DHT Holdings Inc (DHT) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2009 DHT Maritime earnings conference call. My name is Noellia, and I will be your coordinator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Eirik Uboe, Chief Financial Officer of DHT Maritime. Please proceed.

Thank you and good morning. Before we get started, I would like to make the following remarks. This conference call is also being broadcast on our website, dhtmaritime.com, and a replay of this conference call will be available on the website. In addition, a Form 6-K of announcing this news release will be filed with the SEC.

As a reminder, this conference call contains forward-looking statements that are governed by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which include statements regarding DHT's prospects, the outlook for tanker markets in general, expectations regarding daily charter hire rates and vessel utilization, forecasts of world economic activity, oil prices and oil trading patterns, expectations regarding seasonal fluctuations in tanker demand, anticipated levels on newbuilding and scrapping, and projected drydock schedules involve risks and uncertainties that are more fully described in our filings made with the SEC. Actual results may differ materially from the expectations reflected in these forward-looking statements.

And with that, I would like to turn the call over to Ole Jacob Diesen, the CEO of DHT Maritime.

Okay, here I am. Good morning, everybody. I take it that one has had a chance to read the earnings release this morning. So let us focus on some of the main issues. I shall go through the business situation of DHT Maritime for the third quarter 2009, while Eirik Uboe will cover the financial aspects of the period.

The policy of employing the Company's vessels in medium- to long-term charters which provide stable earnings is serving the Company well in the current freight market, with freight rates which today are below the rates [relevant] to the Company's charter parties. And the average remaining years under the current charters, which are all to Overseas Shipholding Group, are over four years.

Despite the freight market falling and the credit crunch taking its toll on ship values during the quarter, the Company remains within its financial covenants. But we keep monitoring the market development for any potential impact on vessel values.

The weak general shipping market environment are, however, also providing opportunities. And with $65 million in cash and stable earnings with positive cash flow, the Company believes that by strengthening its balance sheet further, the Company could be in a position to take benefit of the business opportunities the adverse market condition creates, and thus provide shareholders value over longer term.

Charter hire arrangement we have with OSG provides the Company with a steady cash flow, as I mentioned, and regardless of the negative fluctuation in the market to below rates in the charter parties. Additionally, the charter arrangement also allows for the Company to benefit from the upside when vessel earnings in the market is over and above the base hire through a profit-sharing arrangement.

However, as the current earnings per day generated by OSG per vessel in the freight market are below the base hire, the Company has not had any significant benefit during the third quarter from this profit-sharing arrangement, which traditionally has actually contributed 15% to 20% over and above the base hire.

And unfortunately, for the fourth quarter of 2009, the pools in which the vessels are operating reported in October that a substantial part of their capacity are also booked at rates below our Company's base hire. And consequently, it is not expected that the Company will benefit from any profit-sharing arrangement in the fourth quarter.

Turning to the market, the balance of supply and demand factors affected by the increase in supply of vessels and less cargo are mitigated from vessels used for storage following the current contango in the oil price and from phase-out of older and single-hull tankers, as well as the longer transportation businesses. It is not affected by the market rates. However, the market inefficiencies and vessels' underutilization are not enough to offset the deliveries on newbuildings and the negative effect on demand for transportation caused by OPEC cut in oil production.

On the other hand, the long-term fundamentals for demand of oil and oil transportations are still positive, as we see it, although it is suffering a setback currently from the world economic crisis with the reduced demand that has led to the oil cut in production and thus less cargoes.

Now, when the economy again turns, China, India and Far East emerging markets will continue, as it was before, to be the main driver in the growth of oil demand and thus the tanker demand. And even today, under the current worldwide economic recession, China is the main driver of oil transport. And there is a negative growth in the OECD countries. China's annual growth in GDP is expected at 6% to 8%, according to analysts. And the oil import shows an increase on year to year of over 20%, and 12% quarter-to-quarter basis.

The China stimulus package to ensure continued growth in the economy has also included setting domestic oil prices to encourage production at the new refineries they are building. Such production will require oil imports, substantially transported by sea. Interesting that the stimulus package has given substantial consideration to the fact that transportation is a key driver for growth in China. And, by definition, as China has surpassed the USA as the world's largest auto market, China's oil import is, to the largest extent, for the purpose of transportation.

To get that better supply balance [down] in the freight market, afraid to say that cancellation on newbuildings and phase-out of older and single-hull vessels has to outweigh the growth in the world economy. In addition, there has to be a reduction in the inventories for OPEC to see an acceptable, sustainable price to increase production.

Now, the current adverse credit market is also having its effect. It's encouraging cancellations as well as delays of newbuildings, and the low freight market is enhancing the commercial obsolescence and phase-out of single-hull and older vessels, as they are mandated by the IMO regulations that take effect in 2010.

With the current order book for tankers of about 40%, this assumes that all ships are being delivered that has to be ordered. This has to be looked upon against the current fleet of single-hull vessels and vessels older than 20 years. If you do that, one could, combined with cancellations, reflect actual new supply of vessels of less than 20%. And that -- 20% of the current fleet on that would result in net supply of tonnage of some 3% to 4% annually.

Now, with the strengthening of the Company's balance sheet, the steady cash flow from the long-term charters to strong counterparty and the charters of an average of more than four years to go, combined with scheduled amortization commencing first in 2011, we can see the Company is positioned well to weather the market and take opportunities that create long-term value for the shareholders.

With this, I would like to hand it over to Eirik Uboe.

Thank you, Ole Jacob. Before getting into the numbers for the quarter, I would like to first discuss the accounting changes we implemented with effect from Q1 2009.

First, we changed the basis on which we prepare our financial statements from US GAAP to IFRS. The previously reported financial statements have been converted to IFRS, but did not result in any changes to the income statements for 2008. And the changes to the balance sheet as to January 1, 2008, and December 31, 2008, are minor.

A conversion document, which includes a detailed discussion of the changes to IFRS, was filed as an attachment to the Q1 2009 interim financial report we have filed with the SEC on Form 6-K on May 19, 2009.

Also effective January 1, 2009, we changed the way we account for interest rate swaps. We no longer account for interest rate swaps as hedges for accounting purposes. Therefore, effective January 1 this year, changes in the fair value of our interest rate swaps and amortization of unrealized loss on these swaps of $26.4 million as of December 31, 2008, will be reflected in the Company's income statement.

And with that, I'll turn to the financials for the quarter. Total revenues of $22.7 million for the quarter consisted of $22.1 million in base charter hire, $9.6 million in additional hire under our profit-sharing arrangement with OSG. And we have earned additional hire each quarter since being listed on the New York Stock Exchange in 2005.

Net income for the quarter was $1.1 million or $0.02 per share. However, when adjusting for noncash financial items related to interest rate swaps, net income would have been $0.07 per share.

DHT has paid the base hire under its charters, irrespective of the vessels' actual earnings in the commercial pools. These rates were above the rates the vessels earned in the market from the respective pools in Q3 2009. However, for your benefit of evaluating the [capturing] element, DHT's VLCCs and Aframaxes achieved average time charter equivalent revenues in the commercial pools of $21,700 and $13,400 per day, respectively. The Suezmax Overseas Newcastle achieved earnings of $14,700 per day during the quarter.

While the vessels' earnings for the quarter were below the base charter hire for the quarter, DHT earned a small profit-sharing, which is calculated on a four-quarter rolling basis.

Total off-hire days for the period was 56 days, mainly reflecting the scheduled docking of Overseas Ania. For the third quarter of 2009, DHT's vessel expenses, including insurance costs, were $7.1 million, reflecting the new technical management contracts effective January 16, 2009. Depreciation and amortization expenses were $6.8 million.

The docking costs relating to Class Special Surveys for Overseas Rebecca and Overseas Ania is now capitalized and was depreciated based on the estimated time to the next docking. G&A expenses for the quarter were $1 million. Net finance expenses of $6.8 million include amortization of unrealized loss on interest rate swaps of $2.6 million. Adjusted for this item, net interest expense was $4.2 million.

And with that, I will open up for questions you may have.

(Operator Instructions). Natasha Boyden, Cantor Fitzgerald.

I wanted to just take a look at your operating expense for the quarter. It looks like it came down pretty significantly from last quarter. Were there any one-time items in that, or is this the kind of run rate you are looking at for going forward, given your new contract?

In Q2, we had the [interim server] of one of the vessels, and that was expensed in full; that was about $500,000 on that expense. We had thought Chris would have been in Q3, but it has been delayed now into Q1. So there will be some ups and downs. And exactly what the run rate will be, it's a little too early to say. We are still in the first year under the new contract. So we'll get back to that when we have, I guess, a full year behind us.

Okay, great. Thank you. And then just to touch briefly on the dividend, this is obviously the second quarter we haven't paid it, which is reasonable in the current environment. But is this a permanent move on your part, or do you see yourself reinstating the dividend once you think the market is picking up and should be sustainable for a while?

Well, let's put it this way. We are aware of our shareholders' base. But the dividend cannot be expensed at what I call the Company's solidity and the growth opportunities. And the situation in the Company -- the dividend is being evaluated every quarter, in fact. And it will depend on the situation as we go forward, with regard to what is the growth opportunities, what are the financial commitments, what are the cash flow for the Company and the overall general shipping market.

So it is a situation that is being reviewed on a quarterly basis. But currently, we feel it is correct to strengthen the Company balance sheet at the expense of paying dividend in today's environment.

Okay, fair enough. And that actually leads me to my next question. You are speaking of growth, and with asset values falling and rates being where they are, do you see yourself expanding the fleet at this point and taking advantage of, perhaps, these lower asset values? Do you think the asset values are attractive where they are right now?

Well, I don't necessarily want to be drawn into where the asset value is going to end up being. But I think what we are seeing is we have seen a deep or a very -- steep, I should say, is probably the word -- steep fall in ship values. And I think it's fair to say that it looks like the fall is evening out a bit, if you will. That doesn't mean that it isn't going to continue for a while.

And on that basis, we think that we are best off, rather than to jump in and do a transaction today, we think we are better off trying to build the strength in the Company and position ourselves for the future opportunities.

Matthew Troy, Citi Investment Research.

This is Bascome Majors in for Matt Troy. You said you didn't want to talk about where asset values are going. But can you give us an update of where they are as far as your most recent fleet valuation, how that has trended since year end? And just remind us of what sort of bandwidth you have within your covenants and what sort of the sensitivity is there.

Well, the ship values since the beginning of the year have fallen by over 30%, as far as we can see it. And this is, of course -- what can I say? It's an industry issue, the ship values versus the bank covenants. And it's also, of course, reflected by the market environment.

We are doing our share to manage our relationship with the bank and the balance sheet. We have, since the IPO, always put emphasis on strong balance sheet as well as dividend, and we always focus on cash flow and the debt to market value of the ships.

Having said that, we also, then, as you know, we made a voluntary prepayment of $50 million in June. And we assess that, today, with the outstanding debt and the financing of the ships for just under $300 million, we have ship values, the latest that we can assess, although it is a little hard to get the right data point, as you probably appreciate, is around $400 million.

So that is how we see it. But I think that it looks like the values are kind of leveling off, but the trend is still down.

Okay. And as far as your covenants, can you remind us what the --

The bank covenant that we have is -- minimum value is 120% of charter-free value of the vessels to outstanding debt. But I think it's important when you look at this and the relationship with the bank, I think it's important that you also pay some attention, because we may have to make some prepayment to meet the covenants. But I think it then is important to look to the fact that we have the cash flow that is coming in on a quarterly basis. And you look to the last quarter, the third quarter, we generated a cash flow of $10 million based on the base hires only.

(Operator Instructions). Ken Hoexter, Banc of America-Merrill Lynch.

It's actually Scott Weber sitting in for Ken Hoexter here. I just wanted to follow up on that last question regarding the bank covenants. How often is the bank test held on the covenant? And when is the next valuation test?

There isn't a test kind of -- there isn't any set dates. We have, of course, the obligation to make sure that we are not in violation of any covenants. And then it's up to the bank to decide -- whenever they want, they can come and ask us to bring up valuations. There isn't any set date; at least, that's what (technical difficulty).

Okay. And I know you said the average remaining term under the current charters is a little over four years. How staggered is that? Could you remind us as to when the first boat would come off of charter?

The time charter vessels -- there are seven of the time charter vessels, the VLCCs and the Aframaxes. And the first Aframaxes come off in the beginning of 2012, and then these charters are staggered so that the last VLCC is off the current charter in the end of 2013. The variable charters, one ship goes to 2014 and one goes to 2018. (multiple speakers).

Okay. Terrific. Those were my two questions.

Ben Mackovjak, Rivanna Capital.

Can you take us through the appraisal process in a little more detail? So the bank can ask for you to do an appraisal at any point, or is an appraisal good for a year?

No. We have an obligation to make sure that we are not in violation at all the time. And then the bank, if they want to, they can ask for valuations during the year. And they have done it, but they haven't done it right now.

They can ask four times in a year, Ben.

Excuse me?

They can ask four times in one calendar year.

Okay. And historically, how often have they done it? Do they do it four --

Actually, the only time they have -- we have had a valuation initiated by the bank was in May this year. Then we made a voluntary prepayment, because we saw the development, what was happening to the ship values. So the bank has -- as far as we are concerned, are comfortable.

And was it $415 million in May? Is that correct?

No. I think the values in May -- Tom may have to correct me here, but I think the values in May, with an average between the brokers, were over $430 million-plus.

Yes, that's right, Ole Jacob, $430 million.

Jeff Rudner, UBS.

I'd like to revisit the dividend policy, which the Company decided not to pay in the second quarter. I'm looking at the press release for the second-quarter earnings, and you indicated that, because the Company believes the recent adverse developments in the global shipping market with downward pressures, that by eliminating the dividend, you said, therefore, decided not to declare the dividend to take advantage of such opportunities and would also generate shareholder value over time.

When the second-quarter earnings release came out, the price of the common stock was slightly over $5 a share. Based on this morning's premarket quotes, the stock is trading under the close of $4 a share yesterday, so the stock is down by over 20% in the intervening quarter.

Cash flow, on the other hand, was $65 million at the end of the third quarter versus $50 million, an increase of $15 million over the quarter, with slightly under 50 million shares outstanding. We had been paying a dividend of $0.25 a quarter. Cutting it in half would have been $0.125 a quarter. Even paying $0.10 a quarter winds up being roughly $5 million.

Wouldn't it make sense to enhance the price of the stock by paying even a minimal dividend of $0.10 a quarter or $5 million a quarter? It would still give the Company the opportunity to increase cash flow. But more importantly, by increasing the cash price of the stock, it gives us the flexibility to issue new stock if a strategic opportunity came along in which the Company wanted to participate.

First, I shouldn't answer a question with a question. But the first question that comes to my mind when I hear your question is really if the share price would actually go up if we increased the dividend with a small amount. That is the one side; I'm uncertain about that.

And the other side is that I do believe that growth is not only a yield issue, but is also about building value and financial flexibility. That gives us the possibility to build value in the Company, and I would hope that that also should bring up the share price in itself.

I appreciate your comments and thoughts. But getting back to your first question, based on the fact that the price of the stock went down significantly the first day that the dividend was eliminated -- purely a guess or a guesstimate, I would imagine, but certainly by paying out a cash dividend of, say, $0.10 a quarter or $0.40 a year, it would appear to me that it certainly wouldn't hurt the price of the stock, but certainly could help the price of the stock. I'm not saying it would necessarily get back to $5 or even higher, but at least it would give people confidence, investors confidence in the fact that the Company would pay out part of its cash flow in the form of a dividend, as had been announced in previous years.

But secondly, and equally as important, I appreciate the fact the Company wants to keep as much cash capital available for future acquisitions. But being that we are building up cash balance by $15 million this quarter, and I would imagine over the next few quarters, even without any profit-sharing arrangements from Overseas Shipholding Group, a $10 million to $15 million cash balance increase, that paying out $5 million to the shareholders might make the most economic sense for the long-term prospects of the Company.

I think that, as I said earlier, in that regard, I see what you are coming from. And of course, we are aware of the shareholder base. But I think that -- I don't think it's correct to us to pay a dividend at the expense of the Company's solidity and the growth opportunity that we see down the road.

I think in this regard, it's also important to say we don't know exactly what's going to happen with ship values going forward. The trend is going down; how much, we don't know. And we think it's, therefore, right that we keep a solidity in the Company to meet financial commitments as well as potential to give us flexibility for growth opportunities.

At this moment, I'm showing you have no further questions in the queue.

Well, if that is the case, then I would just like to say thank you for everybody who participated. And we shall do our best for our shareholders going forward in the next quarter.

Thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Have a great day.