DHT Holdings Inc (DHT) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the DHT Holdings Fourth Quarter Results presentation with Laila Halvorsen, CFO; Trygve Munthe, Svein Harfjeld, Co-CEO. (Operator Instructions)

I would like to advise you that this conference is being recorded today on Tuesday, the 9th of February 2021. I would now like to hand the conference over to your first speaker today, Laila Halvorsen. Please go ahead.

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-CEOs, 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 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, including DHT's prospects, dividends, share repurchases and debt repayments; the outlook for the tanker market in general; daily charter high rates and vessel utilization; forecasts of world economic activity; oil prices and oil trading patterns; anticipated levels of new building and scrapping; and projected dry dock schedules.

Actual results may differ materially from the expectations reflected in these forward-looking statements. We urge you to read our periodic 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.

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 2.8x the old record from 2015. So with that as the backdrop, Laila will now focus in on the fourth quarter financials. Laila?

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 noncash gain in fair value related to interest rate derivatives of $2.4 million and a noncash 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 noncash loss in fair value related to interest rate derivatives of $8.1 million and a noncash 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. So 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 about 35% when including the 2 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.

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 4 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 2 VLCCs built 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 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 debt 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 drydockings in view of the soft spot freight market. During the fourth quarter, we dried out 5 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 7 ships going through special surveys, and we estimate some 200 to 230 days of planned off hire for the quarter. And for the full year, we have 14 drydocking 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.

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% to 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, 7 will come off during the remainder of the quarter. Our spot exposure will then gradually increase for 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 we -- as this was prepaid with the generous cash flows last year. Our time charter cover for the first half takes care of some 87% to 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 cost is included.

Staying on the same subject. On this slide, we put 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 4 times. We have then put in 2 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 it's 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 4 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 behoove us 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 Instructions) The first question comes from the line of Randall Giveans from Jefferies.

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 '21? And then maybe what rates are you currently booking this week?

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

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

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 miniscule.

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 going to be in the low teens or mid-teens, something like that, on the TCE.

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 '21. And then also looking at Slide 12, showing the long-term average VLCC 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 1-year rate is only $25,000 a day right now, the 3- and 5-year rate is only maybe $30,000 a day?

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% levered transaction. So the cash breakeven level will go significantly up once you add that. So unless there is some purchase options or something of that nature associated with it, don't expect us to do it.

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

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

And the next question comes from the line of Chris Tsung from Webber Research.

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

I think our strategy has been to -- when times are good, to invent in our balance sheet. Right now, times aren't so good. So we're not generating the type of cash flows that we saw through the past 5 quarters. So this may be a time when there's going to be a pause in debt prepayments. And as you also heard, we actually invested in additional ships. So the combination really suggests that you will see a pause in the debt reductions or extraordinary debt reductions for a little while, at least.

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

Yes. 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.

Great. No, that makes sense. And I guess just as a follow-up, just sticking with capital allocation. As for -- as regards to new tonnage, is there a particular age range that you're looking at or leaning towards any, I guess, future propulsion technology in the pair of eco-designed VLCCs that were from 2016, which should bring out their useful life through to 2020 -- no, 2030? Will these vessels meet the EEXI standards? And are there any capital improvements you guys are looking at or might look to do to kind of get your fleet ready for trading in those times in 2023?

No. We have a focus on to buy ships in the water at this point in time. That's our priority. And they will have to be of eco-designs, i.e., delivered from the second half of 2015 onwards. And these type of designs had a significant fuel efficiency improvement from prior designs and they will certainly have a good life post-EEXI 2023. So we're not in the mood to order ships at this point. And when it comes to future technology, I think you don't rule anything out right now.

And so far, we don't see any convincing technologies that will really carve out the future for these [receipts]. 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 newbuilds and investing in future technology, we are on the sidelines for now.

And the next question comes from the line of Jon Chappell from Evercore.

Trygve, it's pretty noteworthy that when you spoke about the vessel acquisitions, you said it's very rare that you see ships of this quality available at the trough of the market. Maybe a 2-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?

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 the sort of 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.

I think you can assume that we have an excellent deal flow. So when things develop, they certainly come across our desk. So -- and we've also paused on a number of things, right? So...

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?

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 roar and generate a lot of money. And our capital allocation policy says minimum 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 business. So -- but I think keep in mind, it's minimum 60%.

And the next question comes from the line of Omar Nokta from Clarksons Platou.

Just maybe wanted to ask a bit of a general question. You've obviously a fantastic job of putting DHT in a strong position, both commercially and financially. The -- 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?

We think that the sort of the main thing to watch is really COVID, that we are suffering now with the reduced oil concession 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 market increase in the global oil consumption.

And as far as the inventory overhang, that has been worked down quite significantly already. So we think the number one factor to monitor is the vaccine rollout.

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 2 VLCCS, 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?

Sure. What we typically want to do is to borrow up to or around $2.5 million per year of remaining economic life. So for a 5-year-old ship, we figure there's 15 years left in them and 15 x $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, we -- 5 years is the industry standard.

We -- the last 2 big ones we did over 6 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 to commit 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 DHT-style financing.

And the next question comes from the line of Ronald Silvera from R.E. Silvera Association.

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 2 new ships. Can you give me some feeling as to all ships right now. Do you see selling any of the older ones or turning them to scrap during this coming year, 2021 or 2022?

I think our countercyclical strategy typically would involve a desire try to sell older ships when the market is very strong. But during this last up cycle, values didn't appreciate as much as the earnings opportunities. So we managed to secure time charters on several of the older ships that we have that far outstripped sort of the opportunity to sell. So we elected to keep the ships and earn moneys. And as an example, our 2 -- our 2004-built ships were on 1-year time charters earning moneys in the high teens of millions each, which, of course, was a much greater benefit to the company as opposed to selling them.

So -- but of course, we are mindful that some of these ships are getting older. They are all quality ships and certainly have additional opportunities to dance in the recovering market. But they will also be candidates for potential divestiture if those opportunities come. But it's not like they have a fixed policy that has a certain age to have to go. Unless we reach to 20, then they will definitely go.

Okay. Good. How many did we have that close, only 2 of them, right?

Yes, 3 ships that were built 2004.

3. 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 out strengthening the balance sheet. It is obvious to me that the wonderful way that you have done that and reduce the debt so significantly is definitely reflected in the share price, which just recently went above $6, again a share U.S.

And I find it kind of ironic that Frontline that has a totally different attitude toward 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.

Thank you very much, Appreciate it.

(Operator Instructions) And our next question from [George Bowman] from [CS Securities].

I've got a quick question. A couple of quarters ago, you mentioned that one of your ships had been hit in a port, 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?

It's not yet settled. So there is -- there are negotiations, if you like, between the 2 insurance companies, but there is no question about fault. It's more a question about outcome, financial outcome. So we feel it's not prudent to try to suggest any number at this point, but the ship is fully operational, back in business. And again, there's no dispute about fault.

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

I think that would be overstating result of the claim. So...

Okay. All right. Then in general, I would welcome your comments about the market in general. We've seen reports -- press reports about companies ordering as me as 10 ships, then canceling those orders. Then we've seen a report that a prominent, I think, a Chinese shipper, was scrapping up to 10 vessels in their fleet.

How do you see, at the moment, looking at buying opportunities, et cetera, you've got your ear to the market, do you see any scrapping of older tonnage in the current market? Or has that increased recently? Or is it still -- everybody is still fixed under time charters that expire here in the first quarter?

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 financing and long-term charters. And I think most of the market participants, us included, had some doubts that, that would ever go through, and it has now failed. So those 10 ships are sort of out of the way, if you like.

When it comes to scrapping or demolition, in a weak market like now and also with the strong scrapping prices, one would expect scrapping to sort of start to get traction. But there are a number of sort 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 sort of 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 the sort of CapEx decisions to make with dry docks, ballasts, water treatments 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.

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.

We shall see.

There are no further questions. Please continue.

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

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