DHT Holdings Inc (DHT) 2022 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Q2 2022 DHT Holdings Inc. Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to our speaker today, Laila Halvorsen, please go ahead.

Thank you. Good morning and good afternoon, everyone. Welcome and thank you for joining DHT Holding's Second Quarter 2022 Earnings Call.

I'm joined by DHT's President and CEO, Svein Moxnes Harfjeld. As usual, we will go through financials and some highlights before we open up for your questions. The link to the slide deck can be found on our website, dhtankers.com.

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, until August 18. In addition, our earnings press release will be available on our website and on the SEC 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 as detailed in our financial report. Actual results may differ materially from the expectations reflected in these forward-looking statements. We urge you to read our periodic report available on our website and on the SEC EDGAR system, including the risk factors in these reports, for more information regarding risks that we face.

The company continues to show a very strong and healthy balance sheet and the quarter ended with $106 million of cash. At quarter end, the company's availability under both revolving credit facilities was $188 million, putting total liquidity at $294 million as of June 30. Financial leverage is about 28% based on market values for the ships. And net debt per vessel was $15.7 million at quarter end, which is well below current scrap values.

Looking at the P&L highlights. EBITDA for the second quarter was $32.5 million and net income came in at $10 million equal to $0.06 per share. The result includes the gain related to sale of vessels and a non-cash gain in fair value related to interest rate derivatives. The company continues to show -- continues with a good cost control with OpEx for the quarter at $18 million equal to $7,800 per day, and G&A for the quarter at $4.2 million.

In the second quarter, the company achieved an average TCE of $24,300 per day, with the vessels on time charter earning $33,800 per day, and the vessels in the spot market earning $21,200 per day. For the third quarter, 68% of the available days have been booked at an average rate of $23,600 per day. And 58% of available spot days have been booked at an average rate of $18,400 per day.

We sold 2 vessels during the quarter, DHT Hawk and DHT Falcon, for $40 million and $38 million respectively. The sales generated a combined gain of $12.7 million. In connection with the sales, we repaid outstanding debt on the 2 vessels of $13.3 million. Both vessels were delivered during the second quarter and net proceeds amounted to $62.9 million. Following the sales, the average age of our fleet has been reduced and our AER and EEOI metrics improved.

Part of the net proceeds were used to reduce debt. In June, we prepaid $23.1 million under the Nordea Credit Facility. The voluntary prepayment was made under the revolving credit facility tranche and may be re-borrowed.

On the next slide, we present the cash bridge for the quarter. We started the quarter with $58.6 million of cash and we generated $32.5 million in EBITDA. Ordinary debt repayment and cash interest amounted to $9.1 million while $19.2 million was allocated to shareholders through share buybacks and dividend payment. $4.5 million was used for maintenance CapEx while net proceeds from sale of vessels amounted to $62.9 million. $23.1 million was, as mentioned on the previous slide, used to prepay long-term debt, $8.3 million was the initial cash recognition from [Gizzard]. And we ended the quarter with $105.8 million of cash.

Switching now to capital allocation. During the second quarter, the company purchased $2.8 million of its own shares equal to 1.7% of the outstanding number of shares as of March 31 for an aggregate consideration of $15.9 million. In addition, the company will pay a dividend of $0.04 per share for the quarter. It will be payable on August 30 to shareholders of record as of August 23. This marks the 50th consecutive quarterly cash dividend.

With that, I'll turn the call over to Svein.

Thank you, Laila. Following the share repurchases conducted during the second quarter as discussed by Laila, we continue to buy back stock after quarter end under the 10b5-1 rule. We are third quarter to date acquired some 1.5 million shares at an aggregate cost of $8.8 million at an average price of $5.87 per share.

Considering buybacks conducted in 2021 and buybacks made year to date, we have in total bought back close to 10 million shares equaling some 6% of the company's capital. With a total consideration of $57 million, the average price of these repurchases is $5.77 per share. We consider this to be a great and an accretive investment. And all shares have been retired upon receipt.

During the quarter, we agreed to refinance the bilateral credit facility for the DHT Tiger with existing lender Credit Agricole. The structure is in line with the DHT style financing, $37.5 million made up of $2.5 million per year of the remaining life of the ship. It has 6 years tenor and a 20-year repayment profile. The pricing represents a new loan for DHT's borrowing costs at the Secured Overnight Financing Rate, also referred to as SOFR, plus a margin of 2.05%. It includes a historical Credit Adjustment Spread of 26 bps between SOFR and Libor. That this is a new structure that will replace Libor, you should note for reference that this pricing is equal to a Libor plus a margin of 179 bps.

We typically have a mix of spot and fixed employment for our fleets. However, it is not formulaic with a percentage of the fleet employed one way or another, but a focus on the nominal rates and tenors that in our view will contribute meaningfully to the business. We have entered into a 5-year time charter for the DHT Osprey at $37,000 per day.

Delivery is planned for August and the customer has options to extend for an additional 2 years at $40,000 and $45,000 per day respectively. The key attraction to this time charter is the tenor as we would not find this rate attractive for a 2- or 3-year charter. We see an increased level of inquiries for time charters and we'll selectively engage with our customers if and when meaningful business can be conducted.

We have committed $25 million to retrofit an additional 8 ships which scrubbers. The combination of decreased scrubber cost, early delivery of equipment, and continued elevated spreads between heavy fuel oil and very low sulfur fuel oil makes this a compelling investment in our view. Considering the current average spreads in Fujairah and Singapore, the payback on these investments should be inside the year.

The work will commence in the fourth quarter and we expect completion during the first quarter of next year. We plan to take each ship out of service for 30 days to give or take. This is a highly efficient schedule that will be executed by our experienced team at one of our go-to shipyards. Upon completion, we will have a total of 23 VLCCs fitted with scrubbers, with these additions expected to boost earnings for the company.

So to sum it all up. We continue to stay disciplined focusing on execution of our business model and strategy. This includes key building blocks in delivering value for our shareholders. We are well structured for cyclical markets with probably the strongest balance sheet amongst the peer group. Ample liquidity enabling us to invest in the business and act on opportunities should they arise, all with robust downside protection without having given away the upside.

The tanker market recovery has started. And we are tuned for this recovery through our actions as structured to create value. This includes a reduced number of outstanding shares through buybacks and an expanded on fast track scrubber program that will boost earnings. We have substantial operating leverage in the business combined with a significant capital distribution potential.

And with that, we open up for questions. Operator?

(Operator Instructions) And the first question comes from the line of Omar Nokta from Jefferies.

Yes, I just wanted to ask, Svein, you sort of touched on the 5-year contract and the duration that made it so compelling. Clearly, we haven't seen this much, sort of, time charter activity or at least that type of duration for the past, I don't know, several years going at least, I would think, a decade plus. How would you characterize the liquidity in the charter markets today? As you mentioned, the recovery has begun. We haven't necessarily seen a resurgence in VLCC spot rates, but how would you say the time charter market is at this point?

The liquidity for this sort of tenor is very, very thin. So -- but there is quite a few clients asking for 1, maybe 2 years and also want a lot of options for sort of shorter durations. We don't find that very attractive. And we are very constructive on what to expect for next year and '24. Obviously, beyond that, it's always hard to sort of have a specific number. Hence, we found this 5-year charter to be attractive.

There are some additional discussions or incoming discussions to us. So it could be that we, over time, will build more and more fixed income. But hopefully, that will be at increased rates going forward, and it will also maybe be with forward delivery. So let's see. But to your point, liquidity is thin for now, so.

Okay. All right. And then just a follow-up, sort of, maybe a bit more broadly on the market itself. We've seen clearly the midsized crude tankers and the product tankers lifted as you highlighted in the release. The -- on the VLCCs, can you give maybe a sense of just how the market here recently, maybe within the past, call it, 4 to 6 weeks, how that's been developing in terms of what you're seeing from your lens, in terms of activity levels out of -- maybe out of the Middle East and then maybe the Atlantic Basin?

So the market is clearly on the rise and the rates are moving up. So the sort of latter part of what we have booked are at higher rates than the earlier part. We are in discussions as we speak, negotiating spot voyages at the rates that's meaningfully higher than what we have on average booked quarter-to-date. So -- and this looks to be robust. It's not like a fast-moving super volatile change in rates, as you can see on smaller ships, but it's certainly going in the right direction.

And there is a mix of inquiry both in the Atlantic and in Asia. I think a key point there is that oil has been steeply backwardated for quite a while. And with the backwardation between the fourth quarter this year and fourth quarter next year is about half in the last few weeks. And this will enable more Atlantic barrels to go long-haul into Asia. And we see some of that already and some requests to load in the U.S. and then to discharge in Asia. And of course, this will certainly be good for our markets.

And the next question comes from the line of Frode Morkedal from Clarksons.

Regarding the final comment you made on the backwardation, actually I read the [REA] report this morning, and then I'll actually predict the global inventory build of close to 1 million barrels per day in the second half of this year and 0.5 million barrels in the first half of next year. To me, this seems to be very positive for tankers, but I just wanted to hear from you, how you would expect this to be impacting the tax market dynamics going forward?

We certainly agree with you. So we think that the inventory cycle is the sort of key metric in understanding the factor cycle. And as you all know, the oil inventories have been brought down over many, many years now. So -- and at some point, there has to be more feedstock. We spoke about this on our prior call and also during Marine Money and conference. So we certainly think this is a positive. There will likely be more numen or more supply, if you like, into the refineries, and this should certainly be good for large tankers. These are really the real workforce of the crude market. VLCCs have on average handled about 46%, 47% of all crude being transported. And with Atlantic still being long oil and the big demand picture being in Asia, this is truly a VLCC business from a fundamental perspective. So although, of course, some of the smaller ships will still enjoy benefits from the disruptions we are seeing following the hostilities between Russia and Ukraine, but overall we are very constructive on this period going forward.

I agree. Yes, you've been buying back shares and now announced investment in your own ships with scrubbers, which makes totally sense to me. That's great. On the scrubbers, I'm curious to know if there's been any development in the technology since you last did this retrofit. It seems to me to be at quite good price versus the obvious benefits.

No, it's not really any development. These scrubbers are fairly simple. These are essentially washing machines or the mother of all washing machines with the capacity to handle sort of 30,000 cubic meters of water per day, a handysize tanker, right? So -- but the cost of building them has come down. I don't think the cost was, as for the producer, very much higher a few years back, but it was a new thing, it was very sort of hyped-up and they probably had higher profit margins on them. So they are available to us now at 1 of our 2 key suppliers at a much lower cost than what we did last time. So with the 35 there, you will see that we budget just over $3 million per ship to do this, right? Which is a significant improvement in the CapEx. So our technology is basically the same. So there's no change.

We will go to the next question. And it comes from the line of Jon Chappell from Evercore.

Laila, can I start with just a couple of modeling questions for you. First of all, my apologies, I missed the spot today. I thought I caught 18,400 for the third quarter, is that correct? And what percentages that were?

Just the spot?

yes, just the spot part.

Yes, that spot was 58% at 18,400.

Okay. And then, Svein, you said 30 days roughly for the travel retrofitting. Should we assume 4 in the fourth quarter, 4 in the first? And then my other question regarding to the scrubbers and the model is, how should we think about the depreciation of those? How much will it reset the depreciation higher once completed?

So it's exactly which day we will enter this will depend a bit on how we schedule the ships in the spot market, and we want to discharge as close to the yard as possible. So if we can do 6 ships in the fourth quarter, we will do it in the fourth quarter. But -- so it's a bit hard to say this, Jon. So sorry not being able to be more precise, but we are very confident in the fourth and the first quarter schedule. So you will sort of be at liberty to do this the way you want, but we can't give you a more precise guidance I'm afraid. But the equipment is ready and the yard is ready. So if we can do it sooner, we will do it sooner. But if we want to optimize the fleet to get as little off-hire and positioning cost as possible, it might be a bit dried off, but it will not be beyond the first quarter.

On the depreciation profile, we will communicate this on the third quarter with the third quarter results, but I think it's a reasonable lead to look at what we did last time, which was a 3-year depreciation profile. But it's not finalized yet, so.

Okay. And then final bigger picture question. I mean, we talked about this last quarter, Svein, on the deployment of cash as it comes in. It seems asset values have moved and at least in the situation with VLCCs far before the rates have themselves. So if ships weren't an attractive investment maybe 6 to 9 months ago, just mathematically they're probably even less so today. You've made significant headway with the buyback and there's a ways to go there. Clearly, would you say that at this point, you remain firmly in that your stock is less than NAV and capital return is the top priority of cash? Or do you think that at a certain point, you have to start pivoting to thinking longer term and start making investments in assets even if the rates don't necessarily catch up to the asset values in the short term?

I think when it comes to investments, we are not excited about the current trial values from a buying perspective. So it has to be very special opportunities if we are going to buy something. When it comes to buying back our own stock, of course NAV is also a moving element here. So we are very happy with what we have done all, sort of, below $6 mark and which compares well to where the stock is trading today. But that, as I think everybody knows, our capital allocation policy stays minimum 60% of ordinary net income to be distributed. There could be that we will reduce the debt level even further. So I think that was that sort of the key metrics. But I don't think you should expect us to run buy ships in the current valuations. And 2, we'll probably not buy stock at the current levels either. We will leave that to our investors and then focus on returning money to shareholders in the sort of future.

Okay. My last one is kind of a follow-up to that last point. A $0.04 dividend is certainly off your minimum, so to speak, of $0.02 in a quarter where if we take out gains, it was still a loss. So should we think about now as we're in the early stages of a recovery, assuming all else stays the same, is $0.04 kind of a new base dividend and then we'll transition to that minimum 60% payout once you're more sustainably in the profitability?

No. The 60% in this quarter is actually based on the net income reported because contrary to some of our peers, we don't exclude, sort of, elements in the P&L that is cash inputs, so such as the sale of a ship, profit. We tend to include that when we consider the dividend. So for us, this is just the way they've always done it. So it's not a new law. It's just a pure reflection of what was the income for the quarter.

And the next question comes from the line of Anders Karlsen from Kepler Cheuvreux.

A quick question on your fleet. I mean, you sold the 2006 and 2007 built ship. You have more left of the same ones. With the firming market, are you considering more sales? Or is that off the table now?

I think for now, we will be very selective. It could, of course, be that we elect to sell 1 or 2 ships. But I think we'd like to see, in particular, for the scrubber fit units, appreciation in both asset values, but also have these ships giving them the opportunity to earn money, which we expect them to do. So I don't think you should plan for our fleet to be much smaller than what it is today.

Okay. And then just a quick one on the market. You were mentioning backwardation as one factor that is holding back. What other important drivers do you see in the short term here?

Of course, the supply. So OpEx is a bit tight on handling more oil into the market. The key argument is that I feel that they're sort of meeting current demand and they are questioning the macroeconomic picture. I think these last couple of days, we've seen some tidbits here and there suggesting that inflation might sort of be leveling off and maybe giving some ease to some of the prior macroeconomic concerns. If that is the case, maybe we'll have more work to the market. But I think that's the key reason of holding things back is that OpEx has been tight, which we assume is they wanted to enjoy the ride of the strong prices for as long as they can.

Okay. And then just a final question on -- have you seen any pull from the EU in terms of building inventory? I mean from an energy security perspective, I guess EU is short energy and would require to build substantial inventories of everything they can get their hands on. So have you seen any signs of that, Svein?

No, I can't say I've seen that. So of course, the gas has been more of a hot topic for Europe. So because oil is not really used so much for heating or for energy production, right? It's more for transportation and for petrochemicals. So I think there are other areas where you've seen this focus.

Next question comes from the line of Climent Molins from Value Investor's Edge.

I wanted to ask about the disruptions you're seeing from the sanctions in Russia. The effect mostly will fall from smaller vessels, considering VLCCs cannot dock on Russia's western ports. But could you provide some commentary on the ship-to-ship transfers and the effect on the overall market?

We are not involved in those type of operations, but we are aware that they've been taking place in the Atlantic Basin. So there's been, say, Aframax is coming out of the Baltic and Black Sea. There's also potentially the Suezmaxes, but this is mainly we think, is the Baltic business. And then we load it on to the VLCCs and then transport it to the Far East with China in particular being the destination. But to our knowledge, it's not a huge business tying up many, many ships. There's been a few of these transactions being done. So it's a bit on the sideline of the conventional markets.

All right. That's helpful. And considering the high energy price in Europe, do you expect to see any additional crude import substitution for natural gas volumes during this coming winter?

It could, of course, happen. So there are some suggestions that the fuel oil will be used for heating this winter. So -- but we haven't seen any, sort of, clear evidence of it or at least not to our knowledge. So -- but I think this will be defined also by the cost differential between heating oil and gas.

(Operator Instructions) Next question, it comes from the line of [Michael Moskopf from NRM Capital].

Question answered.

There are no more questions at this time. I would like to hand the conference back to the speaker for final remarks.

Well, thank you to everyone who's been on the call and on holding DHT, that's greatly appreciated, and we're seeing you all a good day ahead.

That does conclude our conference for today. Thank you for participating. You may all disconnect.