DHT Holdings Inc (DHT) 2012 Q3 法說會逐字稿

Good day. Welcome to the DHT Holdings Q3 results 2012 conference call. Today's conference is being recorded. At this time, I'd now like to turn the conference over to Mr. Eirik Uboe. Please go ahead, sir.

Thank you and good morning. Before we get started with today's call, I would like to make the following remarks. This conference call is also being broadcast on the website at dhtankers.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 and tested bedded levels on 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.

And with that, I'll turn the call over to Svein Moxnes Harfjeld, Chief Executive Officer of DHT Holdings.

Thank you, Eirik. And welcome to our third quarter 2012 call. Thank you for attending. I'll walk you through the highlights of the quarter. And following that, we will open up for questions.

The EBITDA for the quarter came in at $7.3 million, resulting in a net loss for the quarter of $4.2 million, after adjusting for a non-cash impairment charge of $92.5 million. Net cash provided by operating activities for the quarter was $8.5 million.

We will pay a dividend of $0.02 per common share, and $0.28 per preferred share for the quarter, payable on November 12 for shareholders of record as of November 6.

When determining the dividend, our Board has taken into account the general business conditions, the continued weak tanker market and the recent 8-K filing by OSG.

Following the recent announcement by OSG regarding its solvency and due to the continued weak tanker markets, we adjusted the carrying value of our fleet through a non-cash impairment charge of $92.5 million.

The decline in revenues during 2012 is primarily due to two vessels being sold during the second quarter and increased spot market exposure as vessels have come off charters.

We are in compliance with our loan facilities and had an unencumbered cash balance of $72.2 million as of September 30. We have no scheduled principal installments under our three credit facilities in 2013 and 2014.

Scheduled principal installments total $12 million in 2015. However, further decline in vessel values may result in additional prepayments in order to remain in compliance with minimum value covenants.

One vessel was redelivered from time charter with OSG during the quarter and two more vessels are expected to be redelivered from OSG during the next six months. Following these redeliveries, the remaining charters with OSG will be two Suezmax vessels, which are on long-term bareboat charters to December 2014 and January 2018, respectively.

Following the fleet appraisal for the third quarter, we repaid $3.1 million under the RBS credit facility. Following the fleet appraisal for the fourth quarter, conducted in early October, we repaid $4 million in October. The next scheduled principal installment under the RBS facility is in the fourth quarter of 2015.

The VLCC Venture Spirit, which was chartered in, was redelivered to its owners in September. The vessel traded in the spot market during the quarter.

At our 2012 Annual General Meeting of Shareholders, the shareholders voted to authorize a 12-for-1 reverse stock split of our common stock, par value at $0.01 per share. The reverse stock split became effective after the close of business on July 16, 2012.

And with that, we open up for questions.

Thank you. (Operator Instructions). Jon Chappell, Evercore Partners.

Pretty timely announcement I guess, given what OSG put out on Monday morning, and you guys are out, a little bit less than 24 hours later, and making some big changes.

So, number one, were you already in conversations with OSG? Had you anticipated what was happening there? And then, how did you get to the math surrounding the magnitude of the write-down? Is that just assuming that the contracts are no longer generating cash any more? I mean, how did the $92.5 million come about?

Just on your first question, we are not privy to any other information with respect to OSG than what the market has been informed about; so just to be clear on that.

I think, in general, on the impairment, the non-cash impairment charge, it is largely driven by IFRS accounting rules, and thereby, considering the general market environment, and the one key in this analysis is to reduce the expected life of the vessels and the depreciation line, from 25 years to 20 years.

And then, as I mentioned, it's really then adjusting also for a potential loss of the bareboat revenues in particular, with -- for the two Suezmax vessels.

Is OSG current on all the charters as it stands today?

Yes they are.

Okay. And what -- I mean the -- two of the contracts expire in January and April, so I would think that they would continue to honor those, given their short duration, but the bareboats are obviously somewhat at risk.

What will your plans be for the Suezmax vessels if OSG were to try to renegotiate? Would you accept a much lower rate from them? Would you look to put it out to a third party and reassess the employment of those vessels?

We are prepared to take over management of these vessels. We are not engaged in any discussions with OSG for potential renegotiations or other solutions.

So I think, in general, the markets are quite weak and we would consider really all options for what would be deemed the best solution for the Company. And whether that is spot, through pool participation, or entertaining alternative time charters.

But, again, as we speak, the charters are still in place. OSG has not filed, and they're not requested any renegotiations on these charters, and they are current on their payments to us.

But, of course, as a contingency, we're prepared for all eventualities and we'll react swiftly.

Right. Just a question about the magnitude of the dividend cut. If we just assume that the contracts with OSG were to go away, and you had to re-charter those vessels at market levels, by my estimates, it's a little over 20% hit to the 2013 EBITDA, yet the magnitude of the dividend cut was far higher than that.

Is this more than just the OSG issue? Is this potentially a transition of DHT's strategy from one of yield to one of growth? I understand that the market wasn't giving you credit for $0.24; the yield was ridiculous. But is now the time where you maybe look to retain cash and maybe transition a little bit more to a growth strategy?

I think on a general note, and as we have stated in the release, our Board has taken into account general business conditions and the continued weak tanker market.

But I think also, adding to that, as we have stated all along, the Company, DHT, we have growth ambitions, and certainly hope to expand the Company during the downturn when the right opportunities will arise, and we feel that the Company are in a position to capture those.

Okay. Last question, just for Eirik. The D&A run rate, obviously, you cut the lifespan of the vessel from 25 years to 20 years, so the $10.6 million in the third quarter, is that the run rate to use going forward?

Jon, it's actually not. Q3 was a special quarter because we had to assume that the life was reduced already from July, 1. But, of course, at the end of the quarter, we did the impairment charge and wrote down the book values.

So, going forward, we have estimated the run rate depreciation to be about $7.5 million.

All right. Thanks, Eirik. Thanks, Svein and Trygve.

Herman Hildan, RS Platou Markets.

I think you briefly touched upon many of the questions. I'm just wondering in terms of what time do you feel like it would be interesting to expand your fleet? Is that more a timing issue or a price issue? And if it's a price issue, what kind of levels would you find it interesting to acquire assets, and what kind of assets would you like to acquire?

I think we are not communicating a specific time or price target on our ambition to expand. So we are very much following the general market. We feel we have an attractive deal flow and are looking through a number of opportunities.

So -- but there are a number of things that we would like to see in place, so to speak, but in order to make a move, I think, ideally, we would like to maybe contemplate ships in the [V2C] sector, and also somewhat more modern ships than what we have. But it's too early to say, really, what that specific growth opportunity will be, whether it's a single ship or whether it's a fleet, and so forth, so.

And with so much unclarity about our future cash flow, due to the OSG situation, we are going to play it very cautiously in the near future. So I don't think you should expect any acquisition from our side until we see a little more clarity on the OSG situation.

Okay, thank you very much. That makes sense. Thank you.

[Brian Shearer] from Deutsche Bank.

Just a quick follow-up on OSG. If OSG were to file for protection under Chapter 11 of the Bankruptcy Code, do you -- and they then sought to project the charters on the Newcastle and the London, do you have -- can you give us any color in terms of how that would unfold for DHT?

I think it's important to note that our balance sheet has, by design, been built for all eventualities. I think you'll recognize DHT with a moderate leverage, a pretty significant cash cushion and, again, as we have said many times, very low cash break-even levels.

So we have a plan conservatively, so I think the Company would be able to deal with that eventuality, although we, of course, hope that OSG will stand by its obligations to us. But I think at this point, it's a little premature to speculate in exactly what we would do if OSG files.

Okay. That's fair. Thank you.

(Operator Instructions). Matthew Ryder from Credit Suisse

I just have a quick question about the bank facilities, your anticipation of the use of the cash, run rate or over the next two years maybe to have to continue to cure those covenants based on how the valuations have been going for you guys.

Your line broke up for us, so your question wasn't all clear. Could you please repeat your question?

I'm sorry, yes. I'm just -- I'm asking about the bank facility covenants, the value to loan covenants. You seem to continue to need to use a little bit of cash here and there every quarter to cure those covenants.

I guess, just based on how valuations have been going for tankers in general, what do you see the run rate, use of cash going forward, either on an annual or quarterly basis to continue to pay those -- to meet those covenants?

As well as the decision between just outright selling the vessel and sweeping the cash to pay it down permanently, how do you weigh those things with the use of cash? I know the installments are 2015 and beyond, I'm just curious about the interim use of the cash.

As you know, we have three loan facilities and the largest one is with RBS. That is the one where we've had to make prepayments on the past several quarters. And the covenant in question is value to loan of 120% based on ship broker value assessments, and we collect these assessments once a quarter and it's really pretty simple math.

If you see a 10% drop in values, then there is a 10% prepayment requirement and the outstanding balance of that loan today is $168 million. So it really depends on your view on values going forward.

On the other two facilities, we have more headroom based on the restructuring we did with these banks in the beginning of the year.

Got it. Okay, so it's just you guys haven't really pro forma'd or anticipated any kind of -- what that might be over the next year or two, totally dependent on where rates go and you haven't really earmarked any cash reserve for any of that stuff?

As you see, we're running with a pretty significant cash balance today and, of course, we think that's the prudent way to do it, given the uncertainty and the pretty low freight market we're in.

Got you. Okay. Thanks, guys.

Petros Kalligas from Delos Investment Management.

I've got two or three questions. The first question relates to the decline in the useful life of your vessels, as you mentioned, from 25 years to 20 years. What -- could you explain the rationale behind this?

Secondly, regarding your receivables, obviously much of that, I understand, has to do with the payment in arrears of Frontline. How confident are you that these payments will be made and are there any provisions to ensure prepayment on -- payment on these?

And, finally, regarding the RBS credit facility; you mentioned that after fleet appraisal about $4 million was classified as the current portion of debt. Could you -- was that due to some kind -- to a reduction in -- to a prepayment or was there something else? Thank you very much.

On the first question, on the economic life of the vessels, I think it's important to note that there's nothing technically that suggests that these vessels can only last 20 years. To the contrary, they've been built for certainly a 25-year lifespan.

But under IFRS accounting rules, you are supposed to examine your value-in-use assumptions on a regular basis and it becomes more of an issue of how long you think that vessels will be trading in current market environment.

We deem that in the very low freight markets we're in today, we will see vessels being retired at a younger age on the average than during a high market.

So we have taken it down from 25 years to 20 years as an assumption now, but it could be a scenario where, when the market recovers, that we will back it up to 25 years again and this is, quite frankly, dictated by the accounting standards.

As to your second question on account receivables, the two lump sums due in December and April/May under the Frontline charter represent just north of 10% of the account receivables in total. So the majority of the account receivables are really working capital and predominantly bunkers for the vessels operating in the spot market.

It has gone up because we've had ships being redelivered to us. When you have them on period charter, you get paid in advance. When you trade them spot, you get paid in arrears and you have to prepay a lot of expenses before you collect your revenue.

As to your last question on the prepayment on the RBS facility, that is a consequence of the broker valuations made on that particular fleet at the beginning of the fourth quarter. Then the asset values had a marginal drop from the third to the fourth quarter and the prepayment was then required at $4 million. That prepayment was made -- has already been made.

Okay. Thank you very much.

(Operator instructions). Jeff Rudner from UBS

Obviously, a difficult quarter and just one really broad-based question. Being that you're in a better position than I were to think most of us on the call here to ascertain what the outlook for the market is over the next six to 12 months and going forward, can you give us any kind of feeling, any kind of assessment as to what you see for the next six to 12 months and when you do see some kind of recovery in the freighter market?

We expect a continued tough freight market in the foreseeable future. I think just on the -- some of the short-term aspects, over the summer, you had a significant drop in imports of crude in China and there, they have been drawing in their stocks, at the same time, they've also been through refinery maintenance season.

So, they've been running at -- in the high 5 million barrels per day import level during the first half of this year and that dropped down to 4.3 million/4.4 million barrels per day during the third quarter. That is now slowly climbing back up again and we believe that they are currently at close to 5 million.

So, assuming that the Chinese will continue to increase the imports back to what was the run rate earlier, that could, of course, help, say, a winter market on the margin. But we are not expecting any significant recovery in the near future and are really planning for a continued tough freight markets.

And on the supply side we continue to see new bills being delivered into this market. We haven't seen much scrapping yet, but I think it's important to note that the first double haul large tankers were delivered in '93 and '94.

So, we're hopeful that scrapping will pick up next year, once these vessels are starting to phase their fourth special service and dry-docking costs and so forth. That would typically be the time when you have to make the tough decision whether to invest further in your old assets or to retire them. But on the demand side, it's been soft, as Svein said, and we don't see any immediate rebound on that side.

Okay. Thank you very much, gentlemen.

(Operator instructions). Carras Holmstead from Stone Lion Capital.

I joined a little late, so this might already have been asked, but regarding the impairment charge, has a claim at all been filed with the counterparty?

Just to be clear, our counterparty has not filed for Chapter 11. They have said that that is one of the options that they are contemplating.

So, as such, these charters are still in place and the counterparty is current on their payments to us. But the filing itself raised questions about the probability of those charters staying in place for their intended tenders, so hence, we have decided to take that into consideration when evaluating the fleet, for the carrying value of the fleet.

Okay. And just where, if I can, does that -- the contractor -- who is the actual counterparty? Is it the parent company or is it a subsidiary where that claim would be, if it did arise?

The counterparties are to a subsidiary, obviously, but the charters are guaranteed by, obviously, the main company.

The parent company.

That's correct, yes.

Okay, great. Thank you.

(Operator instructions). As there are no further questions in the queue, that will now conclude today's question-and-answer session. I would now like to turn the call back to your host today for any additional or closing remarks.

Well, thank you very much, all, for attending our conference call and continuing to take an interest in DHT. It's appreciated. Have a good day. Bye, bye.

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