Earnings Call Transcript - DHT Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for being here and welcome to the DHT Holdings Fourth Quarter Results presentation featuring Laila Halvorsen, CFO; Trygve Munthe, and Svein Harfjeld, Co-CEO. I want to inform you that this conference is being recorded today, February 9, 2021. I will now turn the conference over to our first speaker, Laila Halvorsen. Please proceed.

Laila Halvorsen, CFO

Thank you. Good morning and good afternoon everyone. Welcome and thank you for joining DHT Holdings fourth quarter 2020 earnings call. I'm joined by DHT's Co-CEO, Svein Moxnes Harfjeld and Trygve Munthe; and Wilhelm Flinder, Head of Investor Relations. 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 and until February 16th. 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 high rates and vessel utilization; forecast 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 report 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.

Trygve Munthe, Co-CEO

Good morning and good afternoon everyone. This is Trygve. Before we take you through the highlights for the quarter, I just wanted to get you up in the helicopter, so to say, in order for you to get the right perspective. The fact of the matter is that 2020 not only set a new record for adjusted net income, it crushed the old one. The adjusted net income of $287 million last year was 2.8 times the old record from 2015. So with that as a backdrop, Laila will now focus in on the fourth quarter financials. Laila?

Laila Halvorsen, CFO

Thank you, Trygve. Looking at the P&L highlights, DHT showed profitable results for the fourth quarter despite a very tough tanker market. EBITDA for the quarter came in at $51.1 million and a net income of $7.6 million or $0.04 per share. Adjusted for a non-cash gain in fair value related to interest rate derivatives of $2.4 million and a non-cash impairment charge of $7.6 million, net income would be $12.9 million or $0.08 per share for the quarter. OpEx for the quarter was $22.1 million which is above the quarterly average for the year of $20.5 million. The increase is mainly due to higher costs for crude changes due to COVID-19 and upstoring of spares and consumables. We expect OpEx to be more in line with historical levels when things normalize. G&A for the quarter was $4.5 million. EBITDA for 2020 came in at $450.4 million and a net income of $266.3 million or $1.71 per share. Adjusted for a non-cash loss in fair value related to interest rate derivatives of $8.1 million and a non-cash impairment charge of $12.6 million, net income would be $286.9 million or $1.84 per share for 2020. Moving over to the balance sheet. The quarter ended with $68.6 million of cash. During the quarter, we prepaid $25.8 million under the Nordea Credit Facility. The voluntary prepayment was made for all regular installments for 2022. At quarter end, the company's availability under both the revolving credit facilities was $170 million, putting total liquidity at $239 million as of December 31. DHT has continued to strengthen the balance sheet with the prepayment done during the quarter. Financial leverage is 29% based on market values for the ships and estimated to be about 35% when including the two new assets announced in January. Net debt per vessel is $14.1 million for year-end, which is well below current scrap values. Looking at the cash bridge. The quarter started with $75 million of cash, and we generated $51 million in EBITDA. Ordinary debt repayment and cash interest amounted to $23 million, $34 million was paid in dividends, $11 million was used for maintenance CapEx, and $26 million was used for debt prepayments. Changes in working capital amounted to $35 million, and the quarter ended with $69 million of cash. With that, I will turn the call over to Trygve.

Trygve Munthe, Co-CEO

Thank you. Let us then talk about capital allocation. For the quarter, we will pay a dividend of $0.05 per share on February 25 to shareholders of record on February 18. This will be our 44th consecutive quarterly dividend payment. And for the full year 2020, dividends will amount to $176 million or $1.08 per share. In line with our strategy, we have in the quarter continued to strengthen the balance sheet through debt prepayments. As Laila said, we prepaid the 2022 installments under the Nordea Credit Facility, in the amount of $25.8 million. This represents roughly 40% of the total 2022 installments under our four existing credit facilities. This will of course have a significant positive impact on our cash breakeven for next year. Continuing on the theme of debt reduction, we wanted to highlight that interest-bearing debt was reduced by nearly 50% through the year. We started the year with $866 million of debt and ended with just $455 million. This has of course made an already sound balance sheet even stronger, and it has contributed to very robust cash breakeven levels. Something, Svein will dig into the details of in a minute. Let us then switch to the recently announced fleet expansion. In January, we bought two VLCCs built in 2016 at DSME for $136 million combined. When this opportunity surfaced, we were immediately intrigued. It is actually not that often that quality ships become available for purchase in the trough of the cycle. These are quality ships, built at a quality shipyard, and having been owned by quality owners, just the way we like it. We're excited about this transaction for the following reasons. One, these are modern scrubber-fitted eco-ships with great fuel economics; two, with a DHT style debt financing of $37.5 million per ship, we only need $32,400 a day to earn a 15% return on equity, and this is significantly below the 25-year historic average of $42,460 per day; three, to cover OpEx and full at service, the ships will only need to earn about $17,000 per day; and finally four, from an ESG perspective, these ships will improve our annual efficiency ratio and our energy efficiency operational index. So in a nutshell, this move exemplifies our countercyclical strategy, growth and fleet renewal at the bottom of the cycle, while maintaining a strong balance sheet. As you surely have noted from our press release, we elected to advance our dry dockings in view of the soft spot freight market. During the fourth quarter, we dry docked five ships and recorded a total of 180 days of scheduled off-hire which includes 16 days related to COVID-compliant crew changes. As there are still limited ports where crew changes are possible, we sometimes pay deviations to get the ships to ports where the crew changes can take place. For the current quarter we will have seven ships going through special surveys and we estimate 200 to 230 days of planned off-hire for the quarter. And for the full year, we have 14 dry dockings scheduled. And we will revert in due course with guidance for off-hire in subsequent quarters. And with that, I'll pass it over to Svein.

Svein Moxnes Harfjeld, Co-CEO

Thank you, Trygve. We will now spend some time on how we have positioned the fleet. Last year we managed to secure time charters for a meaningful part of our fleet at very rewarding rates. This strategy ensured that we stayed profitable during the fourth quarter. Further, this strategy is well reflected in our first quarter-to-date, as we have booked 75% of our available days at an average of $34,800 per day. This should allow DHT a good showing again. Several of our charters will gradually come off during this year, whereby we'll increasingly build more market exposure as the year advances. For the first quarter, you will note that we have a balanced time charter book, with 58% of the available fleet on time charters. Of our 16 ships on time charters, seven will come off during the remainder of the quarter. Our spot exposure will then gradually increase from the second quarter, ending the year with more than 80% market exposure. We like this development, as it could well coincide with the market recovery. Those of you that have followed us for a while will know that cash breakeven is a core building block in our strategy. Here we illustrate our cash breakeven levels for the first and second half of 2021. As you will see, we have very limited debt repayments this year. This is by design, as this was prepaid with the generous cash flows last year. Our time charter cover for the first half takes care of some 87% of our cash costs, resulting in the company only needing to earn $4,000 per day on its spot ships to go cash breakeven for the period. We believe this to be a very robust position that you can match. For the second half, we will, as mentioned, gradually increase our market exposure. However, we still retain our focus on staying power with an estimated cash breakeven level for our spot ships during the period at $14,100 per day. For the full year, our cash breakeven for the spot ships is $9,900 per day. Keep in mind that our cash breakeven levels include maintenance CapEx of close to $50 million as well, i.e., all true cash costs are included. Staying on the same subject, on this slide we took our cash breakeven levels in a novel perspective. The bars display the annual spot market over the past 20 years. As you will see, average earnings during the year have only fallen below $20,000 per day four times. We have then taken in two straight lines showing our cash breakeven levels for the first and second half of the year in comparison. Again, we think this illustrates that DHT has been put in a very comfortable position. Moving on, we shared this slide with you on our last earnings call. In broad terms, this illustrates DHT's strategy and how we allocate capital through the cycles. We firmly believe that this model works to the benefit of our shareholders and believe that is supported by our performance relative to the peer group. We have deliberately positioned the company for investments at this time. As Trygve talked about earlier, we have recently made our first investments since four years having stayed on the sidelines during the up cycle. You should expect us to stay focused and maintain our disciplined approach in how we allocate the capital that we have been entrusted. So, to sum it up we were profitable during a difficult tanker market. We have built a very strong balance sheet with mark-to-market leverage as of year-end below 30%. We have put in place significant staying power with very robust cash breakeven levels for our spot fleet which will be given our near-term market outlook. We expect to make additional investments this year as we will pursue opportunities to renew our fleet with accretive acquisitions. And with that, we'll open up for Q&A.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question comes from Randall Giveans at Jefferies. Please go ahead, your line is open.

Randall Giveans, Analyst

Howdy team DHT. How are you all?

Svein Moxnes Harfjeld, Co-CEO

Great. Thank you.

Randall Giveans, Analyst

All right. I guess first question I know you included it in the past but I don't see it in this presentation. So, excluding the time charters what rates and percentage of spot days fixed have you booked for the first quarter of 2021? And then maybe what rates are you currently booking this week?

Svein Moxnes Harfjeld, Co-CEO

So, we have booked 44% of the spot fleet for the first quarter at $17,500 a day.

Randall Giveans, Analyst

Okay. And are those rates kind of in line with what you're seeing this week for current fixtures?

Svein Moxnes Harfjeld, Co-CEO

It really depends a lot on what ship it is and what load area it is. And if it's a sort of a conventional design without scrubbers and you're loading in the AG and you're missing SIREs then well the TCE that you're going to generate is minuscule. But on the other hand if you have a fully approved ship with an eco-design and you're loading out of the Atlantic chances are you are going to be in the low teens or mid-teens, something like that on your TCE.

Randall Giveans, Analyst

Got it. All right. And then looking at slide 10, right, your spot exposure is set to increase throughout the year kind of a good thing as you mentioned with your views on a market recovery in the back half of 2021. And then also looking at slide 12 showing the long-term average BOCC rate around let's call it 40,000 a day, what are your thoughts on maybe securing some time charter ins right for VLCCs as the one-year rate is only $25,000 a day right now the three and five-year rate is only maybe $30,000 a day?

Svein Moxnes Harfjeld, Co-CEO

I think we have addressed this question a couple of times in the past but our strategy or our view on this remains the same that we do not see any need to add leverage to the position that we have. So, we're not really there to charter in ships just to get more exposure to the spot VLCC market. That's not going to happen. Keep in mind that chartering-in is a 100% leveraged transaction. So, the cash breakeven level will go significantly up once you add that. So, unless there are some purchase options or something of that nature associated with it, don't expect us to do it.

Randall Giveans, Analyst

Got it. Yes, that's fair. And then quickly any other scrubber installations planned for 2022 after the ones you've kind of earmarked for this year?

Svein Moxnes Harfjeld, Co-CEO

No. So, we have four to do this year and that marks an end to that program.

Randall Giveans, Analyst

Perfect. That’s it for me. Thanks so much for the time and congrats on a great year.

Svein Moxnes Harfjeld, Co-CEO

Thank you.

Operator, Operator

Thank you. And the next question comes from the line of Chris Tsung from Webber Research. Please ask your question. Your line is now open.

Chris Tsung, Analyst

Hey guys, good afternoon. How are you?

Svein Moxnes Harfjeld, Co-CEO

Well. Thanks.

Chris Tsung, Analyst

Good. I wanted to kind of just ask about the decision to repay $26 million under the Nordea Credit Facility which looks like it's probably made in late 2020. In light of upcoming CapEx with the accelerated drydocking schedule and the purchase of two VLCCs, will there be additional prepayments? And how should we think about your capital allocation strategy?

Svein Moxnes Harfjeld, Co-CEO

I believe our strategy has been to invest in our balance sheet during good times. Currently, times are not favorable, and we are not generating the cash flows we experienced over the last five quarters. This may lead to a pause in debt prepayments. Additionally, as you've noted, we have invested in additional ships. Therefore, it's likely that we will see a pause in debt reductions or significant debt reductions for at least a little while.

Chris Tsung, Analyst

Right. Sorry, just to make sure I got that right. We will see a pause in further debt pay downs, right?

Svein Moxnes Harfjeld, Co-CEO

Yeah.

Chris Tsung, Analyst

Okay.

Svein Moxnes Harfjeld, Co-CEO

Extraordinary pay downs. Of course, we'll do whatever is there on a regular basis, but the voluntary prepayments are probably going to take a pause.

Chris Tsung, Analyst

Great. That makes sense. As a follow-up regarding capital allocation, are you considering any specific technology for new tonnage or leaning towards future propulsion technologies in the eco-design VLCCs from 2016, which are expected to extend their useful life through 2030? Will these vessels comply with EEXI standards, and are there any capital improvements you are planning to undertake to prepare your fleet for trading in 2023?

Svein Moxnes Harfjeld, Co-CEO

No. We have a focus on buying ships in the water at this point in time. That's our priority. And there will have to be eco-designs i.e. delivered from the second half of 2015 onwards. And these types of designs had significant fuel efficiency improvements from prior designs and they will certainly have a good life post-EEXI 2023. So, we're not in the midst of ordering ships at this point. And when it comes to future technology, I think we don't rule anything out right now. So far, we don't see any convincing technologies that will really carve out the future for these vessels. It might be that we will have different types of fuels for different parts of ships and traits and sizes and whatnot. But I think this landscape is yet to really be mapped out frankly. So, when it comes to newbuild and investing in future technology, we are on the sidelines for now.

Chris Tsung, Analyst

Yeah. No, that all makes sense. Great. That’s all for me and I turn it over. Thanks, guys.

Operator, Operator

Thank you. And the next question comes from the line of Jon Chappell from Evercore. Please ask your question. Your line is now open.

Jon Chappell, Analyst

Thank you. Good morning, good afternoon. Trygve, it's pretty noteworthy that when you spoke about the vessel acquisitions. You said, it's very rare that you see ships quality available at the trough of the market. Maybe a two-part question. One, do you see any other opportunities like this emerging? I mean it feels like most owners and industry participants have a pretty consensus view that the first half is going to be really difficult but the second half shows signs of optimism. Therefore people may hold on a little bit longer and wait to get to that point, which isn't too far away? And then the second part is, if other opportunities like that don't present themselves and you've done a great job managing your balance sheet, how do you think about the use of this capital if you can't find the right ships at the right price?

Trygve Munthe, Co-CEO

I think to the latter part, Jon, if we cannot find anything that makes sense to us, we are not going to invest. Simple as that. It needs to be sort of meeting our criteria. It's going to be at sort of the right price levels and it's got to be quality ships and so forth. We hope and expect that there will be additional opportunities before this market takes off. But of course, this is really a time will reveal whether we're right or not in that expectation. But we don't really have anything specific at this point to inform you about, but we'll keep on looking.

Svein Moxnes Harfjeld, Co-CEO

I think you can assume that we have an excellent deal flow. When opportunities arise, they certainly come to our attention. We have also paused on several initiatives.

Jon Chappell, Analyst

Okay. So, if I look at slide 13 then and how you've managed the cycle quite well. And then, we get to that point where the right side of this starts to turn up significantly and those opportunities haven't presented themselves. At what point do you maybe change your capital return policy, because you've missed the opportunity to invest in the business and don't want to do it in any other manner but in a prudent way.

Svein Moxnes Harfjeld, Co-CEO

I think this is an important point, because, of course, if the market turns and if we haven't been able to buy more ships, we have 29 VLCCs ready to generate a lot of money. And our capital allocation policy says a minimum of 60%. So it doesn't prevent us from then thinking differently about this as we go forward. So it's a bit hypothetical. I think we think we should be able to invest a bit more this year and people might be sellers for different reasons. But, I think, keep in mind it's a minimum of 60%.

Jon Chappell, Analyst

Yes. That’s a good point. Thank you, Svein. Thanks, Trygve.

Svein Moxnes Harfjeld, Co-CEO

Thank you.

Operator, Operator

Thank you. And the next question comes from the line of Omar Nokta from Clarksons Platou. Please ask your question. Your line is now open.

Omar Nokta, Analyst

Yes. Thank you. Hey, guys. Just maybe wanted to ask a bit of a general question. You've done, obviously, a fantastic job of putting DHT in a strong position, both commercially and financially. In terms of a market recovery, you're becoming more acquisitive at the moment. Obviously, the rates are very weak. But can you give us a sense of what you're looking for, or what signs you're looking at to gauge market recovery for the tanker space?

Svein Moxnes Harfjeld, Co-CEO

We think that the, sort of, the main thing to watch is really COVID that we are suffering now with the reduced oil consumption on a global basis, because people are in lockdowns and so forth. But we're optimistic that once the vaccines are rolled out on a sufficient scale that we will see people returning to past consumption patterns and we expect to see a marked increase in the global oil consumption. And as far as the inventory overhang, that has been worked on quite significantly already. So we think the number one factor to monitor is the vaccine rollout.

Omar Nokta, Analyst

Yes, it does seem just as simple as that. I do have a follow-up. Obviously, you’ve only got $14 million of net debt per ship, which is clearly below scrap value, giving you a lot of flexibility there. With regards to the financing of the two VLCCs, as you mentioned DHT-style financing, can you give maybe just some further color on what that is, maybe in terms of whether it's term, duration, that type of thing?

Trygve Munthe, Co-CEO

Sure. What we typically want to do is to borrow up to around $2.5 million per year of remaining economic life. So for a five-year-old ship, we figured is 15 years left in them and 15 times $2.5 million is $37.5 million. And with that said then, the annual installments to repay the loan, based on the mortgage financing, would be $2.5 million. So a 20-year profile on the loans. And as far as the tenor of the loans themselves, five years is the industry standard. The last two big ones we did were six years. So we certainly try to stretch it as much as we can. But the point is that, we're not really looking at a percentage of value when we borrow money. We look at how much we are comfortable committing to in terms of debt service on an annual basis in order to keep our cash breakevens as sharp as they are. So that's what we mean with the DHT-style financing.

Omar Nokta, Analyst

Okay. Very good. That’s really helpful. Thank you for that. I’ll turn it over.

Operator, Operator

Thank you. And the next question comes from the line of Ronald Silvera from R.E. Silvera Association. Please ask your question. Your line is now open.

Ronald Silvera, Analyst

Thank you, gentlemen, for a great job. And I'd like to say that I really love the presentation format that you did; very clear, very easy to understand. We have gotten the two new ships. Can you give me some feeling as to our ships right now? Do you see selling any of the older ones or turning them to scrap during this coming year, 2021 or 2022?

Svein Moxnes Harfjeld, Co-CEO

I believe our countercyclical strategy generally aims to sell older ships when the market is strong. However, in the recent up cycle, ship values didn't rise as much as potential earnings. Therefore, we secured time charters for several of our older ships that surpassed the benefits of selling them. As an example, our two ships built in 2004 were on one-year time charters, generating high teen millions each, which provided a greater advantage than selling them. We are aware that some of the ships are aging. They are all quality vessels and still have opportunities to benefit from the recovering market. However, they could also be candidates for sale if the right opportunities arise. There isn't a strict policy regarding their age for selling, but if we reach 20 years, they will definitely be sold.

Ronald Silvera, Analyst

Okay. Good. How many do we have that close only two of them, right?

Svein Moxnes Harfjeld, Co-CEO

Yes, three ships that were built in 2004.

Ronald Silvera, Analyst

Three. Okay. If you look at the trough we're in, okay, you made the comment earlier that if we can't find any good deals on ships and the rates begin to rise, I would like to encourage you again to maintain the attitude that you have in strengthening the balance sheet. It is obvious to me that, the wonderful way that you have done that and reduced the debt so significantly is definitely reflected in the share price, which just recently went above $6 again a share US. And I find it kind of ironic that frontline that has a totally different attitude to our debt than you guys do. Is not that far away price-wise any longer from the price of our shares and the spread that was there in the days when they tried to obtain us is quite narrow now, which I think is a reflection on the wonderful job you guys have done of managing and managing the business. So, I just want to compliment you and I want to encourage you to whenever possible go after the debt again and maintain the same philosophy that you've maintained because, it's a very good one. And that's basically all I have.

Svein Moxnes Harfjeld, Co-CEO

Thank you very much. Appreciate it.

Operator, Operator

Thank you. Our next question comes from George Bowman from CF Securities. Please go ahead with your question. Your line is now open.

Unidentified Analyst, Analyst

Good morning, gentlemen. Thanks for taking my call.

Trygve Munthe, Co-CEO

Good morning.

Unidentified Analyst, Analyst

I’ve got a quick question. A couple of quarters ago, you mentioned that one of your ships had been hit in a port in an accident and not your fault and you're expecting an insurance settlement. Wondering, if that has been settled? And if so for how much?

Trygve Munthe, Co-CEO

It's not yet settled. There are negotiations between the two insurance companies, but there is no question of fault. The focus is more on the financial outcome. We believe it's not wise to suggest any number at this point, but the ship is fully operational and back in business. Again, there is no dispute regarding fault.

Unidentified Analyst, Analyst

Okay, great. So, we're expecting possibly a multimillion-dollar settlement there sometime in the future?

Trygve Munthe, Co-CEO

I think that would be overstating result of a claim. So–

Unidentified Analyst, Analyst

I would appreciate your thoughts on the market overall. We've heard reports of companies placing orders for up to 10 ships and then canceling them. Additionally, there's a report about a prominent Chinese shipper scrapping up to 10 vessels from their fleet. What is your perspective on buying opportunities currently? Given your insights into the market, do you notice any increase in the scrapping of older tonnage, or is it still the case that everyone is locked into time charters that will expire in the first quarter?

Svein Moxnes Harfjeld, Co-CEO

I think your first part of the question there was an order that was reported for 10 ships at Hyundai in Korea. This order was really a project broker who tried to put a deal together with and long-term charters. And I think most of the market participants have included had some doubts that would ever go through and it has now ceased. So, those 10 ships are sort of out of the way, if you like. The cost of scrapping or demolition in a weak market like now and also with a strong scrapping price, one would expect scrapping to sort of start to gain traction. But there are a number of the old ships that are involved in trades that would not sort of pass a KYC test for a company like DHT. And until this maybe normalizes or changes, I think there will be some opportunities for these ships to continue to trade a little longer. Of course, they will have sort of CapEx decisions to make regarding dry docks, ballast water business systems, and typically those sort of investments turn to develop or be a fork in the road for these guys are they going to spend millions of dollars or not. And so I think we're hopeful that you will start to see retirements during the year. But so far it's been very limited.

Unidentified Analyst, Analyst

Okay. Thank you very much. And I look forward to hope for stronger quarters to come. Maybe we have seen the bottom here in the fourth quarter.

Svein Moxnes Harfjeld, Co-CEO

We shall see. Thank you.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

Thank you. There are no further questions. Please continue.

Svein Moxnes Harfjeld, Co-CEO

Okay. Thank you very much to all for following DHT and we wishing you a continued good day.

Operator, Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.