DHT Holdings Inc (DHT) 2015 Q4 法說會逐字稿

Thank you. Before we get started with today's call, I would like to make the following remarks. A replay of this conference call will be available after at our website, DHtankers.com, through February 11, 2016. In addition, our earnings press release will be available on our website and on the SEC's EDGAR system as an exhibit to our Form 6-K.

As a reminder, on this conference call we will discuss matters that are forward-looking in nature. These forward-looking statements are based on our current expectations about future events including DHT's prospects, dividends, share repurchases and debt repayment, the outlook for the tanker market in general, daily charter hire rates and (inaudible) utilization, forecasts of world economic activity, oil price and oil trading patterns, anticipated levels of new building and scrapping, and projected dry dock schedules.

Actual results may differ materially from the expectations reflected in these forward-looking statements. We urge you to read our periodic reports available on our website and on the SEC's EDGAR system, including the risk factors in these reports for more information regarding the risks that we face.

I'm today joined by DHT's co-CEOs, Svein Harfjeld, and Trygve Munthe. With that, it will turn the call over to Trygve.

Thank you, Eric. Good morning and good afternoon to you, to everyone. And thank you for participating in DHT's fourth-quarter 2015 earnings call. This earnings call will follow a slightly different format than what we have done in the past. First, we will go through the slide presentation, and you can find the link to the webcast on the front page of our website, DHtankers.com.

Through the presentation, we will discuss highlights from the quarter. We will bring you the status on the deleveraging program. We will explain our updated capital allocation policy. And we will discuss how DHT is currently positioned. And, finally, we will try to illustrate how DHT will perform financially in some different tanker markets scenarios. And then, after the presentation, we will be happy to take your questions.

We have had a strong and busy fourth quarter as well as the start of the current quarter. On the chartering front, we have extended three existing time charters and entered into one new one at rates we consider attractive. We provide good returns on investments, and they offer increased visibility on future earnings and cash flow.

On the investment side, we have grown the fleet with the deliveries of 2 newbuilding VLCCs, both of which have been delivered ahead of schedule. We have also sold one of our oldest Suezmaxes at what we consider an attractive price.

When it comes to capital allocation, we have paid dividends in accordance with our policy. And we have also delevered our balance sheet further by prepaying about $38 million in the fourth quarter and another $47 million of mortgage debt since the beginning of this quarter. Additionally, we have purchased $3 million worth of our convertible notes. Combined, these prepayments represent some 13% of interest-bearing debt as per quarter end. And as a result, we now have 4 debt-free VLCCs.

Then on to the spot earnings. The fourth quarter's spot earnings was the best quarter of the year, with TC coming in at $62,200 per day. The large tanking market is regarded as seasonal and volatile. But looking back, our average spot earnings in 2015 have been remarkably stable over the quarters.

Our average spot earnings for the year were [$58,700] per day and represent an excellent performance that compares well to the competition. The chief TC is a result of our high-quality freighter ships combined with an experienced and dedicated team running them. You should note that our reported TC does not include profit-sharing from time charters. If we had added profit-sharing from time charter to our spot earnings, the average for 2015 would be $60,000 per day.

We are off to a great start to 2016, with two-thirds booked at solid rates. We have so far booked 66% of the first quarter at $73,300 per day.

And then on to our P&L. We are certainly pleased with our fourth-quarter numbers. With TCE revenues of [$80 million] and EBITDA of $60 million, it was a solid quarter. Earnings per share came in at $0.35 per share. As such, we will pay a cash dividend of $0.21 per share on February 24, to shareholders of record as of February 16.

Looking at the year as a whole, with EBITDA of $215 million, a net income of $105 million, it was certainly a strong year for DHT. Earnings per share for the year were $1.13. Quarterly cash dividends for the financial year of 2015 will reach $0.69 once the fourth-quarter cash dividend is paid later this month.

Then on to our balance sheet. It is a robust balance sheet with net debt to (inaudible) our vessels at 41%. It should be noted that the year-end cash balance includes $50 million drawn down on December 29 to finance the BCC newbuilding DHT Leopard that we took delivery of on January 4.

As Svein mentioned, there has been some important subsequent events since quarter-end, so we would therefore like to take you through the balance sheet effects of them and also present the pro forma balance sheet based on delivery of the 4 remaining newbuilds.

As part of the focus will be on interest-bearing debt to total assets, we have combined the current and long-term portion of interest-bearing debt into one line, and simply calling it interest-bearing debt.

First, as Svein said, we took delivery of the DHT Leopard on 4 January, and we had drawn down the debt of the same ship -- for the same ship on 29 December. And the balance sheet effect of the delivery is simply that $50 million leaves cash and goes into vessels.

Secondly, we have, since the beginning of the year, prepaid the loan on the DHT Hawk and Falcon in its entirety of $42 million. We have prepaid RBS with $4.9 million, and we have purchased senior (inaudible) or senior unsecured convertible notes.

Based on these adjustments, you will see that unadjusted balance sheet shows an interest-bearing debt to total assets of 44.5% and net debt to vessels (inaudible) at 39.7%.

We would now like to show you the pro forma balance sheet based on an assumed immediate delivery of the 4 remaining newbuildings. These newbuildings will grow our VLCC fleet by 25% over the next nine months. The remaining CapEx of some $216 million of these 4 ships -- and note we have already paid some $166 million in pre-delivery installments for these ships, will be funded by $25 million from cash at hand and about $191 million of mortgage debt. The debt financing, which represents 50% of purchase price, is secured and fully committed.

As you can see, on a pro forma basis, with all newbuilds delivered, interest-bearing debt to total assets now stands at 51.3%. This is a significant improvement over the 56.5% we had before we started the deleveraging campaign. And as a reminder, this is all based on the fourth-quarter balance sheet.

We announced a capital allocation policy in July last year. It stated that we would return at least 60% of ordinary net income to shareholders. It further stated that we intended to use a significant amount of surface cash flow of the dividends to delever our balance sheets. As you will see in this table, our quarterly cash dividends were growing through the year. You will also see in these tables that we made ordinary debt prepayments of $32.9 million during last year. Delevering since the second quarter last year totaled $107.9 million, and this number includes $49.9 million prepaid during the first quarter of this year.

As illustrated on the previous slide, the strong freight market has allowed us to make meaningful efforts in delevering our balance sheets. Since early January, the capital markets have been rocky, and that is the case with most comparable stocks. The market valuation of our Company has also dislocated from cash generation, earnings and underlying values. As such, we thought it timely to update our capital allocation policy to include the securities repurchase program.

It is important to note that our quarterly cash dividends remain unchanged at 60% of net income. What is new is that the we open up for buying back our securities. We envisage that this will continue -- that we will continue to delever the balance sheet, although not necessarily at the same pace.

Our new capital allocation policy reads as follows. DHT intends to return at least 60% of its ordinary net income, adjusted for extraordinary items, to shareholders as quarterly cash dividends. Further, DHT intends to allocate surplus cash flow, after paying such quarterly cash dividends, to delever its balance sheet, to repurchase its own securities or for general corporate purposes. To extend an allocation will depend on market conditions and other corporate considerations. DHT will apply its updated capital allocation policies starting with the first quarter of 2016.

Let's now focus on our time charter book. For 2016, we have in total 37% of our available tanker days and expect to generate about $102 million of revenue from these time charters. That means that 62% of our estimated cash costs for the year is covered. But still, we have 69% [RBOCC] capacity open in what we expect to be another rewarding year. For 2017, we have 16% of capacity and cover approximately 29% of expected cash costs.

Switching then to cash breakeven -- as most of you know, this is a key metric for us. And with this slide, we would like to illustrate where this lies for 2016. Starting on the left side in the first bar, we have stacked expected cash costs for the year. This is all cash costs -- operating expenses, debt service, G&A and maintenance CapEx.

However, it should be noted that a market-related debt repayment structure in the RBS loan is not included, as it will not apply at rate levels around cash-break-even levels.

So this cash cost for the year is totaling about $163 million. And in order to generate that type of revenue, we need the VLCCs to earn $22,600 a day, the Suezmaxes $18,600 and the Afras, $11,200. However, 37% of (inaudible) has been fixed, generating $102 million in revenue, which means that the VLCCs in the spot market will only need to learn earn about $13,600 a day. Indeed, a very comfortable cash breakeven.

The last stacked bar illustrates the cash generating capacity of the Company, if the spot VLCCs earn $42,500 a day, which is the historic average, and $60,000 a day, respectively. And as you can see, if we get 2016 in line with 2015, we should generate over $200 million of cash flow beyond what the cash costs for the year is estimated to be. And if we drop down to 20-year historic average, we will generate over $130 million. In both cases, quite rewarding for DHT, in our opinion.

To be clear, this slide does not represent a market view. Following up on the two previous slides and previous commentary, it illustrates the downside protection built into our Company in combination with a significant upside potential. The lower case illustrates that our fixed income allows us to be profitable even in the $30,000-per-day spot markets. Historical average case and the high case simply illustrates the very attractive operational leverage in the Company.

On that note, we open up for questions.

(Operator Instructions) (inaudible), (inaudible).

First on the how you think about your portfolio approaches. Is the strategy to in the years going forward always have two-thirds of your cash breakeven covered, call it, one year forward or so? Or how should we think about that?

No, it is not really a target number for that, Herman. We just think that in the current time charter environment, these rates make sense to us. And we are happy to secure it. And as a side effect, it was just meant that illustration how much (inaudible) capacity is covering in terms of the cash costs.

Okay. And also, obviously, in Q4 I think you had some $50 million-plus in operating cash flow and you spent about (inaudible) on it paying dividends. That $50 million buyback, is that for a year or is it the idea that --. I mean, obviously, it depends on the prices and everything, but are you keen on having a lower leverage on 50% or do you think this is very conservative number? Or right number?

(inaudible), Herman. The program extends through February 2017 so it is over a year. The normal amount is close to 10% of our market cap. But I think importantly, as you stated, is that we will use this to look at both securities and also some additional deleveraging. So I think it is fair to say we will be a bit optimistic and look at where we can create most value for our shareholders.

Fotis Giannakoulis, Morgan Stanley.

Congratulations on a good quarter. What I want to ask is about your capital allocation policy. And you mentioned about being open in share buybacks. Can you share with us how do you view the value of your stock? Is it the MAV that you are considering? Is it the earnings multiples? How do you think -- what is the right price to buy back your stock?

I think what is intriguing to us is, as we just illustrated, if you get rates in 2016 similar to what we saw last year, we should generate over $200 million of cash flow. And with the market cap of $550 million, we think that is quite attractive. And even if you drop down to $42,000 a day, you're still getting only 4 times cash and we think that is attractive.

So does MAV play any at all? And also there is a lot of discussion about asset values which have a very strong freight market for crude tankers. But at the same time, asset values the last 12 months instead of going up, they have actually come off a little bit. Where do you see asset values moving the next year? And given your outlook, what may be more attractive at the current market given your current stock price -- share buyback or further asset acquisitions?

I think (technical difficulty) referring to our earlier statements, that we are typically not communicating a house view on NAV. We think that the street average is a high 7's or around $8. And as we stated also on this call, we do think that our current pricing in the capital market is dislocated from, as we have alluded to, the cash generation potential of the business. But also, as we are reporting our earnings, as well as underlying values.

You are right, we have not really seen any of the past six to 12 months in any big moves in asset values. And we think some of this is a reflection of limited capital being available in the industry. But investors should look at this on a positive note that they are able to buy into companies such as DHT; in a way, enjoying these earnings without asset values having been appreciated.

So -- but given where we trade today, we of course trade at a significant discount to the Street average NAV. As you all know, NAV is also somewhat of a moving target, so we are not specifying publicly a price that we will act from this program. We will report this quarterly what we eventually will execute on.

Thank you for that. Can I ask about the current state of the market right now? And if you can describe some of the trends in crude flows and, in particular, how the Iranian oiler is moving, if you have seen any movements, either from the Iranian fleet or from your market vessels that they are loading to the region? And also, if you can comment about the US -- the lift of the US export ban, if it has -- if it makes any changes in the oil flows and the way that your vessels are trading?

Well, that was quite a few questions, Fotis. But in general, in the market, I think it is important that we remind ourselves that we are in the midst of a very healthy tanker market. As Svein said, we have booked two-thirds of our capacity for the current quarter at $73,000-a-day levels.

Yes, from a -- on a weekly basis, the rates have come off a peak around $100,000 a day down to today, maybe mid-$40,000. But mid-$40,000 is still a very healthy rate. So we don't think there is any reason to get very panicky about this short-term volatility. As a matter of fact, we saw it a few times last year when rates in the short term tanked, and then they recovered quite quickly again.

If you look at our quarterly earnings on spot ships through last year, it was remarkably stable; so, despite that short-term volatility.

And then, to your crude flow questions, we are certainly getting incoming phone calls from Western or European oil companies that want to be able to go to Iran and pick up cargo. So there is definitely buying interest out there. There is some wrinkles to be ironed out for the ship owners to be able to do those barrels quite yet. But we think that that will be sorted in the relatively short time. And, as such, we do expect it to add to demand.

Can you describe if you see right now any changes in relation to the Iranian barrels or in relation to the US export ban lift cargos moving out of the US or Iran?

Well, on the Iranian side, we have had incoming requests about lifting cargo out of Iran. But the biggest point there (inaudible) is just to be sorted out. In particular, it relates to P&I insurance, where the international group has their reinsurance -- part of the reinsurance program placed in the United States. So, settlement of potential claims and some of that insurance coverage could be a challenge. One could not transact in US dollars, for one. And now, as of late, we have seen also Saudi and Bahrain adding some trade restrictions on ships that have traded in Iran.

So there is still leases to be sorted out following some big political decisions and to see if you can make these operational. (multiple speakers) on the US side, I think there is limited flows for now. There have been some smaller cargos going out. But they are opening up. And (inaudible) we think has it that they should export their (inaudible) products. And this should eventually also be good for the large tankers that they would need to still import some other, more heavier grades for the refineries. So one could expect continued or potentially even increased imports accrued from the Middle East into the United States.

Thank you. That's very thorough. And one last question about the oil contango. We see that the two-months Brent spread is between $1.50 and $2. As that seems to make floating storage profitable at the levels close to $40,000, have you seen any activity -- and new activity for floating storage? And given the fact that the floating storage becomes economical at such close levels to the current stock market, have you seen any increase in the inquiries for the contracts -- six- to 12-month contracts that will help time charter markets?

I think there are a number of traders asking for short-term time charters, but with a large degree of optionality in their favor. And we are not typically entertaining that. So this contango play, it is very much a micro play. And one day it is in the moment, and the next day it is out of the moment. So people need to act very quickly to make this work unless you have people that make a longer position and say they book a ship for a year or two. And they get options in that charter to use it for storage for either part of the pier or the whole pier.

Typically, I think almost I am not too keen on providing storage options for really long periods. I think it typically hampers the hull over time, and you would need to scrub at least -- or in some of the worst (inaudible) cases, then dry dock the ship to get the hull back in good trading condition.

Amit Mehotra, Deutsche Bank.

I think there is about half a question left to be asked, but I will try anyway. A quick question on asset values and just following up on your comments. Conventional wisdom would obviously suggest that asset value should be higher or improving in the current rate environment. But I guess counterintuitively, I think also it is encouraging that they have not in terms of what it means to the sustainability of the strong cash flows.

So I'm just trying to understand, based on obviously your experience, how you observed the relationship between rates and asset values at different points in the cycle, really, the early point in the cycle and also the latter point in the cycle. And if the lack of recovery in ship value is actually a bullish sign for the sustainability of the market. Thanks.

I think the levels of the secondhand values has been discussed on prior calls and in general, and I think it comes back to what I said before that there is quite a few people in the private side of this business that is a bit down and out because they typically own dry dock and even offshore assets in addition to tankers. So, quite frankly, they are not in a position to go out and buy anything. And I think that is a very real factor behind the lack of asset value appreciation.

In a normal tanker market, with of the kind of rate levels that we have today, you're absolutely right. Secondhand values would normally be higher, but the good news and the fact that we haven't really rallied this time around is that there is no incentive to go out and contract for newbuilds when you can buy second-hands in the VLCCs in the high $70 million or $80 million apiece.

So we agree with what you allude to that the lack of asset value appreciation gives hope that this healthy market can last a little bit longer.

Okay. Great. And then just one quick one, if I may. Regarding your comment on using the significant amount of surplus cash flow to delever the balance sheet, I know you are not going to precisely talk about capital allocation. That is fine. But, you obviously have a pretty good LTV right now, and it is only most likely going to get better over the next 12 months.

So how do you sort of balance deleveraging while at the same time -- I guess the way to put it is optimizing the balance sheet to really create more equity value? And how do you balance the two? Because it is going to get to a point now when you use that excess free cash flow, so to speak, you're going to get to sort of levels that are well below sort of the peers over time. So just trying to understand how you balance those two items. Thanks.

I think it is hard to give you details on this. We would need to consider market conditions at any given time, really. But in the bigger picture, we do think it serves a tanker company well to have a very robust balance sheet that we have all times.

So, as you all know, this industry presents opportunities both in the down cycle and up cycles for a variety of reasons. And we think it is only prudent to build long legs in our company. And, hence, there is a continued focus on delevering. Whilst, at the same time, returning a meaningful amount of capital to the shareholders, firstly through these cash dividends, but then also (inaudible) opening up for buying back our own securities.

Spiro Dounas, UBS.

This is (inaudible) in for Spiro. Thank you for taking my call. I just had a couple quick questions. First one, can you walk us through the decision to buy back the convertible bonds before the equity and how you are viewing the relative value of each as you provide -- as you pursue your new capital allocation strategy?

I think in our book, buying back the convertible notes is, first and foremost, deleveraging. It is the most expensive debt that we have out there. It carries a coupon of 4.5%. And of course, in addition, there is conversion rates. And from that perspective it serves both purposes; it delevers and it also reduces the full share count.

Going forward, I think it is difficult to speculate on that. Whether we are going to do more stocks than converts or so forth, I think that really depends on where things are when we start the program.

Okay. Great. That makes sense. And, your actions so far have been pretty consistent and on par with what you have guided. But, to some degree, some may view it as defensive given the vessels sailed, deleveraging and chartering. How would you respond to those that say you are preparing for a turn in cycle?

Could you repeat that question, please?

Yes. Just with the vessel sales, deleveraging and chartering, there are some out there that may say you are preparing for a turn in the cycle. I just wanted to get your view as to how you would respond to those who say that.

I think we have a (inaudible) over how we want to play at different parts of the cycle. And, in a way, it is not like just the push of a button where you can do everything at once, where all you need to do is when there is liquidity at the different times in the cycle. We were rather aggressive between the second half of 2013 and into first half of 2014 in buying essentially 16 VLCCs at the very good prices and positioning the Company well for this up cycle and strong earnings.

Now, we -- at the same time, we also place orders for newbuilds. So the sale of the Suezmax is to hold the Suezmax we have, and so you can view that as part of a fleet renewal. Assets like this on average have a 50-year life. They will need to be replaced at some point.

When it comes to charters, these charters are now -- that we can secure are in excess of the 20-year average rate. We think that their return on investment compared to what we have paid for these assets will be very handsome. And it provides the Company with a lot of flexibility as we also bring down or secure a good portion of the cost, brings down the cash breakeven in the Company and gives us excellent maneuverability at any point in the cycle.

So I think it is important to stress that chartering out is more a reflection of how we think that mid-$40,000 is very attractive to get them on the old ships and the new ships alike. It is not to batten down the hatches and get ready for a very tough storm.

But we continue to delever, and we just think it is good business. And I think in this industry, there are some curveballs being thrown every once in a while, and we would like to have a DHT that is well-positioned to handle whatever is coming at us. But we do not have a high probability on such a scenario, but you cannot put it down to zero either. So that is what -- why we are doing what we are doing.

And, finally, by delivering, you're also extending the time when you can actually pay out dividends and return capital to shareholders.

Okay. Great. Thank you, and congrats on the quarter.

Charles Rupinski, Seaport Global.

Congratulations on the strong performance for the quarter. Most of my questions have been answered, but I just -- I was curious what you are hearing in terms of longer-term charters, three to five years. Is this something that oil majors or major customers are becoming more receptive to? And is this something that you think could be part of the mix going forward, some of the longer-length charters?

I think you will see it stated on numerous of (technical difficulty) occasions the liquidity in the long-term market is rather shallow. (inaudible). We are open to long-term charters for sure -- three, five, seven, 10 years -- as long as numbers make sense. But, again, liquidity is limited.

So there are somebody -- some clients out sniffing every now and then, checking prices and in discussions. Some might be a bit more optimistic. Some might just want to have a certain percentage of their requirements covered long-term -- are they good ships, are they good operators such as ourselves. But I don't think the market should expect that there will be a flurry of, say, five-year charters coming into anybody's book anytime, really.

I see. So no flurry. But just in terms of over the last few months or quarters, has it gone directionally one way or the other? Are people more interested a little bit or less interested, or is it exactly the same?

I think as you've seen from our news, certainly we have been more interested as the pricing has got up and making more sense to us. But in the current environment, at the moment, you don't really have to give options to the customers in any meaningful form. So that to us is attractive.

I think there will always be clients there to talk about term charters. But you look back in 2013 or even in the early parts of 2014, the rates were rather miserable, we think. So we were not really that excited by a term business. So if you put (multiple speakers) take a long-term charter, but that's not the business we are in.

I understand that. Thank you.

(Operator Instructions) Eric Stavseth, Arctic Securities.

You seem to me to sound like the most conservative (inaudible) entities out there. You have kind of moved into a lot of full harvest mode in terms of deleveraging and then chartering out to take some coverage and make sure you have a solid balance sheet. But what could make you change the view? I realize that you are painting a picture of being opportunistic here, but it just sounds to me like you are kind of positioning for the bad times.

I think the result of the two things that you allude to is building up some more fixed income and delevering. And really to (inaudible) earlier point, you are creating better visibility on earnings, and you are then also potentially extending your ability to pay dividends. And we gather from most of the capital markets if there is some uncertainty amongst investors, it's really how long this market is going to last.

So to build some better more clarity on certain (inaudible), we just think it is good business. We have been around for a while. I mean, running shipping businesses for quite a while, so we think to be a little bit prudent really anytime is just wise.

We have no further questions in the queue.

Okay. So then, we will just thank everybody for your interest in DHT and wish you a good day. Thank you.