deal, takes longer than market observers have suggested. The Russia-Ukraine conflict is reducing supply. The U.S., however, announced a release from the SPRs, a release that will offer the market double benefits, firstly through additional barrels to the market over the coming six months, and then likely retail in due course. Further, we don't think it's unreasonable to expect a Saudi and UAE-led OPEC response to higher oil prices at some point, maybe in the second half of this year. As you all know, shipowners make their living by transporting supply; there is a danger of talking our own book and stating the obvious: more supply would be most welcome. The sanctions and ensuing trade disruptions coming out of the Ukraine conflict seem to be increasing transportation distances, visible most to ships smaller than VLCCs. If freight differentials become too wide, freight tends to flow up and down between different ship sizes. We saw some of this at the outset of the conflict and should regulated trades see these differentials come back—the theory that a tide lifts all boats holds true. The pop in freight rates for VLCCs that you saw a few weeks back is a good indicator that the underlying balance is not as bad as the current rates suggest. Keep in mind that VLCCs typically transport almost 45% of all seaborne crude oil volumes, close to 60% on a ton-mile basis. This is truly the workhorse of the oil industry. The trade disruptions are changing the sourcing of refined oil products, elevating freight rates for product tankers. As this happens at a time of low inventories of both crude oil and refined products, it backs the question whether product tankers are front running crude tankers, suggesting the amount for feedstock and thus crude oil transportation to come next. There are currently too many ships in the market. The old fleet is getting older by the day in combination with low ordering of new ships. The VLCC order book consists of about 54 ships to be delivered through the remainder of this year and next. This equals a major 6.3% of the existing fleet—very low by any reference. With very limited scrapping, the current number of ships older than 20 years has now become significant—these parts of the fleet could grow close to 100 ships by the end of the year assuming low scrapping. You find it discouraging that those older ships are not retiring from the fleet, particularly with very healthy demolition prices being offered. Until not long ago, there were hardly any commercial prospects for ships older than 20 years. Sadly, it is only sanctioned trades that keep all these older ships currently in business. These sanctions have developed new trades for ships that do not comply with rules and regulations. However, we do think something's got to give; dry docks and all the capital expenditure will eventually force all the ships out of the markets. In sum, all this would lead us to envisage the fleet potentially shrinking at a time when demand for transportation is expected to recover, creating a very rewarding freight environment. It would be a very bold move to bid against large tankers. And with that, we open up for Q&A.

Jon Chappell, Analyst

Thank you. Good afternoon, or good morning, Svein. I’m going to ask all my questions in kind of one multi-parter. The vessel sales make 100% sense given the asset values and where equities are trading right now, and you didn't have much debt on them. So the first part is what's the use of proceeds from that net $65 million? And then secondly, you've kind of indicated in the past that you're not interested in buying assets at this point. And again, if you're selling, then the price is probably indicating you're not into buying. If we are in the beginning of this upturn as you've laid out, you're probably not going to have other opportunities to buy either. So do you envision the next several quarters, the next beginning of the upturn in the cycle, to be a cash harvesting period with more aggressive capital returns to shareholders? And then look to purchase when we're kind of peaked or past the cycle?

Svein Moxnes Harfjeld, CEO

Thank you, Jon. Just to be clear, we didn't say that we're not interested in buying at this time, but we have not been interested in buying at some of the prices that people have been asking. So there's a sort of reasonable distinction in those two observations. We're always sort of looking at opportunities. And it's been really hard, we think, to find something that has made good sense, but it should not really rule that out. And I think with our balance sheet, we are more than able to fund any acquisitions that we sort of would like to look at without relying on additional capital. So if we do something, it will certainly sort of improve the earnings in the company. But as you also noted, we do like to have a low-leveraged balance sheet. We think our business is suited for that or the balance sheet is suited for the business, depending on which way you look at it. As you also point to when it comes to capital allocation, our policy is a minimum of 60% of ordinary net income. And we have demonstrated in the past that when earnings or cash flows are committed, we have certainly rewarded shareholders with more than 60%. So that's also possible. And of course, with low cash breakevens, low leverage overtime, it could put the company in position to be more generous than what the specific numbers suggest. We will not be drawn on giving a specific outcome of that, but that's how we think about it in general.

Jon Chappell, Analyst

Okay. That's very helpful. And I lied before, I do have one more additional question. It seems like other segments have been more immediate direct beneficiaries of some of the new trading routes developing from what's happening in Europe right now. Are the VLCCs just a laggard in that regard? Or do you see, maybe China comes back online, reverse lightering from the Baltic or the Black Sea, that could be a big VLCC beneficiary? How do you see the map redrawing to the benefit or not of the VLCC market over time?

Svein Moxnes Harfjeld, CEO

Prior to the conflict, you had about four to five VLCC cargoes going out to the Baltic, and they were all loaded to transshipment in the Danish straits. That business, of course, has become very difficult now for most people. And from what we understand, also, the initial pilots are not so interested in assisting that type of social transshipment to take place. So people are needed further away to try to do this. But currently, it's really some of the traders buying this oil and it's not a business at the detachment. I think it's—this whole conflict situation changes, one should expect that trade to come back at some point. This has not really been the case out of the Black Sea, where you have more Suezmaxes trading directly out to Asia. What we did see immediately after the conflict are some B2C loadings after the U.S. Gulf going to Europe, and with notable port discharges, so two to three-year discharge ports in the Iberian Peninsula, etc. And those were dominant, very good freight rates, up in the $40,000-a-day sort of territory. So that might well increase at some point once these U.S. barrels are coming to market. There seems to be appetite for, in particular, the new crude in Europe, which is driving a lot of West African barrels now going to Europe. So, there are many moving parts here. It’s very hard to have a precise view on exactly how it will play out, other than just saying that disruptions and increased distances will serve our business well. I do think, right now, we are probably the last ship type to benefit from this. But eventually, it will also come to continue to cease, and then it should be quite forcefully, we think.

Chris Robertson, Analyst

Hello, Svein. Thank you for taking my questions.

Svein Moxnes Harfjeld, CEO

Good morning.

Chris Robertson, Analyst

Good morning. Yeah, you guys have done a good job in the past with counter-cyclical investing and divesting. So you have a handful of ships with the same age profile as the two that were just sold. Can we see some additional vessel sales this year? Or do you think that that's over with at this point?

Svein Moxnes Harfjeld, CEO

If we see any sort of assets that we think are attractive to divest, say one or two more ships, that has to happen. The challenging part also in selling ships in this age bracket is that not all buyers that a company like DHT can entertain to do business with. So, on this occasion, this was a known entity to us, somebody we've done business with in the past and they've performed very well, so it's a proper company. For us, that's worked out in connection with a good price. So I will not rule it out. There is not like a heavy marketing or effort in getting rid of ships. We have a high-quality fleet and they're also ready to dance once the music can really start.

Chris Robertson, Analyst

Sure. I guess just thinking about the pre-Eco built ships, especially the pre-2010s, kind of what's the incremental CapEx needed to bring them up to speed for IMO 2023 and beyond? And does it vary heavily by age bracket or is it about the same price?

Svein Moxnes Harfjeld, CEO

I think for all those ships, they have large engines. We've gone through the exercise of calculating sort of the EXI and what we would need to do with the ships. There will be some minor sort of power reductions. But the power reductions end up in sort of cap speeds, which are still way higher than what is the service speed in the market. So basically, all these ships are designed to run at 17.5-18 knots. We might have to reduce speeds to around 15.5 knots, or maybe closer to 16 knots, whereas the service speed in the market is 13-13.5 knots. So I think commercially, we'll have hardly any impact on VLCC’s earnings capability. There’s not any CapEx to speak of, so this is really a minor cost.

Chris Robertson, Analyst

Great. Yeah. Thanks for that color. That's all for me.

Svein Moxnes Harfjeld, CEO

Thank you.

Frode Morkeda, Analyst

Yes, thank you. Hi, Svein.

Svein Moxnes Harfjeld, CEO

Hi, Frode.

Frode Morkeda, Analyst

A few questions on daily rates? Looks like a very good price you achieved. I guess, and they of course, include the scrubbers, right? So one question I had is, did the value of the scrubbers come up in discussion? And if so, how much would you ascribe this scrubber value to be in today's market?

Svein Moxnes Harfjeld, CEO

There were no specific discussions about the scrubber value. This buyer wanted ships with scrubbers, so it was not an alternative discussion. We had a rough idea of what we wanted for the ships, and they were willing to meet our price expectations. There’s been some volatility in the spreads; they've been at 100, up to 250, depending on what you reference. With an ease of reference at the $100 spread, the nominal value in the year on the ship that is vintage is about $1.5 million to $1.7 million in incremental earnings. So, you need to have a view on how long you think the spreads will stay. But again, as I said, there were no specific discussions on any value per se.

Frode Morkeda, Analyst

Okay. Now, the reason I asked is that, if you look at broker quotes, they usually do not want a scrubber-free value typically.

Svein Moxnes Harfjeld, CEO

That's right.

Frode Morkeda, Analyst

In general terms, how do you see the sale and purchase market for VLCCs today? And in combination with that, can you also talk about the timing of this vessel sale? I guess, given the outlook you have, which seems to be quite optimistic, would definitely prices go even higher in the future? Or do you think like there's new carbon regulations coming into play next year that have an impact for these older vessels?

Svein Moxnes Harfjeld, CEO

There seems to be reasonable liquidity in the older realm. However, as I mentioned prior, because of all these counterparties that we could do business with, there might be private buyers that could come into play. There are regular transactions happening in that space for all of the ships that are trading anywhere, depending on the age and the condition, from the high-20s up to the high-30s. As we know or as maybe even forecasts demonstrate, it depends on the value position, ballast water treatments, scrubbers, prior history, etc. There are regular transactions taking place in a very modern market. There are a few things being talked about but no big movement, and it’s been a bit disconnected from newbuilding prices. The asking price from the shipyards at $220 plus/minus is just a derivative of what they can get for a gas carrier, LNG carrier, or a large container ship. It’s not driven by a strong demand to build tankers, and that's really great news for our space because you don’t see a lot of people wedging in on building large tankers now, which leads us to a good benefit. In the middle of brackets, called ships around the 10-year mark, there's not much movement for sales or purchases. You have to move up to sort of starting at 13-14 years old ships before you see significant activity.

Frode Morkeda, Analyst

Yeah, sure. Thank you for that color. That's it for me.

Operator, Operator

Your next question comes from the line of Robert Silvera from Associate Marine. Please ask your question.

Unidentified Analyst, Analyst

Hi. Very good job as usual. You guys are conservative and have reduced your interest cost, which is always positive. You did have extra shares outstanding of about 672,000. I was curious where those shares went? Were they in fulfillment of option buying or where did they come into existence?

Svein Moxnes Harfjeld, CEO

The company on a regular basis has a long-term incentive program for directors and officers, and there are allocated shares that could be rewarded, typically rewarded annually with vesting criteria. So that is a reflection of that.

Unidentified Analyst, Analyst

Okay, so it's all management, then, directors and management?

Svein Moxnes Harfjeld, CEO

Correct.

Unidentified Analyst, Analyst

You also noted a number called and you called it the share profits from associated companies. Can you give us some color on what that is?

Svein Moxnes Harfjeld, CEO

So we owned, in the first quarter, 50% of our ship management company, Goodwood in Singapore, that runs all our ships, that’s an associated company. We have now subsequently in the second quarter increased our ownership position to have economic control of the company and also have two or three directors of that company. We will then change the accounting treatment of that company going forward. That will be visible from the second quarter results onwards.

Unidentified Analyst, Analyst

Okay, but that will increase profits. Can you clarify what that is?

Svein Moxnes Harfjeld, CEO

The company is profitable, but the change in ownership from 50% to 53% is not significant in sort of nominal incentive space. So it's a small part of the P&L in DHT.

Unidentified Analyst, Analyst

Right. In one of the earliest questions, there was cash from the sale of the ships. What was your allocation for it? And I missed—I didn't pick up what your answer was on that. What are you using those millions for?

Svein Moxnes Harfjeld, CEO

So, initially, the cash flow is going to the company's cash reserves. We have not communicated a specific use of that cash. We are sniffing around to see if we can find a good investment opportunity, although we must admit they are very hard to find right now. That is one alternative. We could also do, as we have done in the past, and prepay more debt. So that's also an opportunity that we have, and I think in the next quarter or two, that will become more visible to investors as we move ahead to see what we have decided to do. It could also be a mix of both.

Unidentified Analyst, Analyst

Yeah, I liked the option of reducing the debt. So it was a good one in my mind. One last question, the large number of ships that are over 20 years. How is that playing out right now with the scrap steel market? Is the scrap steel market still high and attractive to take the ships out? Or has it been dropping?

Svein Moxnes Harfjeld, CEO

Prices to sell the scrap for the ship for demolition are still very high, which all makes it a bit puzzling that you don't see more ships heading into the scrap yards. But as I mentioned, it's really driven by the fact that they have some commercial opportunities that are almost exclusively available to people willing to take these risks and not be compliant. These sanctions have created separate markets, and many can be concerned that, for the smaller ships, like Aframax, that if Russian cargo sells allow sanctions, it could create an additional pocket for similar types of businesses in the future. It's not an ideal outcome; the flip side of sanctions is that we understand why they're being made. Unfortunately, IMO and relevant flag states are not able to enforce these regulations and get rid of the ships.

Unidentified Analyst, Analyst

Okay. With your experience, though, with the ship ages that are out there, when do you see it kind of being economically forced that they be scrapped, a year out or two years out?

Svein Moxnes Harfjeld, CEO

With the new regulations coming in from 2023, I think the next hard line will be 2026. By that time, it's going to be very difficult. It’s not impossible to operate older ships. If you look at the demographics of DHT’s fleet, you will note that our ships will phase out of the commercial picture well within that time. We have a natural retirement, either by selling or potentially scrapping in due course. We will sort of pass through, and what we will own beyond that will be a very efficient fleet, assuming nothing else happens.

Unidentified Analyst, Analyst

Right. Well, thank you. Thank you very much for doing such a good job.

Svein Moxnes Harfjeld, CEO

Thank you. Appreciate that.

Unidentified Analyst, Analyst

That’s it for me. Thank you.

Operator, Operator

Your next question comes from the line of Climent Molins from Value Investor's Research. Please ask your question.

Svein Moxnes Harfjeld, CEO

Hello?

Operator, Operator

Climent Molins, your line is open. Please ask your question. As there is no answer, I'll move on to the next question. Next question comes from the line of Chris Tsung from Webber Research. Please ask your question.

Chris Tsung, Analyst

Hi, Good afternoon, Svein. How are you?

Svein Moxnes Harfjeld, CEO

Good. Thank you.

Chris Tsung, Analyst

Thank you for the question. I would like to inquire about your dry docking schedule. I believe there is one remaining for the second half of this year. I also remember that in 2021, due to a weak freight market, several dry dockings were postponed. Do you have the capacity to accommodate more for the rest of the year, or is one the maximum you can manage?

Svein Moxnes Harfjeld, CEO

There's only one super left for this year. We might start with one that's due in January later this year. If you want details, please make contact with our CFO, Laila. She will assist you with more details.

Chris Tsung, Analyst

Okay, great. And just on your vessel sales. It looks like the outstanding debt on the two were about $13 million, given that DHT is self-financing $2.5 million over the remaining economic life. To me, that comes out to be about two to two and a half years remaining on these vessels. Am I thinking about it correctly that the economic life you guys build in is about 18 years for these VLCCs?

Svein Moxnes Harfjeld, CEO

No. What we did in financing is that we like to cap the borrowing ownership to be a maximum of $2.5 million per year in amortization for the remaining commercial life of that vessel. So for a newbuilding with a 20-year life, it would be $50 million sort of maximum debt. If you buy a 10-year-old ship, it will be $25 million. That is also a reflection as we have done some prepayments on those early loans. So there's a mix of regular amortization and some prepayments as the debt was a bit lower.

Chris Tsung, Analyst

Okay. All right. That's it for me. Thank you.

Operator, Operator

There appear to be no further questions, please proceed.

Svein Moxnes Harfjeld, CEO

Well, thank you very much to everyone for listening. DHT and your support and interest in our company is most appreciated. Wishing you a good day ahead.

Operator, Operator

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