DHT Holdings Inc (DHT) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2009 DHT Maritime earnings conference call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today, Eirik Uboe, Chief Financial Officer of DHT Maritime. Please proceed.

Thank you, and welcome. Before we get started with the earnings details, I would like to make the following remark. This conference call is also being broadcast on our website at dhtmaritime.com, and a replay of this conference call will be available on the website. In addition, our Form 6-K evidencing 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 of newbuilding and scrapping; and projected dry dock 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.

With that out of the way, I would like to turn the call over to Ole Jacob Diesen, the CEO of DHT Maritime.

Good morning, everybody. I take it that one has had the [chance] to read the earnings release sent out early this morning, but I would still like to focus on some of the main issues. I would also like to say that I am sorry. We didn't quite realize that yesterday was a holiday when we sent out the notice, until it was, in fact, too late.

Now, I shall go through the business situation of DHT Maritime for the fourth quarter of 2009, while Eirik Uboe will focus on the financial aspect for the period.

It looks like the policy of employing the Company's vessels on medium- to long-term charters, which provides stable earnings, is serving the Company well in the current freight market with freight rates today in fact being below the rates relevant to the Company's charter parties. The average remaining years under the charter parties, which are all with Overseas Shipholding Group, is for about 3.5 years.

Now, despite of the freight market falling and the credit crunch taking its toll on ship values during the fourth quarter, the Company remains within its financial covenants, but we keep monitoring the uncertain market development for any potential impact of a further fall in ship values and what this may have on the Company.

We don't think the shipping is out of the woods yet, but it is encouraging to see that currently there seems to be -- the fall in values are leveling off, and, in fact, the freight market has shown improvement in the end of Q4 and also the beginning of Q1 2010. These are traditionally, Q4 and Q1, traditionally the best quarters of the year.

Now, the weak general shipping environment also creates opportunities. And where the DHT Maritime, having over $70 million in cash and stable earnings, the Company believes that by continuing to strengthen its balance sheet, it will be in a position to weather well any fall in ship values and also be in a position to take benefit of the business opportunities such adverse market conditions create and that can provide shareholder value over longer term.

The charter hire arrangements provide the Company with a steady cash flow, regardless of any negative fluctuation in the market to below rates in the charter parties. Additionally, the charter parties, or charter arrangement, also allow for the Company to benefit from the upside when vessels' earnings in the market is over and above the base hire through this profit-sharing arrangement we have with OSG.

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 benefit during the fourth quarter from the profit-sharing arrangement, which traditionally has actually provided at 15% to 20% higher over and above the base hire per quarter.

The balance of supply and demand factors affected by the increase in the supply of vessels and the less cargo we are currently experiencing are mitigating from vessels used for storage, following the contango in the oil price and also phaseout of older and single-hull tankers and, to some extent, from longer transportation distances and slow steaming; not so much by the freight rates. Currently, there are estimated about 40 VLCCs which are being used as storage for oil.

Now again, the market inefficiencies and the vessels' underutilizations unfortunately are not enough to offset the deliveries of newbuildings and the negative effect on demand for transportation, which is caused by OPEC's cuts in oil production.

Long-term fundamentals, however, for the demand of oil and oil transportation are still positive, although it is suffering from a setback currently by the world economic crisis, which resulted in the reduced demand that had led to the cut in the production, and therefore, also less cargo.

With a reduction in the westbound cargoes, which it has experienced, it is China, India and the Far East, the emerging markets, with the growing economies, which remain the primary driver of the growth in oil demand and thus the tanker demand. While the oil demand is expected to show a small increase, any increase in OPEC production is not expected until [one sees] a substantial further reduction in the inventories.

The International Energy Administration has estimated that -- an increase in demand for 2010 by 1.2 million barrels a day, while OPEC is estimated to increase the production by 0.5 million barrels per day.

To get the best balance of supply and demand in the freight market, we are dependent on cancellation of newbuildings, as we see it, as well as the phaseout of the older and single-hull vessels. And this has to outweigh the supply of the newbuildings and the slow growth in the world economy.

Now, the current adverse credit market is encouraging cancellations, as well as delays on newbuildings, and the low freight market is enhancing the commercial obsolescence and phaseout of single-hull and older vessels, as they are mandated by the IMO regulations to take effect in 2010. Among the VLCCs, for example, the expected delivery on newbuildings for 2010 is 80 vessels, while the total single-hull vessels in the fleet are about 90. Of course, not all these ships will disappear at one time, but it is expected by certain brokers that in fact the net increase in the number of ships for 2010 will probably only be 30 vessels.

With the strengthening of the Company's balance sheet, the steady cash flow from long-term charters to strong charter parties and the charters of an average of more than 3.5 years, as I mentioned, to go, this, combined with the scheduled [loan] amortization of the Company's debt commencing in 2011, we feel the Company is in the position to weather the adverse market conditions well and to look to opportunities that can create long-term value for the shareholders.

And with this, I am going to hand it over to Eirik Uboe.

Thank you, Jacob. Before getting into the numbers for the quarter, I would first like to 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. Previously reported finance statements have been converted to IFRS, but did not result in any changes to the income statement for 2008. The changes to the balance sheet as of 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, 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, 2009, changes in the fair value of our interest rate swaps and amortization of the unrealized loss of swaps of $26.4 million as of December 31, 2008 will be reflected in the Company's income statement.

Then let me turn to the financials for the quarter. Total revenues for the quarter was $23.9 million. All these revenues were related to the base charter hire, as there was no additional hires under our profit-sharing arrangements with OSG for the quarter.

Net income for the quarter was $3.9 million, or $0.08 per share. When adjusting for non-cash financial items related to the interest rate swaps, net income would also have been $0.08 per share.

DHT is paid the base hire under a charter irrespective of the vessel's actual earnings in the commercial pools, and these rates were above the rates the vessels earned in the market from the respective pools in the fourth quarter. However, for your benefit evaluating the profit sharing elements, DHT's VLCCs, which operates in the Tankers International Pool, achieved average time charter rates in the Pool of $23,300 for the quarter. And the two Aframaxes, which operate in the Aframax International Pool, achieved $13,300 per day for the quarter. The Suezmax Overseas Newcastle achieved earnings of $22,000 per day during the quarter.

Total off-hire days for the period was 24 days. This mainly reflects the scheduled docking of Overseas Ania. And for the fourth quarter of 2009, DHT's vessel expenses, including insurance costs, were $7.7 million. This reflects the new technical management contracts effective January 16, 2009.

Depreciation and amortization expenses were $6.9 million, and the docking costs relating to Class Special Surveys for both Overseas Rebecca and Overseas Ania [have been] capitalized and will be depreciated based on the estimated time to the next dockings.

D&A expenses were $1.5 million, including legal and financial advisory costs. Net finance expenses of $3.8 million include a gain on interest rate swaps of $2.6 million, and also includes amortization of unrealized loss on interest rate swaps of $2.4 million. Adjusted for these items, interest expense was $4 million.

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

(Operator Instructions) Natasha Boyden, Cantor Fitzgerald.

Just wanted to continue on with your line of thought which -- concerning the balance sheet. Obviously, you are not paying a dividend anymore. With vessel after values falling, do you see yourself (inaudible) at all? And if so, do you find values attractive, given where they are now and what your spot rates would be?

Natasha, it is actually a little difficult to hear what you were saying, so can you please repeat your question?

Sure. Can you hear me now?

Better.

I really just wanted to see, given your current -- [either] your strength in the balance sheet and not paying out a dividend, whether or not you saw yourself expanding your fleet, and whether or not you found vessel values attractive, given where they are now, and what you expect rates to be.

Well, I think that we are actually having a window for expanding the fleet, growing the Company. I think that 2010 will be -- give us such a value -- opportunity. So in that regard, I think it is important that we are strengthening the balance sheet.

With regard to exactly what the rates are going to be going forward, I can (inaudible) actually refer to the time charter rates. And as the time charter rates, if you take a view of the VLCCs currently, the brokers are estimated at the one-year time charter for a VLCC at $34,000 a day, and for three years, they estimate the same, in fact. And the same even for five years. I think I am making reference to the VLCCs because, as you know, that is kind of the benchmark for the whole -- what happens to the total fleet of crude oil carriers.

But we also see that for the Aframaxes, as another example, the rates are around $17,500 to $18,500, and up to $20,000 for five years, which is reasonable rates. And with ship values as they are now, I think there are opportunities that we can see in 2010.

Now of course, I wouldn't mind, from this point of view of growing the fleet, I wouldn't mind if I -- even if could see even lower values. But of course, that would also have to take our own fleet values. And the problem with seeing lower values is often that there won't be any sellers when it gets to it.

That actually is a good point that leads me to my next question. Again, you referenced the credit market turmoil. And we've heard of many companies moving away from newbuild orders or having difficulty financing them. What are you seeing as far as distressed resale opportunities? Are they out there? And if so, is that something that you would look to take advantage of?

We certainly would like to take advantage of it. But I think that the banks currently are not prepared to take these losses, because it will have -- that distressed sale will incur, because it will have -- create a downward spiral, if you will, on their own portfolios. I think that is what you see in the banking world.

The other thing you see in the banking world today, which is making a lid on the credit market, is of course in the United States in particular, where, in fact, the banks can borrow at zero interest rate and invest it in Treasury Bonds and get 3%, 4%. That doesn't open up the pocket book for ship financing at the moment.

Okay. All right. Thank you very much.

Jon Chappell, JPMorgan.

Thank you. Good afternoon. I wanted to follow up on the asset price question, but this way a little bit more to how it impacts DHT specifically.

In your last call, you mentioned that the value of your fleet, charter-free, in May was about $430 million, and that puts you well in compliance with your debt covenants, which is 120% of debt. Just curious, as the year progressed and asset prices weakened since May, do you have an updated charter-free value for your fleet, to give us a little bit of a sense of how much wiggle room you still have on the debt covenants?

First of all, I would like to say that this thing with the -- this charter-free values and the bank, it is of course an industry problem -- or industry issue, I should say. It is not [specifically] for us.

But we have -- our estimation is that we have fallen in ship values by about 50% since January 2008. But from September of 2009 to today, I don't think we have seen much of a fall in ship values in fact. There has been a little bit improvement on the ship values of the newer vessels, but have been a little bit down on the older vessels. So it is clearly flattening out at the moment.

And I think that one should, however, not focus so much on the net asset value as, in our case, one should focus on the fact that we have charters. We are earning, as you can see from the press release today, approximately $10 million a quarter in cash flow.

And I think that is very importantly -- I think one should focus more on the fact that we have a good cash flow going forward and we have charters that last for several years still. I think that is more important then to focus just on the net asset values. I might put it that way.

And in your conversations with the banks, do they share that view, that the cash flow generation from the charters is more important than the charter-free value of the asset?

Well, I think that you will see this in general with many banks, and (inaudible) goes back a little bit to what we said to Natasha. The fact that the banks don't really want to take losses at the moment, they are ready to renegotiate covenants. And we are in the lucky position that we have cash flow and we have cash on the balance sheet, so we are really not affected much on -- and we are well prepared to meet any further fall in ship values.

But I repeat that I think it looks like it is flattening out a little bit, but we are certainly prepared for some further falls through the year, fall in values through the year.

One more just actual question on this topic. When will be the next time that the banks ask for a reassessment of the value of the fleet?

The situation is there that the bank can ask for valuation of the fleet every quarter. We, on our hand, have to always be in compliance. And I can tell you that the bank has in fact not asked for any valuation.

Okay. Two more housekeeping issues. First, the legal and advisory costs from G&A. What was the magnitude of that in the fourth quarter, and was that a one-time issue?

It was -- yes, it is related to certain transactions that we were working on, where we needed some special assistance. Now, the exact figure of this thing, Eirik, would you please give me a hand on exactly what the figure was?

It was about $300,000, $400,000. I don't have the exact figure, but say about $350,000.

Okay, and no carryover to the first quarter (multiple speakers)?

And it's on a -- it is a one-time.

All right. And then finally, there were 23 off-hire days in the fourth quarter. 18 were associated with the Ania. What were the other five?

This is just for the usual off-hire for -- what do you call it -- running repairs that goes on. And that happens always to the ships. It is something -- it goes on every quarter. And I think we are accounting for a certain number of days. How many days are we allowing for each quarter, Eirik?

Well, in the results, we report actual, but I think -- I can get back to you, John, on exactly -- there was a couple of ships that had some running repairs. [They aren't] right in front of me. I can get back to you on which ships those were and how many days.

Sounds good.

Matthew Troy, Citi Investment.

This is Bascome Majors in for Matthew Troy. Looking at the OpEx with the new agreement in effect this year, it has kind of been quite volatile each quarter. Do you guys have a sense for what a good run rate to look at for 2010 might be on the OpEx line, on a per-day basis, now that you've got one year under the belt?

Well, it (inaudible) clearly that the budget that we operated under for 2009 have been a very accurate budget. And therefore, we have certainly now achieved the confidence in OSG's budgeting of our operating costs. So I think what you see now is what we will experience through the year. Do you have something to add on this, Eirik?

No. I think if you look at Q4, I think that is a pretty good -- actually, if you look at the year as a whole, it is probably a good basis for the future.

But we will have some jumps and some ups and downs depending on the various inter-repair periods and also special surveys. It won't be entirely smooth, but I think 2009 will be a good estimation for 2010, with some increase for inflation, obviously.

Okay, so when you say inflation, I'm assuming in the low to mid single digits would be reasonable there.

(inaudible) low single digits? Yes, I mean, I don't have exact number in mind, but, yes, that is probably correct.

It isn't absolutely.

Okay, and on --

There isn't really, you know -- let's put it this way -- as we all know these days, there isn't much of an inflation you put in (inaudible).

Fair enough,

So I think that with a 2009 basis and a small increase on that is probably what we can expect for 2010.

Okay. And back to the cash balance and covenants questions that were earlier. It looks like you've been building cash through the last several quarters and haven't really started to pay down debt. How should we read into that? Is that more of hedging your bets with the banks issue, or are you actually waiting to make a deal with that cash?

We think, as I tried to say, is that I think that opportunities are opening up. We have experienced through 2009 a steady falling values in ships. And yes, it also affects ships we own, but it also gave opportunities.

One of the concerns I think we have had over the last few years and one of the reasons why we haven't really invested in a lot of ships has really been that we've been concerned with the high prices that has been operating in the market. So in fact, the investors should take comfort from the fact -- the deals we didn't do over the last couple of years.

Now, I think that -- and we have always -- I should say we have always focused on having a strong balance sheet, and focus on the cash flow and the debt to market values. We think that it is correct that we at this moment try to build up the cash to increase the solidity of the Company. We don't think we are out of the woods yet with regard to potential further fall in ship values.

At the same time, we think that if we are going to grow, it is important that we have some cash available for that because -- how can I put it -- the access to the credit market is relatively limited today, at least if you want some reasonable cost money.

So if you were to deploy some of that cash in the near term, would you expect that your lenders would be okay with that arrangement as is? And, you know, on top of that, would there, do you think, be any leverage available to possibly increase the deal size beyond what you might have on your balance sheet?

I think that there will be leverage available. And you see that there is a certain opening in the bank market, but you also see other markets which are available, not only the banks. Although that has, of course, traditionally been the least expensive -- or (inaudible) the most attractive debt financing.

All right. Thanks for the time.

(Operator Instructions) Scott Weber, Bank of America.

Thanks. It's Scott Weber sitting in for Ken Hoexter. I just wanted to follow up on the last question and some of your commentary on asset prices coming down and the use of cash. I'm, just curious if you could comment on your priority for the use of excess cash as that cash continues to build.

I know in the past, you've done some voluntary debt paydowns. There hasn't been a dividend in the past two quarters. And then of course, now there is an opportunity to potentially expand the fleet as those values stabilize and you do see opportunities arise. How would you prioritize those sort of three areas for using excess cash?

I'm not 100% I understood which three areas you were referring to.

Paying down -- or paying the dividend, voluntary debt paydowns, or --

Got you. I think that we have -- 2010 is probably a window where the (inaudible) for us as a company to make -- to take advantage of the opportunities that will arrive, rather than to pay dividend or necessarily to pay down debt. The debt is attractive as it is, inasmuch as we have a very low margin. And we believe that the future, we will see again an increase in ship values, and we will see an improvement in the market rates. And conclusion of that is we are holding back cash for investment opportunities.

I see. Okay. And then just in terms of discussing the dividend at all, at what point would you anticipate the timing being right again to start paying out a dividend again? It seems like it is only going to get harder as the debt begins amortizing next year. Is that something that is still kind of on the agenda, or is that something that is really not at the forefront of cash use right now?

The dividend issue is something that we evaluate every quarter, and whether to pay dividend or not is really dependent on several factors. It is dependent on the current and projected cash flow and the relative strength of the shipping markets, as well as new business opportunities and the Company's financial commitments.

So I think that I don't want to give a date for when we are going to reintroduce the dividend. As I said now, I think it depends on the combination of these factors as they are being valued on a quarterly basis.

Perfect. Okay. Thanks.

[Ben Macakovjak], Rivanna Capital.

Thanks for taking my call. You mentioned several times looking for an opportunity. If I look at the stock at $3.51, that looks like a pretty good opportunity to buy it. It is accretive to basically every metric. Can you discuss the possibility of a share buyback?

I think the issue with share buyback is very similar to the issue of dividend, that we -- at the moment, we feel it is better to hold the cash in the Company and that we can -- by going forward can give a better return for the investor over a longer period of time than to start paying back -- buy back shares today. In fact, if we were to buy back shares, the share price has to be even lower. Let's put it that way.

Okay, and so let's assume you do find some ships that you can acquire. How likely is it you could structure the same type of contracts that you have currently?

As you said, that is a hypothetical. We have not talked to OSG specifically about -- if that's what you mean. We are going to do the same thing with OSG. But we are very confident that the fundamentals for transportation of oil in tankers is definitely there. And it is a -- the potential for a long-term.

I mean, the distances for transportation of crude oil specifically become longer and longer, and the emerging markets are further and further away from the producing markets. So the fundamental is definitely there, and I think that is really the basis.

And last question, can you remind me, the debt covenant, is that based on net debt or debt minus (multiple speakers) just told that?

The debt covenant is based on the charter-free value to outstanding debt at the time. As I said, I think we should focus more on the fact that we have a good cash flow on this thing and that we haven't had any calls from the bank on this thing yet.

I understand, but I think it is important for people to know that if you did get too close to the covenant, that you could pay it down with the cash.

Yes.

Okay.

Although that is -- of course, that is not our preference. But we have the flexibility, and that is also what I am saying, that it is good to have cash, and I think the companies which have good solidity and good cash flow are the ones in the best position vis-a-vis the banks and to take advantage of opportunities.

All right. Well, it looked like a good quarter. Thank you, guys.

Andrew Kleinberg, Glickenhaus.

What interest rate are you receiving on all that cash currently?

Eirik, you have to answer that, but I don't know exactly off the top of my head.

It is less than short-term, and if you look at the yield curve, you will see that means very low interest rates.

Could you give me that -- a total right now? Could you actually give me a number?

Well, we do this over time, and it will value over time. But if you go in, if you call a bank and ask for a three-month time deposit, you will get a rate around 20 basis points, is my guess.

Okay, so 20 basis points on $70 million is -- what is that -- about $140,000 a year?

Are you asking me?

Yes.

I would need a calculator to calculate it, but that sounds like it.

Okay. Thank you very much. That's my only question.

[Patrick Wehr, Camden.]

Good morning. I was wondering with regard to the dividend/share repurchase, under your current credit facility, would you be allowed to pay a dividend or repurchase shares? Thank you.

Well, we have not discussed any discuss -- with a bank about repurchasing shares, I must admit. But we -- provided we need the covenants and the loan agreement for a dividend payment, we are free to pay a dividend. But we don't think that is the right thing to do at the moment, as I have mentioned earlier, assuming that you heard some of the other questions that were raised and answers that were given.

Right. But at the end of this quarter, were you in a position where you would be allowed under your debt covenants to pay a dividend, if you so chose to?

It is really up to us to decide how much money we want to spend.

So you would be allowed to?

We have to meet the 135% coverage on our assets to pay a dividend. It depends on the asset values.

(Multiple speakers). All right. Thanks a lot.

[Jerome Rund, Mellowbrook Capital.]

It's [Craig Rosenblum] here for Jerome. You spent $3.9 million in investment in vessels during the quarter. Can you just tell us what that was for and what your expectations are for 2010?

That was special surveys for the Ania and the Rebecca. That is their mandatory special surveys.

Okay. And do you have any expectations for that for 2010?

There is no special survey in 2010, but there are so-called interim surveys. And this is all mandatory, according to the class that the ships are registered with. And the clearly is that when you have a docking and when you have the special survey, it is much more expensive than if you have the interim surveys. But the interim surveys also cost money.

In 2010, we have two interim surveys scheduled. You will see that referred to in the press release.

Okay.

But if you go back on this special surveys that we had in 2009, as Eirik pointed out earlier, these are -- the expenses with those things are [at fact] capitalized and depreciated over the time to next survey. And the basic -- the next special survey.

And then one more question on your comment (technical difficulty). One more question on your comment -- you said the stock would need to be lower for you to consider a buyback. Assuming you are getting about a 20% cash-on-cash return right now, with your free cash flow, what kind of returns are you seeing in the M&A market that make you comfortable with that?

Tom, is that something you can address?

Yes, and this is Tom Kjeldsberg. I work on the business development side. And I think what you are referring to as well is that clearly the investment opportunities that we are seeing right now and that we expect to see going forward either being -- rather than focusing on distressed sales, it is probably sales coming from shipyards that are not being able to deliver the ships to the owners that have owned them. Or alternatively, it is other owners with too many capital commitments that have difficulties.

We see opportunities in those two areas that could generate a significantly larger return -- medium-term return -- to the Company and to the shareholders than by using the cash that we have just to buy back shares right now.

And it is also -- a second part of that question is that for the short term, we are actually using the cash to make sure that we are in fully compliance with our loan agreement and our covenants over the bank. So that is also another reason why potentially right now is not the right moment to use the cash.

The uncertainty in the market is what you are saying. I said earlier that we are not out of the woods yet. Does that answer your question?

Yes, thank you.

Gentlemen, at this time, there are no other questions in the queue. I will turn the call back to Ole Diesen for closing remarks.

Well, thank you very much. Thank you for calling in, and thank you for your questions. They are all good, and we appreciate that you are paying attention to our Company. And we look forward to working with you as we go forward. And we think that the opportunities will come. Thank you very much. Goodbye.

Ladies and gentlemen, thank you all for your participation in today's conference call. This concludes the presentation, and you may disconnect.