DHT Holdings Inc (DHT) 2015 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third-quarter 2015 DHT Holdings earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Eirik Uboe. Please go ahead, sir.

Thank you. 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 our website at DHtankers.com, and a replay of this conference call will be available on the website. In addition, a 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 thus realization, forecast of world economic activity, oil prices and oil trading patterns, expectations regarding seasonal fluctuations in tanker demand, anticipated levels of new building and scrapping, and projected drive-up 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.

I'm today joined by Svein Moxnes Harfjeld and Trygve Munthe, co-CEOs of DHT Holdings. I will now turn the call over to Svein.

Thank you Eirik and good morning to all and thank you for following DHT. Our EBITDA for the quarter came in at $54.8 million. Net income for the quarter was $27.5 million, equal to $0.30 per basic share. Our VLCCs operating in the spot market achieved time charter equivalent earnings of $59,600 per day in the third quarter. As of today, we have booked 65% of our spot lease sea base for the fourth quarter at time charter equivalent earnings of $62,100 per day.

In accordance with our capital allocation policy, we will pay a cash dividend of $0.18 per common share for the quarter. It will be payable on November 25 for shareholders on record as of November 17. Including a dividend for the third quarter, we will then have paid a cash dividend for 23 consecutive quarters.

Further, and as part of our capital allocation policy, we prepaid $26.8 million of bank debt in October. The $26.8 million consists of $22.9 million remaining outstanding under the DHT credit facility that has final maturity in May 2016, as well as $3.9 million under the RBS credit facility.

As of September 30, our cash balance was $158.2 million. Adjusting for debt prepayment of $26.8 million, and the $65.8 million earmarked for the remaining pre-delivery installments for the newbuildings to Uniah and (inaudible) we have a quarter end pro forma free cash balance of $66 million.

Through the two debt prepayments done over the past two quarters, we have covered almost a third of the way towards our target of debt to total assets of less than 50% on the pro forma basis, assuming delivery of all the newbuildings. At the end of the first quarter 2015, the ratio was 56.4%, which we now have brought it down to 54.5%.

With that, I'll hand it over to Trygve.

Thank you Svein. Before we start with the Q&A, we just wanted to highlight that we think we are about to enter a very exciting time for DHT with our earnings power and related dividend capacities set to expand considerably.

Firstly, our six newbuildings are starting to hit the water with the first vessel delivering this month, the next in January, the third in April and so on. This growth is fully funded, hence no additional shares will be issued. The daily cash cost for these ships, i.e. OpEx and debt service, is less than $20,000 per day, so in today's market environment, these new ships will give a substantial boost to our cash flow, net income, and dividend capacity.

Secondly, we would like to point out that three of our existing VLCC time charter contracts are expiring in December, January, and March respectively. The current rates for these three ships are on average in the low $30,000s per day. So clearly these ships are set to contribute more to the bottom line whether they enter the spot market or are extended in the time charter market. So again, the delivery of the newbuildings combined with the exploration of the three time charters will meaningfully expand the earnings power of DHT.

And with that, operator, we would like to open up for questions.

(Operator Instructions). Jon Chappell, Evercore ISI.

Good morning guys. Trygve, you mentioned the two different options that you have for the three VLCC contracts that are expiring in the very near term. I remember in calls past you spoke about kind of holding off on further time charter coverage unless you could either get longer duration for some of those contracts or higher rates. Can you speak about the current liquidity in the market today for two- to three-year contracts, and if they are approaching the rate levels that you would find attractive in the move forward with this?

Thanks Jon. I think, to be precise, what we said was, to do additional business, we would like to see longer terms. On these three that are coming up or expiring, it could be a case where we would extend with existing clients.

And then to your question regarding liquidity and rate levels and so forth, we see that there is reasonable liquidity in the two-year and one-year periods. And we assess rates for one year to be somewhere around $50,000 per day, two years in the mid-low $40,000s. Three years will be down a little bit and then once you get out to five years, it's getting very limited again. So we don't really think that that picture has changed dramatically through the past three months.

Okay. Now, you guys don't give a ship-by-ship kind of breakdown, at least in the press release. I know there's a fleet list on the website. But I think we've seen in some broker reports some potential two-year contracts for some of your vessels. Have you re-chartered anything, maybe any of the recently expired contract in some of the VLCCs for two-year terms, or is that kind of still up in the air?

It's the latter. That still up in the air.

Okay. And then regarding the capital structure, I think Svein mentioned the pro forma look at your net debt to capital once you have taken delivery of all the vessels. Given the cash flow that the ships are generating today, especially those in the spot market, it seems that you can get that down to your target level quite quickly. So, how do you kind of think about the next move with the excess cash that you are generating once you hit your target yield? Do you foresee a change to the dividend policy in the relatively near future kind of ratcheting that up if no opportunities exist for further growth? Or do think that asset values have kind of lagged the cash flow generation in the market right now, and further growth would be a primary use of cash?

You're right. We are certainly on track to reach the target balance sheet that we would like to. And in this market, it goes rather quickly. Our dividend policy or capital allocation policy says the minimum is 60%. So for us, there is the potential once we hit that target to expand. I think this in combination with -- and the two things that Trygve addressed that are newbuildings coming into operation and the potential repricing than of those three ships expiring, this could bode well for more capital being returned to shareholders.

That makes sense. One last quick one, just to get everyone involved. Eirik, I think one of the Suezmax is coming off of time charter and is undergoing drydocking or special survey. How long is that going to be out of commission for this quarter? And then are there any other drydockings either in the fourth quarter or early in 2016 for the fleet that we should be aware of?

In this quarter, it's only the DHT Trader that is undergoing a drydock, and you could assume up to 30 day of hire on that ship. There's nothing else for this year. We have for next year scheduled seven drydocks and special service. And they are spread through the year. That's essentially one of the Suezmaxes, and then the six VLCCs of different vintages.

Got it. Thank you very much for your time, guys.

Spiro Dounis, UBS.

Svein, Trygve, thanks for taking the question. I just wanted to follow up on something you announced I guess two months ago that you're considering or you did put a Suezmax up on the sales block, just to I guess feel out what you could get for the asset. Of course cash flows there have been fantastic, so you are in no rush to sell. But I'm just wondering. Can you offer any updates on that front and whether or not you are considering putting any more assets up on the sales block?

I think, on the DHT Trader, we didn't really see any attractive proposals coming our way, so it was a pretty easy decision to pull the ship from the S&P market and continue to Trader. And as Svein mentioned, she is currently in drydock and going through her third person survey. So we think she is going to be able to contribute significantly to cash flow going forward. Beyond that, we don't really have any plans to put any ships up for sale.

Okay. That makes sense. And then just a quick one on VLCC rate, it's been pretty volatile I guess here in the back half of 2015, especially in the fourth quarter, seen pretty big moves up and down, hitting $100,000 and then going down to $40,000. I'm just wondering two things on that front.

First, do you view it as a good thing I guess that rates have been volatile? Is that indicative of a tight market? And I guess second is what would be your strategy to manage that volatility? It seems like joining a very large pool would capture the market average, but I'm just wondering if that's something you even want.

I think this is part nature of the beast. This is the way the tanker market is. There is a lot of short-term volatility. If you flip it around and look at quarterly earnings over the first three quarters for this year, I think it's been pretty consistent from $60,000 to the low $50,000s to the very high $50,000s now in the third quarter. So on a 90-day perspective, it's not all that volatile at all.

And as far as joining a pool, we really don't see any benefit in doing that. We think we have plenty of clout and presence in the freight market, and I don't think our earnings on the spot fleet year-to-date is any inferior to the competition.

Got it. That's it for me. Thanks guys.

Magnus Fyhr, JMP Securities.

Hi guys. Just a question on the VLCC market to follow up on the prior question. You guys had some repositioning during the second half of the third quarter. Did any of those carry into the fourth quarter? I'm just looking at the average rate you guys mentioned you booked for the fourth quarter.

There will be, due to the nature of the trading of these ships, long voyages, some ships going from East to West and vice versa. And so there will be some variances going in and out of quarters. I think it's important, to Trygve's point, to look at the averages there over the quarters and year-to-date. So there is today somewhat limited volatility, so I think that's really where the market should focus.

Okay. And just on your capital allocation, you mentioned maybe stepping up the dividend. How about buybacks? I mean the stock is still trading at a discount to NAV. Is that something you guys would consider?

I think, once we get to the right structure on the balance sheet, it would be something that we would be -- or would evaluate at the time. But I think it's a bit premature to give any hints in that direction at this point. But of course, if you are trading at a meaningful discount and you think it's a sound investment, it makes sense.

Okay. That's all I had. Thank you.

(Operator Instructions). Fotis Giannakoulis, Morgan Stanley.

Good morning guys and congratulations for the great quarter. I want to ask you about the market and your view of how the cycle is developing. First, how long do you think that this strong crude tanker market is going to last, and how does this impact your investment decision? And at the same time, if you can also comment on the November and December loading programs in the Middle East. We have seen this tremendous volatility three, four weeks ago. The rates, they were significantly lower, and within a few days they've doubled. Where do you attribute that and how do you see the next couple of months developing?

I think I'll do the first part first. On the tanker market going forward, we're obviously in a very healthy environment. There is some concern on the build-up of the order book. And as everybody knows, there is a step-up in the schedule of deliveries towards the end of next year.

I think, if you look at the most recent IEA report and compare their demand numbers for the first half this year to the second half next year, it's a step-up of I think 2.7 million barrels per day. If that happens, I think we are all fine. Then we can absorb these ships and remain in a healthy freight environment even with next to no scrapping. So, we are fairly confident that this is going to continue, that we will be in a rewarding and attractive market environment.

And regarding the short-term?

When it comes to the winter, we certainly think this is healthy. There's been a little bit of a card game between shockers and owners as of late. And that adds to the volatility, if you like. But overall, you see that when it's been quiet for a few days or a week, suddenly it pops back with a number of cargoes and resurge in demand. There's been somewhat -- some turnarounds of refineries in the East and that is also coming to an end. So this combined with the normal seasonality in the winter with some weather delays and all that, we think this winter looks very healthy.

Thank you Svein. And I understand that part of this volatility over the last few months is attributed to the unstable Iraqi production. Do you have any view on how the export schedule looks like for this current month?

It's been a bit erratic coming off the stems in Basra, so there hasn't been really a clear pattern to read. But it was quiet for a while and then suddenly it came out with a number of cargoes again. So it's a bit hard to read, but I think in general it does look that there is a lot of cargo to be shipped, and this turnaround season is behind us. People have been looking to also take more cargo from West Africa, Canada on longer voyages, which again bodes well for the markets.

Thank you. One last question from me. I want to ask about the sale and purchase market. We saw that it is very -- is looking to sell some assets. Is this something that you have reviewed? Are there any assets at reasonable prices out in the market? And overall how do you view the potential of consolidation in the market? We have four very -- four companies, large companies, with a large VLCC fleet in the public -- in the US public market. Are there any thoughts or discussions on how you view the market in the next couple of years developing, how many players do you forecast that there will be?

That's a bit hard to predict. I think you've seen some private equity financed fleets that have been looking to either exit or get themselves into the public domain. So we had a bit of that. I guess generally to some extent is the result of that. And coming out, Princ-Mar sold their fleet to Teekay, and Riverstone has picked up the Richmond fleet.

We are certainly folding everything goes on, but I think, as we have stated earlier, we are -- it is less likely for us to really expand and invest at this point. We are concentrating on executing the commitments that we have. And we already have significant growth in the business as it is today, which is already fully funded.

In terms of size, I think investors need to look at liquidity in the stock and our company has really very good liquidity. I think there's only one crude tanker company in the public space that has higher liquidity or traded volume in dollar terms on a daily basis than what we have. So it's certainly good opportunities for investors to move in and out of the stock.

So when it comes to operational size, we certainly think that we are big enough and I think our commercial performance and our OpEx levels are both very sharp. And we think that in itself is not a driver just to get bigger.

Thank you very much. I appreciate your answers.

Mark Suarez, Euro Pacific Capital.

Good morning guys, and thanks for taking my questions here. Maybe we can touch on asset values for a second and the relationship between secondhand and newbuild prices. I know that you mentioned in the past some of the older VLCCs and Suezmaxes have accelerated. I am seeing how you see that price acceleration or if you still see it in the fourth quarter. And how would you describe newbuild prices and where you think the trend is heading as we see scrap values going down, especially since the start of the year, versus secondhand values?

Clearly, new building prices are under some pressure. It's tough to be a shipbuilder these days. It's soft and nonexistent demand from quite a few sectors. So some of them are getting antsy to fill up their capacity. Foreign exchange rates have also put a bit of a lid on how far prices could move to the north. So we don't expect really any inflationary pressure on newbuilds in the short-term.

So where we are today or perhaps marginally downward is our assessment of that market.

And on the secondhands, the mobile end is then of course influenced by everybody's outlook for new building prices. So it has been very stable and sideways for quite a while now, and we haven't really seen any changes to that in the recent past, and we don't expect it in the near future either.

Got you.

On the other hand, there has been a step up, and quite frankly not that many transactions taking place.

Got you. So you haven't really seen any renewed interest in the S&P so far in the fourth quarter for the VLCCs and the Suezmaxes on the secondhand. Is that correct? Especially on the older vessels?

That's correct. I think it's also fair to -- one has to remember here that, on the private side of our industry, and it is predominantly a private industry, one of the leading booking houses in London has said that some 70% of the guys that own tankers are also involved in dry cargo. And there are some sectors like dry cargo that are not doing too well at the moment. So the cash generated from the very strong tanker markets is then typically not today used to reinvest to buy new ships. It's funneled into other sectors that are not performing so well. So we think that limited capacity really on the private side to go and investment and drive us with prices in the short-term despite very good earnings. I think what's important then for the investors to recognize is that this is a great opportunity, because you buy in that asset prices, essentially too they are buying shares that are not inflated and we get access to very healthy earnings and also dividends. So this is a great opportunity for the financial investor.

Okay, great. And then going back on newbuild resells, have you seen any increased activity in newbuild VLCCs Suezmax resell or maybe some other opportunities you think might be worth pursuing, given --

There is very little activity. There are some potential newbuilding contracts that can be acquired, but I think it is very quiet. We saw recently one of our peers elected not to declare options to acquire some forward contracts. So, that market is quiet and a bit sideways.

Okay. And then finally, I know you mentioned some of the VLCCs potentially re-extending those TCs. Do you think there's an opportunity to maybe go into some -- have more attractive profit-share arrangements, given where the market is at if you were to extend those into TCs, if you will?

There are some people that are very gung ho about doing profit share-based transactions. And as you may know, one of our long-term time charters does have a profit-sharing element in it. To us, that's not sort of the one and only recipe for success. Quite frankly, we think that, with the combination of some fixed income and then some spot participation, you are essentially getting the same.

Okay. Fair enough. Thanks for your time, as always.

Charles Rupinski, Seaport Global.

Good morning and thank you for taking my question. Most of my questions have been answered. I just maybe was curious to get your take on following up a bit on the macro for the winter. Are you seeing a lot of port congestion, and is this playing into maybe the strength of the market going forward over the next couple of months?

And also I'm just curious regarding vessel speeds. Are you seeing anything as far as the charters wanting to have the laden leg slower? Are vessel speeds ticking up and is this something we should be concerned about? Thank you.

I think there are in the market regard today, which is very healthy, and that's a reflection of a lot of cargo being moved. It's essentially moved, so you're having some pressure on the general system. And you do have delays in China. We also are learning in Korea there are delays. So of course that's tying up capacity. This combined with the typical weather delays that you will experience in the transit and Bosphorus Straits and also in the US Golf will just add pressure on the general market and be positive, we think.

When it comes to speed, the latent speed is very stable. It's around 13 knots. And I think in most refineries, they plan their logistics and then there are also (inaudible) that the cargo in transit essentially is around that. So that's not really changed.

When it comes to ballast speed, I think today it makes sense to go as fast as you can, and I think most owners are certainly doing that. So, there's no hidden capacity in the fleet today by adding speed, and that's really a good thing. It means that the market is healthy on its own footing. So --

That's very helpful color and I appreciate it. Thank you.

Noah Parquette, JPMorgan.

Thanks. My question has been answered. I apologize if I missed it, but did you give guidance for how many -- how much of the fleet you fixed so far in Q4 and at what rate?

Yes. So, we have fixed 65% of the spot days for the fourth quarter at a TCE of $62,100 per day.

$62,100 you said?

Yes, correct.

Okay. Thank you.

Lukas Daul, ABG.

Hi guys. I was wondering. You mentioned that some of the tanker money is being fueled into the drybulk segment. Do you see that as sort of a restrictive argument for people putting the newbuilding bottom in Q4 if the market is very healthy as you predict?

Could you rephrase that? I'm not sure we understood.

Yes, you sort of talked about capital not being easily available because some people are using the money they are making in the tanker market to fund the drybulk business. Do you see that as a limiting argument for people not ordering more newbuilds over the next couple of months, if you get it right on the market throughout the winter season?

Yes. And also one explanation for why asset prices in general have been trailing the earnings. So yes.

I think another important element, and I think some other people have been commenting on that, is we think that some of the recent ordering activity for newbuilds have been driven by regulatory changes and the desire to secure newbuilds with a tier 2 type design to avoid additional CapEx that tier 3 would mean. So if this is right, we would expect newbuilding activity to really taper off now and maybe the order book will not (inaudible), but time will tell.

And given the recent slight uptick in the oil prices and forward curve, do you see anymore possibilities for an increase in folding storage in 2016?

The contango is currently not wide enough. So we have not really seen a lot of inquiries to have oil store their own ships.

Okay. And finally on your cost -- on the GMA, what you have achieved in Q3, is that sort of the level that accounts for the integration of Samco, etc.? Is that something we consider a run rate going forward?

I think the G&A will vary a little from quarter to quarter. And we previously guided at G&A and I think that still stands and has been a cash G&A for the quarter of about $3.5 million and non-cash of $1.5 million to $2 million, so a total of $5 million to $5.5 million per quarter.

All right. Thank you guys.

Amit Mehrotra, Deutsche Bank.

Thank you very much. Good morning, afternoon everybody. I just had a question on the share price relative to net asset values. The vast majority, and you know better than I do, the vast majority of tanker companies are trading well above NAV. And that makes sense given the level of strength of cash flow and the disciplined, more disciplined cash return policy. And Euronav in the past has said this type of premium is sustainable because it's essentially the price investors need to pay for the liquidity of investing in a shipping company, and also maybe there's some -- the market is discounting some improvement in asset values. So sort of against that backdrop, I just have a couple-part questions.

One is can you just provide sort of your view on the value proposition for investors, for institutional investors, to buy tanker company equities generally trading at 20% to 30% above net asset value in most cases? That's my first part.

The second part is do you expect this discount to narrow as a result of asset values improving, and are really just people waiting for maybe after the second quarter of next year to see if the strength that we are seeing is sustainable and then hopefully we see a nice leg up in asset values?

And the last part, quickly, is just why do you think DHT gets less love from investors vis-a-vis its valuation relative to NAV? Because it just doesn't really make a whole lot of sense to me given the capital structure and sort of the relatively prudently conservative capital structure. So, I apologize for the long-winded question, but if you can provide any insight on that, I'd appreciate it.

I think you are absolutely right, that our price relative to NAV has been lower than some of the other names out there. We like to believe that the main reason for that is the fair amount of our capital has been "dead" inasmuch as it's been raised when we entered into the new building contracts with Hyundai, and it's not been productive over the past several months. But that is changing now. We are taking delivery of the first ship here in a week or two, and these ships are going to start performing and generating cash flow and earnings for DHT. So we think that would be the main catalyst for us sort of catching up with the field in terms of the relative pricing.

In addition to that, we've also had some fixed income, which is different to most of our peers. So as we alluded to earlier on the call, those contracts are set for some sort of repricing either by new time charters or entering the spot market. So, we think this is a juncture where there is a potential for DHT's earnings to expand significantly and hopefully the market will appreciate that.

Okay. And can you just answer the first part of the question in terms of just generally how you think about institutional investors buying into tanker equities in general at a 20% to 30% premium to net asset value? Because that's sort of big hurdle now as we look, because the equities have responded so well generally. How would you sort of frame that story?

I think, in general, as people have talked about, the asset prices have not appreciated to reflect earnings. So in a way, you are maybe not investing at the premium. It's actually at the discount relative to the earnings that are being generated by this space at large. So, I think investors should really focus on the earnings of all these companies, and try to skew more to the multiple game rather than just the NAV game.

Okay, very good. Thank you very much, appreciate it.

(Operator Instructions). Chris Damas, BCMI Research.

Good afternoon gentlemen. I have a question on how those earnings are achieved. In Q2, you had 56% of the spot VLC fleet fully booked for Q3 at $81,000. Just by the math, the remaining 44% must have been booked at $32,364. You'll recall that the rate was at $64,000 when you made the call on July 29 and then we had an August that was a bungee jump. So what does it actually mean, and I excuse myself for a basic question. I'm a commodities analyst. When you say it's been booked at spot, does that mean there's a daily index where the boat has been booked for a month or two months, or --? And I know Goodwood manages most of the VLCC spot. So could you tell me how that $32,000 evolved on the rest of the fleet in that very volatile Q3? And I know utilization was almost 99%, over 99%, so it wasn't due to drydock.

When we talk about percentage booked, that means the number of days that we have secured the income for the spot fleet. And when we book, that means we book a cargo. That can be a 30-day round voyage; it can be an 80-day voyage. It depends really on which geographical direction we try to ship. So it's not a daily index as such.

When you trade ships from east to west and west to east, there is one leg that is -- that we refer to typically as the backhaul (multiple speakers) generate lower earnings than the other direction, which is then referred to as the fronthaul. So if you have periods coming in and out of quarters with more of their own leg, or less of the other one, that could come out with some volatility in earnings. But hence we think it's important really to look at what we actually earn for the quarters on average. That's really the key.

Secondly, (multiple speakers) sorry?

(multiple speakers). The $81,000 you referenced, and I think Trygve kind of gave a cryptic comment that of course we don't expect it to reach $81,000 for various reasons. That $81,000 or today the $62,100, does that include the ballast run, or any demurrage where you're basically waiting to load?

It includes the ballast leg. The merge is not necessarily included because that's a forward event. That will happen if you are delayed in ports. But the merge will be included in the actual earnings that have been generated in each quarter. Just one comment on --

(multiple speakers) of the journey. The $81,000 you were talking about and today's 62,000 would average both the back at the front legs of the voyage.

Right.

And Goodwood is managing this business?

No. Just to clarify that, Goodwood Ship Management is a company that we own 50% of, and they do the technical management of our ships, which means crewing, maintenance, repairs, spare parts, etc. In the commercial operations, trading the ships and fixing the cargo is done in-house in DHT in our Oslo office.

Right. One last quick one, the six ships that are being special surveyed, are they going to require ballast water management systems to come up to spec next year?

Not really. These rules have not yet been ratified, so there is still lack of clarity on these regulations. But then importantly our foremost modern ships, they already have ballast water treatment installed in all our six newbuildings. So half of our VLCC fleet has ballast water treatment pumps installed already.

Thank you very much. Good quarter.

As there are no further questions at this time, I'd like to hand the call back to the host for any additional or closing remarks.

Thank you operator, and thanks to everyone for your continued interest in DHT. Thanks a lot and have a good day. Thank you.

Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation and you may now disconnect.