DHT Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 6 speakers on the call.

Operator

Welcome to the Q2 2023 DHT Holdings Inc. Earns Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lila Halvorson, CFO.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning and good afternoon, everyone. Welcome and thank you for joining DHT Holdings' 2nd quarter 2023 earnings I'm joined by DHT's President and CEO, Svein Moknes Hargjerch. 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.

Speaker 1

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, thtykers.com, until August 16. 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 ks. 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.

Speaker 1

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 EDGAR system, including the risk factors in these reports for more information regarding risks that we face. DHT continues to show a solid balance sheet, represented by low leverage and significant liquidity. At quarter end, financial leverage was about 18% based on market values for the ships and net debt was just above €11,000,000 per vessel. The quarter ended with total liquidity of €359,000,000 consisting of €131,000,000 in cash and DKK228,000,000 available under our revolving credit facilities.

Speaker 1

Now over to the P and L highlights. It was a strong quarter with robust spot rates for the VLCCs, And we achieved revenues on TCE basis of €113,000,000 and EBITDA of €90,000,000 Net income came in at $57,000,000 equal to $0.35 per share. Reported vessel operating expenses for the quarter was $19,700,000 and G and A was 4,500,000 Included in the OpEx number for the quarter were some advanced costs for spares and consumables associated with ships that have been in yard in connection to some non recurring items. The vessels in the spot market earned $64,800 per day and the vessels on time charters made $36,200 per day. The weighted average TCE achieved for the quarter was $56,300 per day.

Speaker 1

Earnings were impacted by 61 scheduled off hire days in connection with installation of exhaust gas cleaning systems for 3 vessels and unscheduled off hire, mainly related to the repair of 1 vessel. On this slide, we present the cash flow highlights. We started the 2nd quarter with 117.5 €1,000,000 in cash, and we generated €90,000,000 in EBITDA. Ordinary debt repayment and cash interest amounted to 13,600,000 and $38,000,000 was allocated to shareholders through the cash dividend pertaining to the Q1 of 2023. In addition to the cash dividend, we also allocated $9,000,000 to shareholders through share buybacks during the quarter.

Speaker 1

$20,000,000 was invested in our fleet with $1,800,000 in maintenance CapEx, dollars 8,600,000 for installation of Exos gas cleaning systems and $9,500,000 through a deposit for the acquired vessel. The quarter ended with 100 and 30,600,000 in cash. Switching to capital allocation. In line with our dividend policy to pay out 100% of net income to our shareholders, We will pay $0.35 per share as a quarterly cash dividend. The dividend will be payable on August 30 to shareholders of record as of August 23.

Speaker 1

This marks the 54th consecutive quarterly cash dividend And the shares will trade ex dividend from August 22. In addition to the cash dividend, We repurchased 1,100,000 of the company's shares during the quarter for a total consideration of 8,900,000 The average price for the shares was $8.25 per share and DHT's policy is to retire the shares upon receipt. With that, I will turn the call over to Svein.

Speaker 2

Thank you, Leila. As announced, we entered into agreement to acquire a 2018 built DHT for 94,500,000 The vessel is of Eco Design, was built to a high specification, has a large deadweight capacity and is fitted in an exhaust gas cleaning system. This addition is expected to be accretive to our earnings and will further improve our fleet's efficiencies, including our AER and our EEO Hi. We took advantage of the dips in the freight market and completed our last retrofit projects for exhaust gas cleaning systems during the quarter. As such, all our ships are now fitted with these systems.

Speaker 2

Subsequently to the quarter, We put in place a 10b5 program to potentially acquire our own shares after quarter close, resulting in an additional 250,000 shares Bought at $8.46 per share. We took delivery of the newly acquired vessel last week, now named DHT Appaloosa. She was financed with available liquidity, but we have received commitments for a new secured credit facility of $45,000,000 which we expect to draw during the Q3. The new facility has a DHT style structure, which includes a 20 year repayment profile and a 6 year tenure. The facility will be priced at a sulfur Plus

Speaker 3

a margin

Speaker 2

of 180 basis points. Here with a brief fleet update. The DHT Apalusa was delivered last week and is currently in drydock for our first special survey. We have 4 time charter contracts that either have ended or are due to end this quarter. The DHT Mustang and the DHT Stallion have both been delivered back to us.

Speaker 2

The DHT Colt is scheduled to return home later this quarter, and the DHT Amazon contract will expire in Q3, early Q4. Following this, we will have 4 of our vessels on time charters and 20 ships on the dance floor in what we expect to be a rewarding freight market. During this quarter, we will drydock 4 vessels, 3 of which have been brought forward from the scheduled survey dates in the Q4. In our view, we are taking advantage of the current freight market to position these vessels So what we think is ahead of us to the result of having no drydocks planned for the Q4. We will now go through the 3rd quarter outlook.

Speaker 2

We expect 530 days to be covered by our term contracts at an average rate of $35,400 per day. We expect to have 1560 spot days for the quarter, of which about 10 90 days equal to about 70% have been booked at an average rate of 46,300 per day. As of today, this suggests combined bookings of 78% of the total days for the quarter at weighted average earnings of 42,800 per day. You can compare these spot booking numbers with our estimated spot P and L breakeven of $25,700 per day for the Q3, allowing you to model a net income contribution based on your own assumptions for the unfixed The market thus far this quarter exceeds The general idea of what a weak Q3 period should look like. On the graph to your left, You see that this year's recent and current dips are higher than the seasonal lows over the past 5 year period.

Speaker 2

This is in addition to increased transportation distances driven by seaborne crude volumes being in the upper band of the fiber historical range, as illustrated in the graph to the right. To us, this suggests that the market is in the range between balanced and tight and easily triggered for upward movements in freight rates. The current market is a bit lower than the start of Quarter and now mostly moving sideways. An eco vessel fitted with an exhaust gas cleaning system is currently worth about $30,000 plus for a round voyage in the East and about $40,000 per day out of the U. S.

Speaker 2

Gulf. We maintain our robust breakeven levels. The estimated P and L breakeven for the second half of the year for the Fleet as a whole is about $27,700 per day. When adjusted for the fixed income that we have, The P and L breakeven for the spot fleet is about $25,900 per day. The reason the spot P and L breakeven is marginally For the second half when compared to the year as a whole is because we will have less vessels on time charter contracts.

Speaker 2

For the remainder of the year, we estimate the cash breakeven for the fleet as a whole to be $19,200 per day, with the spot ships requiring to make $15,400 per day for the company to be cash neutral. If you set out to compare these numbers with our peers, you should keep in mind that our cash breakeven numbers include all true cash costs, I. E. OpEx, G and A, maintenance CapEx, cash interest and debt amortization. This illustrates a headroom of about $8,500 per day between cash breakeven and net income breakeven for the fleet for the second half of the year.

Speaker 2

This potential discretionary cash flow will be allocated to general corporate purposes. We know you all can count ships, so please excuse us for maybe stating the obvious, But this picture is quite remarkable and still deserves some airtime. The order book for new VLCCs now stands at 1.9% of the sailing fleet. Insignificant would be an understatement. This level of contracted new supply becomes even more insignificant when compared to 30% of the current fleet being older than 15 years of age and 14% being older than 20 years of age.

Speaker 2

To make this fleet development picture even more compelling from a shipowner's point of view, there are some 90 ships that 20 years of age up to the end of 2025. Year to date, 8 vessels have been contracted, consisting of 2 options being declared earlier in the year and 6 new contracts this summer. There are some letters of intent for a few additional ships in place, projects that are subject to financing and employment. Time will tell if they become firm contracts. In the secondhand market, there has, over the past couple of years, been Great buying interest from Asia for older ships.

Speaker 2

We now see a shift in interest towards younger vessels as many of these older ships that have been acquired are facing increasing scrutiny through port state controls and vetting considerations by terminals and end users, The result being quite a large number of older ships for sale, with maybe reducing buying interests. As we have suggested earlier, some of these older vessels might end up retiring from the market, thereby starting to reduce the sailing fleet. This supply picture should become a meaningful tailwind for our business. So let us sum up our thoughts for our markets and our business. As just mentioned, we have an exceptionally constructive vessel supply picture.

Speaker 2

OPEC plus cutting production are typically not good for the tanker markets. But there are some side effects that is softening the current blow and that will build a stronger turnaround. As the implied balances in the oil markets are tight, The cuts have forced refiners to source crude from further away. Think Asian refiners buying more from the Atlantic. This increases transportation distances and is a key factor for the lows this year being meaningfully higher than what most people expected.

Speaker 2

The cuts are also driving refiners to draw on inventories. Assuming the agency forecast So the increased amount listed this year is reasonably correct. 1 should not only expect a need to satisfy demand, but also a potential stock rebuilding. Keep in mind here that we make a living on transporting supply. And in situations when supply exceeds consumption, tanker markets tend to rock.

Speaker 2

Refining margins are under rise again. Expect this to drive refinery runs and then product tanker rates Only the front run crude tanker rates. And if we may wrap up this call with a little twist on one of Winston Churchill's Many great thoughts. Stay calm and buy tanker stocks. And operator, over to you.

Operator

Thank Our first question comes from the line of Frode Morcudal from Clarksons Securities. Please go ahead.

Speaker 3

Thank you. Hi, Tuan.

Speaker 2

Hi, Frode.

Speaker 3

Yes. I would like to hear your thoughts on the VLCC spot market. Specifically, Where do you see the additional demand for VLCCs coming from going forward? Obviously, we have the potential for a reversal in OPEC volumes. But one region with growth in

Speaker 2

the past year has been

Speaker 3

the U. S. Growth, right? And it seems to be a clear trend of more VLCC Taking U. S.

Speaker 3

Crude into Europe. Do you have any thoughts on this going forward? Maybe you see A potential shift in this trade towards Asia?

Speaker 2

You're right. There's been more these Transporting crude from the U. S. Into Europe this past year, 1.5 years. And I think we have That will continue.

Speaker 2

And these barrels have, to a great extent, substituted Russian barrels from the Black Sea and the Baltic. But also it's in combination with increased production in the U. S. And whether the U. S.

Speaker 2

Guys and the traders are selling to Europe Core to Asia is also somewhat driven by the level of accreditation and pricing. And now also, of course, with higher interest rates, when Transport oil longer, there's more cost associated with the trade. So oil price pricing has to sort of support those differences. But as I mentioned earlier in the call, we do see a clear sign that China, in particular, are sourcing more oil now in Atlantic. It's not only U.

Speaker 2

S. Growth that's of importance here. It's also Guyana and Brazil, in particular, has increased their production. So all this combined is really expanding transportation distances.

Speaker 3

Okay. That's good. On the bigger picture, I guess one topic we haven't talked about in A long time, I guess. It's the energy transition and peak oil demand. And I saw that the IEA had a report in June, This 5 year outlook report where they're basically forecasting a slowdown in oil demand Starting next year and a peak before 2,030.

Speaker 3

And I guess the key issue for tankers It's trading distances, right? So what's your perspective on this broader topic? And Do you think it has any influence on the sentiment and the investment decision today?

Speaker 2

I think to answer your last question first, I do think it has an impact on investment decisions because it Adds a level of uncertainty on the longer term future of the market, so people are a bit more hesitant to deploy capital. But it's not only about expansion of ton miles, but it's also about how much of the total demand is Signed by seaborne crude. And as you saw here in the slide, seaborne is now sort of at the 43,000,000 barrel a day level, Well, I see the fiber average is around 40%, 40.5%. And it's really to understand where is the future And is the depletion, is it steeper on Non seaborne crude production? Or is this deeper on what is seaborne production?

Speaker 2

And we are working hard to understand this picture. And we have a particular project in place to try to wise up a bit on this. And if it's successful, we will have some more meaningful, I think details on this later on this year. But we do have a suspicion that Seabourn will uphold better than the general production level and thereby support transportation. And Maybe all of this is sort of right that the fleet might shrink over the next few years.

Speaker 2

But I think when it comes to peak demand, it Depends who you talk to. We see ranges from sort of peak demand in 2028 up to 2,055. So it depends who you ask and who you believe and what is behind that analysis. And is these views loaded or not by business agendas or not? So I think it's hard to just pick one estimate and say this is the estimate.

Speaker 2

I think some people in the oil industry are suggesting that IEA is a bit on the conservative side, and they are being challenged on the reviews That it may be the politically color to some extent in support for sort of a green transition rather than being actual real numbers in what they expect It will happen.

Speaker 3

Yes. That's a good point. Thank you for that color.

Speaker 2

Thank you.

Operator

We'll now move on to our next question. Our next question comes from the line of Jon Chappell from Evercore ISI. Please go ahead.

Speaker 4

Thank you. Good afternoon. So I'm just keeping on your the topics from your closing remarks. There's seasonality and then there's also Saudi cuts. Can you estimate how much of the recent weakness, obviously with the higher floor, Is associated with the cuts.

Speaker 4

And as we think about your comment about moving supply, even if demand were to recover in the Q4 as it typically does seasonally, If the Saudis were to hold back increasing production for whatever their reasoning is, do you think there'd be a more muted winter season or is the changing trade flows

Speaker 2

This is a difficult question a complex question. But I guess I think from my chair, and I should be I'm humble enough to say that I'm not an oil analyst. But I think Saudi's main objective, obviously, is price. And now they're sort of it is working for them. Price is now up in the 80s.

Speaker 2

Of course, if they continue to hold back barrels and you see the forecast demand coming into the 4th quarter, And oil price will rocket. And that could, of course, also hamper demand. So it's let's see how this all plays out. But I think they just want a higher price, and then they will be able to offer more oil to the market when they see demand really being out there. So that's sort of our simple take on it.

Speaker 2

And it, of course, remains to be seen what the case will be. But of course, they want to make revenues as much as possible. And right now, I guess, The price increase is worth more than the loss of volume. So this is the key objective in our view. Exactly how much of the current sort of debt is due to the cuts or not, It's hard to put that into a spreadsheet and get an actual number.

Speaker 2

But so one thing that we picked up, which we Found a bit interesting is that Saudi, in particular, we understand they consume close to 700,000 barrels a day For energy and in particular running air conditioning during a very hot summer period. And we understand this year that they bought quite a lot of discounted Russian fuel oil for that consumption And maybe allowing the cut to be less than 1,000,000 barrel per day. And I think we've seen some estimates that the cuts So actually happening is more in the sort of 650 to 750 level. So there is maybe 25% to 35% difference there. But to get all these details, I think we'll only figure out a bit later on, it's hard to have all this information in light, Frankly, so if I can't be more precise, John, but I think these are sort of the components of it in some shape or form.

Speaker 4

Yes, it's still very helpful. Also may explain the higher floor during the Q3 if they're really not cutting 4,000,000 barrels. Second question is hopefully a bit easier As it relates to the capital allocation, I mean, 100% dividend payout, but then you're also still buying stock. So clearly over 100% Capital return. I just want some clarification on that buyback program.

Speaker 4

Is that kind of programmatic Where you're just you mentioned 10b5-1, so you're just buying stock kind of as the cash flow comes in? Or is it truly kind of opportunistic, Whereas if we get a seasonal recovery in the stocks, maybe you pull back on the buyback?

Speaker 2

It's the latter. So it's optimistic. But when we were approaching the end of the second quarter, the share price was still sort of in the low 8s. And the 10b5 allows us Continue to buy in the blackout period. So in this case, we put up maximum nominal amount to be bought, and we also put up a price grid for how much we want to buy at what prices.

Speaker 2

And there's also some volume limitations. This program expired today. So if there's going to be bought back more stock until the end of this quarter, it will be just purely management deciding whether we should do it or not. But we like the price in the sort of low 8s because that meant at the time that we were maybe at close to 20% discount to NAV. Now we are trading around NAV, so we don't I don't think you should expect us to buy at these levels.

Speaker 4

Okay. Very clear. Thank you, Svein.

Operator

Thank you. We'll now move on to our next question. Our next question comes from the line of Omar Nochtar from Jefferies. Please go ahead.

Speaker 5

Thank you. Hi, Zviin. Hi, Leila. Good afternoon. I just wanted to ask maybe just a bit more on the market and say the VLCC supply side of things.

Speaker 5

In the release, you mentioned that ownership brokers are noting that maybe 15% to 18% of the fleet is or the VLCC fleet is trading in the shadow markets. That's a pretty sizable 100, 150 VLs. Just wanted to see if you had any sort of color, how does that compare So what was in the shadow fleet maybe at the start of the year and perhaps how it looked pre Russia Ukraine war?

Speaker 2

I think pre Russian Ukraine war, call it, now 2 years back, we estimated the VLCC fleet and the shadow trade to be sort of around 60 So it's a meaningful increase. And in addition to this, of course, you had a lot of Suezmaxes. Nephramax is also now being employed in the shuttle fleet. So overall, the shadow fleet has grown meaningfully. I think an interesting aspect for this, in our view, is that These two markets do not operate in the way that ships can sort of move from one market to another, which would be very efficient, right?

Speaker 2

So they tend to stick to their own markets because it's basically just very hard to switch and then go back. And this has reduced productivity of the fleet. So we think this in a way is a positive. So you're right, it's a big number. And at least for now, it will stay.

Speaker 2

We think it's not only Russian barrels, of course, it's also Svela has increased a bit of their production. And Iran is now also has increased production. And this is also going on these ships. That's the sort of the 3 main oil suppliers utilizing these fleets.

Speaker 5

Okay. Yes. Thank you for that. And I guess that and Yes, you mentioned obviously and we've seen it that rates have thus far in the Q3, even though they're softer, they're at a higher floor. Presumably then this 2 pronged VLCC market, I guess, plays a role as well and that you have a dislocated fleet That is contributing to the higher realized averages.

Speaker 2

Yes, of course. But let's not forget that Shadow Fleet, they do serve a purpose. They do transport oil to refiners that is being consumed, right? So they're sort of they're working. It's not like they're doing Some secret business, which is totally outside the global oil market.

Speaker 5

Yes, yes. And then maybe just a follow-up kind of a Separately, you mentioned what we're seeing in the new building market and how the fleet is getting older, the replacement orders that we have seen thus far and nowhere near Enough to offset the declining age. We've seen the orders now they're going out to 27. Prices are fairly expensive, but just wanted to hear kind of what's your view for DHT in terms of new buildings? Does placing an order Makes sense to you for DHT?

Speaker 2

No, we have no plans to pursue newbuildings. I think there's sort of 2 key elements to that or 3. 1 is price, as you said. The other is that if we were to invest like We like to have assets in the water that can make money now. The delivery in end 'twenty six or into 'twenty seven So way out.

Speaker 2

So you end up having a lot of debt capital on your balance sheet, and that's not very efficient use of money, we think. But also, of course, the last component here is what are the future fuels. And when people talk about they have ammonia ready and methanol ready Ready this and ready that. That's not a big chunk of CapEx. The big CapEx will actually come when you need to add fuel tanks, few delivery systems onboarding ships.

Speaker 2

So we don't think there's clarity on this yet. It's not a question of whether you like one fuel or another, but it's also to have Credible view of production capacity levels for these fuels and at what price? And will there be other industries that will compete with the maritime So one example is we read one report that Seems quite confident that the agriculture industry will definitely be a competitor for green ammonia. So what will that do with the price of green ammonia once it It's the marketing volume. So then you need to have some confidence in all this, right?

Speaker 2

And LNG, okay, it's maybe a transitionary fuel, takes, Call it 20% of the carbon footprint over ship, but it's not enough to meet their longer term objectives. So This, I think, is not holding just us back from ordering, also a lot of other people. So but again, just to answer your question, we have no plans to order ships.

Speaker 5

Very good. Thanks, Fain, for that. I'll turn it over.

Operator

Thank you. We'll now move on to our next question. Our next question comes from the line of Chris Sung from Weather Research. Please go ahead.

Speaker 3

Hi, good afternoon, Spine. How are you?

Speaker 2

I'm good, Chris. Thank you.

Speaker 3

Thanks. I wanted to ask for that new vessel, De Alta, Lisa. It was financed for $45,000,000 in line with DHT financing. Just working backwards that implies an expected remaining life of 18 years. So this 5 year

Speaker 5

old vessel will trade for a

Speaker 3

total 23, Slightly longer than the average useful life. And what's that? How will this vessel be depreciated? And does that change the useful life of other vessels when you flee?

Speaker 2

So all our depreciation policy is to depreciate vessels up to the age of 20. So when we talk about repayment profile, we have negotiated with all our banks, all our facilities that the Repayment profile of the loan is also up to year 'twenty, so to match the commercial life of the ship. So the loan of 45, Since the ship is 5 year old, has a 15 year sort of profile, so 3,000,000 per year in amort, right? But it's a 6 year tenure. So after the 6th year, there will be a balloon equal to 6 years times 3,000,000.

Speaker 2

So no, no, So equal to 9 years times $3,000,000 So that's how we put the financings together. All

Speaker 3

right. Thanks for the clarification. And just one follow-up on your buyback. How much is left on your share buyback program?

Speaker 2

So we put in place in March $100,000,000 buyback program. So we have only spent a little bit of it. So if there are opportunities down the road when there are dislocations of how we are trading in the stock market compared to Where we think the business should be valued, then we have ample capacity to utilize that.

Speaker 3

Okay. All right. Perfect. Thanks for me. I'll turn it over.

Speaker 3

Thank you.

Operator

Thank you. There are no further questions at this time. So I'll hand the call back to Sven for closing remarks.

Speaker 2

Thank you very much to all for listening in on DHT and staying tuned, and we're wishing you all a great day ahead. Thank you.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Key Takeaways

  • DHT reported strong Q2 results with €113 M in TCE revenues, €90 M EBITDA and €57 M net income (€0.35 per share), as VLCC spot earnings averaged $64.8 k/day and time-charters $36.2 k/day.
  • The balance sheet remains solid with financial leverage around 18%, net debt of ~€11 M per vessel and total liquidity of €359 M (€131 M cash, DKK 228 M undrawn revolver).
  • In line with its policy, DHT will pay a 100% net income payout via a $0.35/share dividend (54th consecutive), and deployed $9 M in share buybacks under a 10b5-1 program.
  • Fleet enhancements included the completion of exhaust gas cleaning retrofits on all vessels and the accretive acquisition of 2018-built eco VLCC “DHT Appaloosa” for $94.5 M funded by a new six-year credit facility.
  • For Q3, 530 days are fixed at $35.4 k/day and 70% of 1,560 spot days are booked at $46.3 k/day, with a spot breakeven of ~$25.9 k/day; the VLCC orderbook stands at just 1.9% orderbook, underscoring tight supply and an aging fleet supporting rates.
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Earnings Conference Call
DHT Q2 2023
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