DHT Holdings Inc (DHT) 2016 Q2 法說會逐字稿

Good day and welcome to the DHT second-quarter 2016 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Eirik Uboe. Please go ahead, sir.

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 at our website dhtankers.com through August 17, 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 chart for hire rates and vessel utilization, forecasts on world economic activity, oil prices and oil trading patterns, anticipated levels of new building and scrapping and projected dry-dock schedules. Actual results may differ materially from expectations and 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 risks that we face.

I'm joined by DHT's Co-CEOs, Svein Moxnes Harfjeld and Trygve Munthe. With that, I'll turn the call over to Trygve.

Thank you, Eirik. Good morning and good afternoon to everyone. Thank you for joining the DHT second-quarter 2016 earnings call. As we have done the last few quarters, we will go through a short presentation of the highlights for the quarter before we open it up for your questions. You can find the link to the slide deck on our website, dhtankers.com. Before we go into the details, we just wanted to say that this has been a rock-solid quarter for DHT. Best-in-class VLCC spot earnings coupled with low costs have delivered our best quarter net income ever.

If we then turn to the operational highlights for the quarter, we are pleased to inform that we, during the quarter, extended the time charter for DHT Amazon to October next year at the rate of $44,100 per day. We currently have six out of the 18 VLCCs in the water on time charters. In addition, both of our Aframaxes are on fixed-rate time charters. Last Friday, August 5, we took delivery of our fourth new-building VLCC from Hyundai Heavy Industries. She is now underway to her first load port. During the quarter, we sold the DHT Target, the 2001 built Suezmax for $22.5 million. She was delivered to her new owners on May 11.

During the quarter, we continued our deleveraging program. Bank debt was reduced by $42 million, of which $16 million were extraordinary prepayments. For the second quarter, our spot VLCCs sailed in $53,300 a day. For the first half of the year, the number is about $58,000 per day. For the third quarter, we have so far booked 52% of our spot days at $26,700 per day. This relatively weaker number comes as a result of our tactic of fixing short voyages once the spot market came off. The motivation for this was to ensure that we would be there and get timely participation in the rebound.

Further, given the lackluster market, we have opted to accelerate our dry-docking schedule. Quarter to date, we have dry-docked three VLCCs that were due this year and expect to take another one or two ships before the quarter is over.

P&L highlights. As we said at the beginning of the call, the second quarter was very good for DHT. Top line came in at $83 million, driven by competitive spot earnings. Operating expenses and G&A were both sharp, so combined, we generated net income of $35.6 million, with a basic earnings per share of $0.38. For the quarter, we will pay a dividend of $0.23 per share.

With that, I'd like to turn it over to Svein.

Thank you, Trygve. On our balance sheets, of the general comments, we consider our balance sheet to be in good health. As such, providing DHT with staying power through the business cycles. We have paid in all three delivery installments to the shipyard in connection with our new-building program. This is reflected in the quarter and cash balance. Our leverage is comfortable with the interest-bearing debt to total assets at 44%. We have two remaining new-buildings to be delivered towards the end of August and in mid October.

Now, on to our cash flow. Reflecting our solid spot and time charter earnings during the quarter, net cash provided by operating activities came in at $46 million. We paid the final pre-delivery installment of $9.7 million during the quarter. We repaid bank debt of $14 million, as well as $12 million in connection with the sale of the DHT Target. In connection with our delevering efforts, we also prepaid $16 million of bank debts. The dividend pertaining to the first quarter of the year was paid with $23 million.

The slide illustrates how we have allocated our capital over the past year and a half. In line with our prior communication, our earnings have enabled us to pay handsome dividends, whilst at the same time delevering our balance sheet. We also have a keen focus on delevering and through that achieving our robust cash breakeven levels. Going forward, we will consider allocating cash towards other purposes, such as investments and/or repurchasing our own securities. As for potential investments, asset prices have come down some 20%, 25% and are approaching levels where it could be interesting to acquire ships.

We are in the thick of things and have an excellent deal flow, but we are in no rush to act. We at DHT have all along focused on combining spot exposure with a portfolio of fixed income through the time charters. We have built a book of time charters to oil majors that have a meaningful contribution to our earnings, as well as reducing their volatility. The average rate secured for our VLCCs on time charter is a strong $44,400 per day. For our fleet overall, we have for the next four quarters secured time charters for 31% of our ship days, covering more than 50% of our expected cash costs for this period. We would like to think of this as a positive factor setting DHT apart in the crude tanker space.

With that, we open up for questions.

(Operator Instructions)

Jon Chappell, Evercore.

Just three quick ones for me today. First of all, Svein, you talked about the asset prices coming down. I'm just curious about financing alternatives, if you were to move forward? Obviously, with 60% of the earnings coming out in the dividend policy, yet you've brought the leverage down significantly (technical difficulty) Samco acquisition, so would you target 50% to 60% financing for that? Is that available in today's bank market? Then also, would you look to maybe continue to sell some of the older vessels in your fleet to help fund modernization?

As you've seen in the past, we will typically apply 50% leverage on acquisition costs. A key motivation in this is to achieve the robust cash breakeven levels that we already have in the Company. We enjoy excellent support from our current banking universe. They are well versed in our strategy. We hold regular dialogue with them. We would like to think that conventional mortgage financing is available to us or not to the same [returns] to what we already have in the fleet.

As to your last part of your question, Jon, we don't think we're sellers at these price levels. So as you have seen what we have done, values have come off since. We are not very tempted to sell at these price levels.

Understood. Then, just a clarification on the dividend. Obviously, 60% basic earnings you been very clear and consistent with that. Just curious, in this type of environment where you've booked more than half at $26,700, the market's a little bit weaker than that right now. If there were to be a quarter where the arithmetic, 60% of something got you to less than $0.01 of dividend, would it be a zero? Or is there some kind of minimum level that you would pay even if the math says it should be less than that?

{I think as you know] we have a formula that results in a variable dividend. But in certain situations, this will certainly be up to the Board to discuss whether it will then strictly follow the formula or do otherwise. So, that's really all we can comment on that.

Okay, I understand. Then finally, three dry dockings, potentially four to five for this quarter, can you just speak to the off-hire days and costs associated with that? Then also, since it's been accelerated, does that mean nothing for the fourth quarter or for 2017?

I think there will be a rather busy third quarter in terms of drydocks. Number of hire days are in the 25 to 30 a day range for drydock, including positioning. The cost of these are in the $2.5 million to -- upwards to the high $2 millions. There will still be some activity in the fourth quarter, but these are a little bit more modern ships and shorter durations and also less costs associated with that. We have six ships that will go to drydock next year, and that's evenly spread through the year pretty much. Those service are predominantly first and second special service, whereas some of the ones we are doing are also third special service.

So the ones for first and second maybe be only 10 to 12, 10 to 15 days off hire?

I think, the off-hire time on the first, especially it's marginally less of course than the second and the third, but the cost is meaningfully less. So it's really, it does take some time to reposition to the yard. You need to be gas free and there's a few other things that have to happen on the health and safety aspect of that. So, but it's mostly on the CapEx involved that you see the meaningful change in the near end of the spectrum.

Got it. All right. Thank you, Svein. Thanks, Trygve.

Spiro Dounis, UBS Securities.

I just want to follow-up on Jon's first question on the investments and maybe what your preference would be in terms of newbuildings, resales or on the water assets?

I think all along we've been very price and quality focused. So it's not a particular focus on the ship being one year old or six years old. We want to get the best value that at such time would be available to us. But I think you can safely assume that the ships will be well south of 10 years of age.

I think also maybe we should tone it down a little bit. It's not like we're ready to go out and invest at this point. But we just wanted to signal that from having a very keen focus on delevering, we are now really opening up for other uses of cash. But it's not to be interpreted that we are ready to pull the trigger on big investment programs.

Okay, I appreciate that clarification. Then, you mentioned deleveraging, and I guess, it looks like you got about $65 million in cash now. You've made a really good dent on the deleveraging front. It looks like over the next 18 months, about $96 million coming due or amortizing. How should we be thinking about you paying that down or refinancing that going forward?

I think what you are really addressing is the one bank facility that we have with RBS, our credit facility that is coming due in July next year. At quarter end, the balance on that loan was $47.5 million, with a security (technical difficulty). We will, according to the loan agreement, pay another $7.5 million here shortly. So we will have a balance of $40 million against four ships. We don't think that is very problematic to either refinance or to pay down over the 12 coming months. So it's really not a big deal, either way we look at it.

Got it.

To put that $40 million in perspective, currently the market value of all ships are about $90 million. The scrap value of those four ships is about $30 million. So $40 million of that [to math] is certainly we think very manageable.

Got it. Appreciate the color. Enjoy the rest of your summer guys.

Thank you.

(Operator Instructions)

Herman Hildan, Clarksons.

My first question, you mentioned that you have accelerated some dry dockings due to the weak markets. Are there other, in the current spot environment, are you willing to call it holdback vessels in order for it to wait for a better market? Or how do you approach the current weakness also in light of what should be a better winter market ahead?

As we speak, there is not really any big movements in the freight market. There's some marginal steps now in what seems to be a potential recovery. Now, it's more important for us to keep the ships trading efficiently. When you find the cargo that fits your ship and their natural dates, that is typically the preference.

But as we said also, the focus has really been on the short voyages rather than long. We also adjusted our balance to be down.

Also, secondly, could you give some color on what you think is required to really make a meaningful turn on the market? Is there any particular things you are watching for or looking for?

I think we think are key components that have driven the market to where we are today. One, obviously, there is more fleet growth this year than what you've seen on the past couple of three years. So that has some impact. But also, these supply disruptions in Atlantic basin, it seems that the Middle East has taken up that void space as the supplier. As a consequence of that, you have some contraction in sailing distances over the past few months. So that is really we think where are right now. But we all know these trading patterns and these supply situation is not a static situation. So these things can clearly change around again. The big question of course is when it will happen.

I see. Also, on your, call it, older tonnage, it appears that you have not really seen any discount on the ships in particular in Q2. Could you give some color on how they are performing relative to your modern vessels in the spot markets?

I think in the market that we've been, it has not been a handicap to have ships of older vintages, provided that they are in good condition. As you noted, all of the ships we have taken through a third special survey have come out with a CAP1, which is a requirement from certain charters. So, our philosophy and very meaningful to do the investments in the third special and keep on trading. As you all know, our oldest VLCC, The Phoenix, is enjoying a time charter rate of $45,000 a day at the moment. So, very strong contributor to the overall earnings of the Company.

Just to put that CAP1 spec in perspective also, our -- the older ships, they are really in very good condition and they maintain good integrity. So as we talked about earlier on this call, the third specials are roughly in the $2.5 million range, whereas we know other participants in the market have ships of similar vintages, where they spend easily the double of that to put ships through service. So again, the CapEx program we have is a reflection of our ships in general being in excellent condition.

Okay. Then the final question that I find is hard to avoid asking, [you stated on this call, current share price by secured asset values, low cash for -- can you even] accumulate some cash, what would you spend the money on if the world looks like this, whether you were to spend some money?

I think as we've said, we are now going forward [and if it], ourselves allocating cash towards other purposes, such as investments and/or repurchasing our own securities. As Trygve said, here also, we are in no rush to go and buy ships. So we will find the right time to do either of these or both.

Thank you very much.

Thank you.

Fotis Giannakoulis, Morgan Stanley.

This is actually Ben stepping in for Fotis. Just one quick question, kind of broader and touched upon a bit earlier on the call. But for asset values, you mentioned they come down and they will likely continue to come down. But do you see different trajectories for either newbuilds and secondhand vessels or different trajectories for various ages, just in terms of their overall values?

I think typically when you see a market in -- when asset prices have a negative trend, the older spectrum tends to move more in percentage term than the newer part of the range. That being said, I think the buyers that are out there today are very professional companies. It's the public -- some of the public entities, it's some of the top class private owners out there. They will always look for value, whether that's a seven-year-old or a two-year-old or a brand new ship. So I think they will have all to look at the qualitative assets, the shipyard it comes out of, potentially prior ownership history, et cetera. So from the brand new down to the maybe six, seven, eight-year-old is probably rather efficient pricing. But in the older spectrum and also in the smaller asset class, Aframax is probably taking a bigger beating on the decline in values than what the big ships have done.

Cool. All right, thank you so much guys. Turning it back.

Thank you.

Noah Parquette, JPMorgan.

I wanted to ask about the charter extension for the DHT Amazon. It was pretty good rate. Can you talk a little bit about that was their extension option there? Or kind of how did you secure above market charter there?

It was, as you say, it an extension of an existing charter party. So it's the same client. As we have said, we did this during the quarter. We can then inform you, this was done in the middle of the quarter more or less. So arguably, we were fortunate in the timing, as this was done before really the spot market came [off].

Okay.

It wasn't an option, it was a negotiated extension.

Yes, very much so.

Okay. All right, that makes sense. You been operating from the newer ships for a few quarters now, can you give some color about the vessel OpEx that they use versus the older ships? Any sort of discount or savings?

There was two aspects here. One is the fuel efficiency of these new ships. I think on average compared to a 5-, 10-year-old ship, they consume some 20 tons per day less of fuel, We've seen that in real life now, so we're very pleased with that part of their performance. Typically, when you have a newbuild you have a very limited maintenance and really no spare part supplies and whatnot in the beginning. So the OpEx for the first year will be less than a ship that's been operating for a couple of two years. So there are some benefits on the OpEx side at the get go in the first 6 to 12 months.

Okay. Then, there's some talk about it, about contango in floating storage, have you seen any interest from charters for options on floating storage in your discussions?

No. Not really, not in a big way. There's been some people out there recently sniffing for very option loaded short-term time charters. It has not been of any interest to us. But some people have been out there trying to get things done, but it's not in a big way as far as we can observe.

Okay.

We have seen of late some of the traders coming asking for rates for 6 to 12 months, but maybe not storage driven, more just trading driven. What to read into this, is this in anticipation of a recovery in the freight market or forward movements in cargo? It's hard to say. We're trying to take advantage of the lower rates right now potentially.

Okay. It makes sense. Thanks, that's all I have.

Jonathan Staubo, Fearnley Securities.

A quick one just to follow-up on the financing. I see that you drawdown $43.5 million on the delivery of the Panther. Could we assume relatively similar levels for the remaining two newbuilds?

There's actually a slight difference between the two. As I'm sure you're aware, in most loan agreements for newbuilds there is a value test on drawdown. So for the Panther and for the Puma, which is in the same facility, there is a limitation on how much you can drawdown at 50% of the market value of the vessel on delivery. It varies for the Tiger, which is the last one, that's 60%. So that's the reason why we drew down a couple of $4 million less than anticipated on the Panther. We would expect the Puma to be basically the same. But importantly, this is a one-time covenant on drawdown. After that, there is minimum value clause saying that the value needs to be minimum 135% of the loan. So once drawn down we have plenty of headroom against that running covenant, if you understand.

Thanks a lot. That was really going to be my follow-up really on the value clause on delivery. So that wasn't your choosing, taking less than what was available, it was what was really available due to the market value?

That's correct. Then of course, we would've wanted to borrow more, I'm sure we could have done it. But this is a way of delevering as well.

Perfect, thanks a lot. That's it for me guys.

Amit Mehrotra, Deutsche Bank.

So my first question is just a follow-up on your most recent comment regarding the loan to value test. I could be wrong, but it doesn't seem to me that it's a secret that there could be a difference between where the appraisals come in and what you can get for the vessels if you were to sell them today. The question is, first of all, do you agree with that? Or am I wrong in that assumption? Also, just to educate me a little bit, what the mechanism is that causes that discrepancy?

I think it's important to recognize that this is based on broker assessments of values. As a general comment, at the bottom of the market, you cannot find any buyer at the broker valuation assessment. Similarly, at the peak of the market, you can't find a single seller at those levels. So it is based on broker's best estimates, willing seller, willing buyer. That's the way the industry has been operating for decades.

Okay.

Also, just keep in mind, some of the [actual sales] also is that on our ships we have invested in a bit of extras beyond the standard specification. Then we obtain a particular evaluation on our ships ahead of this [drawdown] that is obviously also considered into that calculation.

Right. So I guess when we think about the capital structure or how it moves, we shouldn't really look at today's market values in terms of getting a deal done, but really sort of more efficient market in terms of a willing buyer and a willing seller. That's kind of the more right way of looking at it, I would assume?

Yes.

Okay, good. Let me just ask you a couple more. One is, just obviously an overall market question. If we sort of rewind 12 months, the story for this year at least for the industry was that most of this year would be actually pretty good because supply growth was heavily skewed to late this year. In fact, we have had 25 deliveries year-to-date, which is sort of more than what's been delivered the entire year for the last several years. We've still got many new deliveries to the end of this year.

So I understand there's some exogenous factors in Nigeria and Libya that could either drive the market down or up. But given this sort of wall of supply that's still to come and the wall of supply that we've had year-to-date, how do we paint a bullish picture for the next 12 months? Or are we going to be in this kind of weaker market for the next 12 months before people start looking out to 2018?

I think as we have said all along, we do not expect the next 12 to 18 months to be as strong as the past 12 to 18 months. But as in our industry, every part of the cycle presents opportunities. In the case for DHT, we stand to benefit over a very healthy balance sheet, as well also now having a meaningful portfolio of time charter income. So hopefully, this will put the Company in position at the right time to also -- to make something out of a somewhat weaker scenario and then play it again if you like.

Yes, I guess the only nuance to that is when you say it's going to be a little bit weaker, it doesn't give us a lot of information because last year it was so, so strong. So the question is really, do you think we can be at sort of below all in breakeven levels? Or do you think the market recovers as we move through the end of the year to above breakeven in the $30,000, $40,000, $50,000 -- even $40,000 a day level? I know that's a hard question to answer, but I'm just trying to understand the movements with demand and supply prospectively, how we can sort of create a story where we say that moves -- rates move up significantly from here.

It is an impossible question to answer about the future, but I think the fact of the matter is that on average we made $58,000 a day on our spot rate for the first half of this year. Cash breakeven that we have for our spot rate for the second half of the year is about $15,000 a day. So I think that should give us some opportunity to still generate cash for the remaining part of the year.

I think you should recognize from our prior comments that we are pretty humble. We think it's a very difficult to have a very narrow prediction on where rates are going to play out over the next 12 months. Hence, we have managed DHT the way we have that we always look out to protect the down side, but to certainly not giving away all the upside. I think that's exactly how the Company is positioned today, as Svein said very robust breakeven levels, strong balance sheet, yet we have 14 VLCCs in the spot market. So we feel that we are happy as one of your colleagues said, come rain or come shine.

All right. Let me ask one more specific one related your comment about shorter sailing distances. I just wanted to know if you could elaborate on that a little bit because it obviously has implications to how the incremental demand -- how the supply can be absorbed. So, my question is, could you just talk about the drivers of maybe those shorter sailing distances, whether it's US imports or Iran exports or maybe some other factors? Then how many -- then also related to that, how many voyages per year do you think a VLCC actually does? Because I've heard anywhere from 4.5 on average to 5.5 to 6 on average. Obviously, that has huge implications for overall supply. So I don't know if you can offer any updated thoughts on that?

It is a bit about moving target for us. So what's happened so far this year is a result of some of these outages or the supply disruptions in the Atlantic basin, whereby the Middle East is kind of stepping up. People talk about refinery margins being thinner than what they were last year, that's all fine. But it seems to us that demand for oil is pretty stable and it is growing still. But obviously, when a refinery that sourced some feedstock from West Africa suddenly -- in our [base in Asia] suddenly looks to the Middle East, then sailing distances go down.

But as we said, history at least indicates to us that this is not a static picture. It's a continuously moving picture, which is part of the aspect of our industry. So various reports, they have different ways of polling and counting and all that. But we just think the summer, what we'll see is that there is -- there has been a contraction so far this year. But that is not a continuous trend that it will continue to contract. I think Middle East is for the Asian refineries their closest source on crude. So in a way, you can argue that there is only upside to that, if the Atlantic gets back on. Some people talk about round voyages of 55 days on average, another say it's now down to in the high 40s. So that is maybe the delta that you look at rather than counting how many voyages per year.

Yes, okay. That's really helpful. Thank you for answering my questions. I appreciate it.

Magnus Fyhr, Seaport Global.

Congrats on a good quarter. Just had one question left. Could you clarify your thoughts on your buybacks versus buying assets? I know you said you're not out there looking at aggressively to buy assets, but with the stock trading at such a big discount to NAV, maybe you can just clarify your thoughts on that? Thanks.

I think as we said, we are in no rush to really invest, but when it comes to the securities repurchasing program that we have, we will report on that quarterly as to what extent we have been active in that. So there's no particular guidance beyond that among (inaudible).

Okay. But just you have -- you know your assets very well. Rather than buying assets in the open market wouldn't you -- I'm just trying to get some thoughts on what -- if you would buy your own assets through your shares?

Yes, I think as we have pointed out before, buying your own shares is levering up in a way. We've spent a lot of resources on levering down. So I think everything else being equal, it would be more tempting to buy the convertible note than the common stock. NAV is a moving target. It'll reflect somewhere you think it's going to go and all that. But sure, all else being equal, with the discount that we've seen from time to time, it is indeed tempting.

Okay. All right. Thanks for clarifying.

Jorgen Lien, DNB.

This Nicolay from DNB calling. Sorry to drill down on the same topic, but just this buyback versus investment. On dividend, you paid 60% this quarter. Should, call it, the investment buybacks be in addition to the 60% or are you call it [costing] back on the 60%?

The current policy that's been communicated states 60% of ordinary net income as quarterly cash dividends. It talks about the repurchasing of cash flow excess -- available in excess. So that is the current policy at this time.

So what you're saying is then, no change but you look to do something in addition with probably a larger scale when time is due in addition to the 60%?

No. What we try to address is that the 60% in dividends is of net income. Then the cash flow available beyond that, we have used predominantly on delevering the balance sheet. Now --

That could change? Okay.

Yes.

Okay. Very good. Thank you.

Thank you.

Erik Stavseth, Arctic Securities.

You've previously shown how you've been managing the cycle. You put out neatly how you have -- what you did in the various parts of the cycle, where would you put those now? What part of the cycle that you've been showing are we now?

What part of the cycle? Is that the question?

Yes.

We are in correction phase, whatever you want to call it, values have come down first and then the spot market is currently somewhat depressed. So we are definitely on the down slope, whether we are at a bottom or there is lower to go or whether it's going to be a short-term or the recovery is close by or is going to take some time, that's a little more difficult to call.

But we think, as we've expressed before that, yes, there is probably a bit too many new ships coming into the market this year and the beginning of next. But the really attractive and interesting bullish signal now is that the ordering has been quite limited. So we think we already find ourselves with a smaller order book than we did at the beginning of the year. We will end this year with definitely a significantly smaller order book. So you are starting to see the contours of 2013, 2014 all over again.

Okay, thanks.

Thank you. There are no further questions at this time, so I'd like to hand it back over to the speaker for any additional or closing remarks.

We'll just thank everybody for your continued interest in DHT and wish you a good day.

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