DHT Holdings Inc (DHT) 2011 Q3 法說會逐字稿

Good day and welcome to the DHT Holdings third-quarter 2011 earnings call. For your information, this call is being recorded.

At this time I would like to turn the conference over to your host today, Eirik Uboe. Please go ahead, sir.

Thank you, and before we get started I would like to make the following statement. This earnings call contains assumptions, expectations, projections, intentions, and beliefs about future events, in particular regarding daily charter rates, vessel utilization, the future number of newbuilding deliveries, oil prices, and seasonal fluctuations in vessel supply and demand.

When used the words such as believe, intend, anticipate, estimate, project, forecast, plan, potential, will, may, should, and expect, and similar expressions are intended to identify forward-looking statements but are not exclusive means of identifying such statements. These statements reflect the Company's current views with respect to future events and are based on assumptions, and subject to risk and uncertainties.

Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent the Company's estimates and assumptions only as of the date of this earnings call and are not intended to give any insurance as to future results. For a detailed discussion of the risk factors that might cause future results to differ, please refer to the Company's annual report on Form 20-F filed with the Securities and Exchange Commission on March 31, 2011.

The Company undertakes no obligation to publicly update or revise any forward-looking statement made on this call, whether as a result of new information, future events, or otherwise except as required by law. In light of these risk, uncertainties, and assumptions, the forward-looking events discussed on this call might not occur and the Company's actual results could differ materially from the anticipated -- from those anticipated in these forward looking statements.

And with that out of the way, I would like to turn the call over to Mr. Svein Moxnes Harfjeld, the CEO of DHT Holdings.

Thank you, Eirik. Welcome to our third-quarter earnings call. We will go through the highlights of the results of the quarter.

Net income for the quarter after adjusting for a loan cash impairment charge of $56 million was $3.3 million, or $0.05 per share, compared to net income of $3.6 million, or $0.07 per share, for the third quarter of 2010. We declared a cash dividend of $0.03 per share for the quarter, which is payable on November 16 to shareholders of record as of November 8.

We had a net loss for the quarter of $52.8 million or $0.82 per share. Due to the weak tanker markets and decline in values for secondhand tankers, we adjusted the carrying value of our fleet to a non-cash impairment charge of $56 million or $0.87 per share.

We made a voluntary prepayment of $24 million under our credit facility with RBS, reflecting the decline in values for secondhand tankers and to remain in compliance with our covenants. We enjoyed steady operations through the quarter and our good charter cover resulted in an EBITDA of $13.6 million.

On August 5 we announced that we would renew the offer for all of the issued and outstanding shares of Saga Tankers as the conditions set out in the transaction agreement were not fulfilled. Revenue for the third quarter was $26.6 million, 10 vessels are on period charters until between 2012 and 2018 and the DHT Phoenix and the Venture Spirit are employed in the tanker's international pool.

Vessel operating expenses for the quarter were $8.2 million compared to $6.8 million in the same quarter last year. The increase is a direct reflection of fleet expansion during the first half of 2011. G&A for the quarter was $2.3 million, including non-cash costs related to restricted share agreements from management [and Board].

G&A for the quarter includes $0.3 million related to the offer to acquire Saga Tankers.

Net financial expenses of $1.9 million include net non-cash gain on interest rates of $.7 million as well as amortization and realized loss of interest rate swap of $0.4 million. Adjusted for the non-cash impairment charge and non-cash interest rate swap-related items net income for the quarter was $2.9 million or $0.05 per share.

Cash on hand at quarter end was $45.4 million. The difference in cash from June 30, 2011, was mainly due to the voluntary prepayment of $24 million under our credit agreement with RBS. And with that we open up for Q&A.

(Operator Instructions) Ken Hoexter, Merrill Lynch.

Good morning, guys. Thank you. It's Scott Weber in for Ken. Can you give us a sense now for where the fleet value is and approximately how close you are to the covenants after the repayment of debt?

The impairment is a reflection of impairment tests conducted by the Company. We feel, obviously, that we have done this in a prudent fashion and we want to reflect a realistic picture of the Company as far as possible.

The voluntary prepayment is also a reflection of the same prudence in order to make sure the Company stays in compliance with our covenants. So we are not communicating particular details beyond that, Scott.

Okay. Then just thinking about the fleet here and the Venture Spirit, what is your ability or what would the cost be involved to break the contract on that chartered-in vessel if you wanted to?

When we charter a vessel we are focused on the purchase options on this charter. Due to the significant decline in vessel values during the third quarter that purchase option has not the same value to us as we have envisaged it to be. So we are not explore a cancellation or renegotiation of that charter so we don't have a particular number for that if we were to do that.

And, importantly, we do not have the right to just unilaterally cancel the charter [party] (inaudible).

Sure.

And the period market of such is also very thin at this juncture, so we have seen hardly any period [fixtures]. So say [a relet] of the vessel is not really likely. What we have seen though is that earnings are somewhat improving as of late, and we have seen fixtures up to the low, mid (inaudible) on the AG Far East routes. And considering slow steaming, as we do in the Tankers International Pool, this means that spot earnings in the pool at these small scale levels are the high teens.

Got it, okay. And just to touch on what you mentioned about liquidity and the period market, has that picked up at all or is it still relatively illiquid? Have you seen it pickup very recently with the rate improvement you mentioned?

No, we have not seen any change in that so there are a number of estimates made by brokers for what the period market would be, but we view that to be more theory than reality at this point in time. There are not really there to offer those rates if you wanted to pursue such an opportunity.

Okay, terrific. Thanks for the time, guys.

(Operator Instructions) Jon Chappell, Evercore Partners.

Thanks, good morning. I have another question on the prepayment. I am assuming that that prepayment was done as of the vessel values on September 30, is that correct?

This is done towards the end of the third quarter.

End of the third quarter. So a lot of the deals that we have seen done since then have had increasing declines in asset values. Would it be safe to say as we look at what has been happening in the market and then the pretty steep and proactive cut to your dividend that you have stacked further prepayments to remain in compliance with your covenants as we look at the fourth quarter?

This will obviously depend on how the market develops going forward. The adjustment of the dividend level is truly a reflection of the decline that we have seen in asset values through the third quarter, and there are two main drivers for us to adjust to the dividend accordingly. One is to ensure that we have cash at hand in the case that we need to make adjustments to stay in line with our covenants.

Secondly, and also equally important, is that the drop in asset values are also -- is also creating a number of investment opportunities. So it is also a [value] for us to preserve some cash to see and also to look at investment opportunities at this time in the market.

I know you will probably say that you look at the dividend every single quarter, but when you thought about this cut did you think about making a cut deep enough that you got it to a level that is sustainable, even if the market continues to stay weak? Basically the other way of asking this is there further downside risk to this $0.03 or is this kind of the worst-case dividend?

I think if you keyed up the companies considering the dividend on a quarter-by-quarter basis we do think however it is important for a company to share some of its earnings on a cash basis with its shareholders. So we hope to be able to continue to return cash to shareholders. The level, however, will be determined on a quarter-by-quarter basis and considering market developments, earnings and also the potential need to preserve cash to make sure that we are in line with our covenants in the loan facilities.

Okay. And then just a couple housekeeping for the model. After the impairment charge, does the G&A run rate change significantly?

Yes, it's Eirik. It's going to come down by about $1.3 million on a quarterly basis. We will be fine-tuning that so we will let you know what the exact number will be, but it will come down by $1.3 million [quarterly].

Okay. And then also after the Saga ordeal is now behind us, the G&A run rate, should that come down as well?

Well, the quarter includes some one-off costs related to that so as we initially said they were at $0.3 million in the G&A for the quarter that were particularly related to the Saga transaction.

So a $2 million run rate is probably a good way to look at it.

Yes, I think you could use that number.

Okay. And then, finally, just an update on these -- I think you have one VLCC dry docking and then two interim surveys for Aframax in the fourth quarter. What is the expected off-hire time and the costs associated with that?

We typically plan for up to 30 days off-hire for the VLCCs for special surveys. We did, however, beat that somewhat in the second and third quarter with Ann and Chris, so that is what we are planning on. The Eagle is currently in dry dock and will be out in the next few days.

We have two of Aframaxes, the Sophie and the Chris, conducting interim surveys -- sorry, Cathy -- conducting interim surveys during this quarter. Then we have the Regal up for a first vessel survey in the first quarter net year.

What do you estimate the cost to be for those interim surveys and special surveys?

We are not guiding particularly on cost on our ships, but we believe that the market and the whole industry are using the range from $2 million to $3 million for second special surveys. This will, of course, depend largely on the condition of the vessel and the work to be done. For third special survey on on a VLCC that number will be higher and could be in the range of $2.5 million to $4 million. In the general marketplace, so we are not guiding specifically on our ships.

That being said, we conducted special surveys, second special surveys on Ann and Chris in the second and the third quarter, and we were very pleased with the outcome of that. And they came in at the low end of that range.

Okay. I appreciate the help, thanks.

Michael Chapman, Private Capital Management.

Just want to get your input on the strategy now for the Company. Obviously you have lowered the dividend, you have cash on the balance sheet, and you should generate cash over the next 12 months in almost all instances. You are willing to buy ships in the $50 million to $60 million range. Are you willing to buy ships in the low $30 millions?

Yes, we are but we believe there are two things that we would look for at this juncture. One, as you see, we can develop transactions with some form employment, i.e., cash flow attached to it, like they did with the Eagle.

Secondly, we need to ensure that the Company has sufficient cash at any given time really. So how we will finance it also is something we need to determine, again depending on the deal in question.

What is sufficient cash that has to stay on the balance sheet for you guys to be comfortable?

The holdings -- at the holding level we have a covenant of $20 million that we believe it's prudent to keep a higher level than that. But again this again will be a reflection of the general employment profile of the fleet and we have a number of charters up for exploration next year. To what extent options will be declared, etc., is something we will not know until at the earliest around end of this year.

So cash is really or leverage is really a reflection of the employment profile of the Company.

And given what is going on in the market order rates and we are hearing of a decent number of cancellations, what is your expectation for how long do you think the soft market will last?

We have said as a general comment that we felt that 2012 and also 2013 will be challenging times. But as we have seen earlier this year, as we are probably seeing a little bit right now, you do see some spikes in earnings from time to time, which gives us an indication that the underlying balance is not totally out of whack. So you should get periods with some decent earnings.

I think the challenge now in the order book is that there are a number of very expensive ships on order and some of the companies that have ordered these ships will struggle to finance those orders. So we do expect to see a continuation of some haircutting in the order book. (multiple speakers) We want to stay prudent and we think the next couple of years will be tough.

And when you look at the boats available, the ships available are you looking at newer, older ships? So would you consider taking on some options if people can't pay those or are you thinking more 10-year-old ships to put in the fleet?

We have earlier advised that we wanted to look at the five- to 10-year-old brackets. Obviously now with the vessel values coming down one could afford a slightly newer ship. So it's possible to bring that to kind of three- to seven-year-old bracket. I think that is something we would very much prefer. (multiple speakers) But it's also down to the technical specification and the condition of that particular ship.

Okay. And then just one final question. There has been talk about new orders coming in for VLCCs with just more efficient propulsion systems which would allow them to be profitable at these levels. What is your thought process around that and how that would affect the market going forward? Thanks.

As a reflection of the higher tanker prices, the yards or the leading yards in Korea in particular have developed new designs which will be more economical than the current designs. The additional price tag for those currently is in the range of $12 million to $16 million more for such a vessel, and you are not seeing any traction really in the market of people going out and ordering these ships and paying that extra premium.

So obviously if the bunker prices are adjusting from $650,000, $700,000 to $400,000 or $300,000 then that additional price tag becomes quite expensive to order a more economical ship. So I think there is yet to settle a consensus around whether to order those ships or not, and so far we haven't seen any.

Okay, thank you.

Marius Magelie, ABG.

Thanks, my question has been answered. Thank you.

Natasha Boyden, Cantor Fitzgerald.

Good morning, gentlemen. Just wanted to follow up on the sort of pre-vessel acquisition questions. Given the state of the S&P market now, what are you seeing in terms of liquidity? And when you do look at potentially acquiring assets, are you looking, like you did with Saga, at potentially acquiring some kind of fleet or would you look at one-off?

We are looking at both, and the key for us really is, of course, value on the assets in particular. But then related to that is to what extent can we secure some form of employment and, secondly, then how can we finance that transaction. Every deal is different really, so there is not one simple answer to this, Natasha.

However, I think what we would like to convey is that we are prudent. We don't want to risk the Company or bet the farm, if you like, and it's really important that we can operate the Company steadily and safely through this downturn. A key that we have said in all our presentations is that staying power, i.e., low cash breakeven levels, and ensure that the Company comes out at the other end of this down cycle with very significant upside in our company once the market return, although that might take a couple of years.

So again making sure that we preserve the health of the Company is really the number one criteria for us in making judgments on each individual investment opportunity.

Right, right. Understood. When you look at putting a charter onto a vessel that you might potentially acquire is there one particular vessel class that is standing out as more attractive at this point, given your outlook for rates and asset values?

Not really. I think for now we have been mainly active on the lease sector. We have seen now -- saw Aframax values adjusting to almost the same extent that you have seen on VLCCs. There has traditionally been more liquidity in the period market for Afra than for these. So I would say we are still considering all three asset classes that we are in. Again, it will be dependent on the particular opportunity that will arise.

Okay. All right, and then just lastly just a brief question. In terms of the impairment charge, could you just give a little bit more color as to what specific asset that was in relation to?

We do not communicate a particular book or carrying values for each individual ship, so this is a fleet-wide consideration and in adjusting to the recent events in the market.

Okay. All right, thank you very much.

Jeff Rudner, UBS.

Good morning or actually good afternoon, gentlemen. I would like to get back to some of the questions regarding asset valuation and the $56 million impairment charge.

I realize that obviously it's difficult, if not very difficult to predict going out on any length of basis, but the next one or two quarters do you anticipate further impairments to the asset valuation, which would obviously or possibly mean paying back RBS additional funds? Or do you think at this point in time asset valuations have come down sufficiently that they might hold steady for the next one or two quarters?

This is obviously a difficult thing to predict, but we have seen a significant correction or adjustment in asset values to the third quarter in particular but also to the year. We have a sense that a lot has already been taken out on this in the market, but there could, of course, be new events that could change market prices again.

But we have seen, especially now on the VLCCs sector for, say, the 10-year-old asset class, a number of buyers coming out and picking up assets at the prices that have been set. And these are buyers that have very good record of buying well historically and are the kind of, say, they are [big] fishes if you like. So if this is giving any comfort that is really what just you are observing in the market.

When making the impairment and the prepayment we are, of course, considering not to create too much volatility in these type of issues for the Company. So we can only hope that this is sufficient unless really the market and the world changes significantly over the next quarters.

Okay. An additional question, with the political situation in Libya looking like it's finally coming to a conclusion, assuming we do have an uptick in Libyan oil exports, would that affect the market significantly?

That is predominantly an Aframax trade and some of that Libyan short fall has been substituted by other areas. The Libyan oil is also such a quality that it was attractive in the marketplace, so we don't expect that to change the tanker market dramatically in any way. But it is a source of supply that the market would like to see come back on for sure.

Okay, thank you.

(Operator Instructions) Michael Chapman, Private Capital Management.

I am just trying to get a handle on the strategy going forward. You mentioned a couple of things you wanted to make sure that the Company made it through the downturn. You want to be very safe there, but you also wanted to provide upside when you come out. When you think about the spot versus time charter of your fleet now and in the future, how should that change?

When the vessels come off charter in the next year or so, given the outlook for the market, would you want to put half of them on period charter, half of them in the spot to maintain upside with some flexibility on the cash flows? Or could you just kind of maybe go into a little bit more detail on how you plan to manage out of this downturn?

Shipping will continue to be a cyclical industry and we would like to manage our assets and our fleet accordingly. This means that hopefully going through downturns you have more charter coverage than when you would expect the good markets to be there. And you would like to try to use the good markets to increase your -- and work through to increase your long-term capital position for the next, say, investment in the cycle.

So this is something we would seek to manage quite dynamically. So I think we would like to avoid, to the extent we can, to [fix] out long-term at the bottom of the market on fixed rate.

If you can, however, develop charters where you have some comfort on some fixed cash earnings but at the same time can secure profit sharing agreements or where part of the rate had some reflection on market developments that is one way to try to cater to both, if you like. That you have some floor in earnings on the fleet but at the same time have not given away the upside at the bottom of the market.

So coming out of this, given that this has been a prolonged and pretty brutal downturn, would expect as shareholders that there might be more exposure to the spot market or upside coming out of this than we would have seen historically?

I think even if we were able to call the market right, if you like, and if we have a particular period when we think things will improve, it's in the good markets you would like to see if you can build a strong long-term cash flow book. So not really before that up-turn in the cycle, if you like.

So it's not one simple answer to this, but we are in good dialogue with a number of our existing but also prospective clients in developing DHT as a service provider or supplier of tanker tonnage, in particular, to [more] companies. And, hopefully, during this cycle we can create opportunities that are of mutually interest, both to the end user as well as to DHT and its shareholders.

So there could be ways of investing well in the downturn, but also at the same time develop [fees] with an end-user that gives some comfort to the investment that you have made in a tough market. But also offering some sort of upside to the investor.

So going through the thought process then would be to try to lock up enough tonnage in a period charter to cover your expenses and then have upside? Or would you even risk having periods where you are operationally cash flow negative but have a lot more upside?

I think in general it depends on where in the cycle we are and I think it's important to note that we are very fortunate today with having 10 out of 12 ships on good charter providing solid cash flow that we enjoy. But since Svein and I came into the Company a year ago we made it very clear that the Company will change a bit from the way it was in the past when everything was always done on long-term charters.

So going forward you will see more spot exposure or market exposure. But as we have said all along, we want to do this in a prudent way and make sure that we are not over extending ourselves by taking on too much spot exposure. So it depends a lot on where in the cycle and also the condition of your balance sheet what you can withstand from that perspective.

Okay, great. Thanks. Good luck, guys.

(Operator Instructions) Sandy Goldman, Front Barnett.

Could you comment on your relations with OSG in terms of the management contracts and the likes?

I am not sure I truly understood your question.

OSG is providing you with services on (multiple speakers) some of the vessels [in Greece], correct? Could you comment (multiple speakers)?

We have, as of current, we have nine ships on charter to OSG. Two of these ships, the Suezmaxes, are on so-called variable charters whereby the client, i.e., OSG, are responsible for -- and also not only responsible, also have the risk of the operations of the vessels. So they decided who will manage the ships technically and how they will be insured.

Then we have seven ships that are on time charter to OSG and of those seven there are three VLCCs and four Aframaxes. The three VLCCs used to be technically managed by OSG on an arm's-length contract between OSG and DHT. That technical management agreement was terminated during this year, so those three VLCCs have been shifted to another technical ship manager based in Singapore where our other VLCCs are also managed.

The four Aframaxes are still being technically managed by OSG's technical ship management outfit in Newcastle and those management agreements are third-party agreements or arm's-length basis and not related specifically to the time charter agreement as such.

Do you see any risks or is termination all defined contractually so there is no risk to you of notification or the likes?

There are risks to terminating a technical management agreement, because when you change technical management on a vessel you typically lose your oil major approvals and you need to reestablish those with the new manager. So you are dependent then on getting trade like a grace period with your client to reestablish those oil major approvals with a new manager.

We successfully went through that on the three VLCCs when shifting those from OSG to our other ship manager, so there is no particular plan for the Aframaxes as of now.

Thank you.

(Operator Instructions) Gentlemen, we currently do not have any questions in the queue.

Okay. We then say thank you to all for attending our third-quarter 2011 earnings calls, and we thank you for your continued interest in our company. Have a good day.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.