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Good morning, and good afternoon everyone. Welcome and thank you for joining DHT Holdings' First-Quarter 2019 Earnings Call. I'm joined by DHT's Co-CEOs, Svein Harfjeld and Trygve Munthe. 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, through May 16, 2019. 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, including DHT's prospects, dividends, share repurchases and debt repayment; the outlook for the tanker market in general; daily charter hire rates and vessel utilization; forecasts on the world economic activity; oil prices and oil trading patterns; anticipated levels of newbuilding 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 EDGAR system, including the risk factors in these reports, for more information regarding risks that we face.
Looking at the income statement. Our EBITDA came in at $64.2 million and a net income of $17.7 million or $0.12 per share. Adjusted for a non-cash change in fair value related to interest rate derivatives of $4.4 million, the result would be $22.1 million or $0.16 per share.
The average earnings of our VLCCs came in at 35,500 per day in the first quarter, with our ships on time charter earning 33,900 per day and the spot fleet earning 35,800 per day. This key fee number is the true number in our income statement as our ships are commercially managed in-house.
Capex for the quarter was $17.9 million or 7,400 per day average for the VLCC, and G&A for the quarter was $3.7 million equal to 1500 per ship per day. As of today, we have booked 61% of our second quarter at 29,800 per day. It should be noted that while this is a good start to the second quarter, the market has seen a decline. Hence, we expect the remainder of the quarter to come in below this number.
Moving on to the balance sheet, the quarter ended with $69.3 million in cash. This does not include $85 million available under our revolving credit facilities with ABN and Nordea. As previously disclosed, we have also secured further financing of $50 million where only $5 million is drawn.
Financial leverage is moderate with interest bearing debt to total assets just above 51% based on mark-to-market. Finally, looking at the cash bridge. We would like to highlight that we generated $64.2 million in EBITDA, and after debt service and maintenance CapEx we are left with $30 million in cash from operations.
In March, we prepaid $35 million under the Nordea credit facility. The prepayment was made under the revolving credit facility tranche and may be reborrowed.
With that, I will turn the call over to Svein.
Thank you, Laila. As has been the case for the last four years or so, our capital allocation policy is to return a minimum 60% of ordinary net income to shareholders. It is either in the form of quarterly cash dividends or in the form of buybacks of our own securities. We will for the first quarter this year, be paying our 37th consecutive cash dividend.
In total, we will return $14.6 million equal to 66% of adjusted net income. This amount consists of $11.4 million equal to $0.08 per share as cash dividends and $3.2 million in the form of share buybacks. The cash dividend is payable on May 28 to shareholders of record as of May 21.
The shares were bought back at an average price of $4.47 per share. This level is meaningfully below current trading levels and the consensus net asset value per share and as such, accretive both on valuation and on earnings per share.
And with that, I hand over to Trygve.
Thank you, Svein. There really are no operational highlights to speak of in this quarter, and that is by design. We believe this is the time of the cycle where we'll focus only on efficient operations and maximizing profits. So before we go to Q&A, we’d like to talk a little bit more about DHT in general.
For those of you who have met us at conferences or in one-on-one meetings over the past few quarters have heard us talk about how well we believe DHT is positioned for the anticipated upcycle. Well, we think this quarter illustrated that point quite well.
$35,000 per day is an acceptable rate, but it's not a great rate. It is well below long-term historic averages. But in this market, the company delivered $22 million of net income or $0.16 per share. As per policy, at least 60% of this was returned to shareholders in the form of buybacks and dividends.
We think these numbers compare well with peers, and it provides good indication of the earnings potential of DHT, and it provides a glimpse of what we - what is hopefully to come.
Running rate sensitivities in DHT is very simple as we only have VLCCs. One data peer that you should note is that an increasing rate of $10,000 per day means $90 million in increased cash per year.
To bring it down to EPS levels, if we next year get rates in the mid $60,000s, which some analysts forecast and which we saw in 2015, we should generate earnings not too far off $2.5 per share. These are big numbers in our humble opinion and so are 60% of these numbers.
So in sum, DHT is a very cost efficient - is a very cost-efficient tanker company. We have very attractive operational leverage, and our capital allocation policy ensures a very timely transformation of increased earnings into higher dividends. And that's why we believe DHT is very well-positioned for the upcoming upcycle.
And with that, we would like to open up for your questions. Operator?
Thank you [Operator Instructions] And the first question comes from the line of Frode Morkedal from Clarksons Securities. Please go ahead and ask your question.
Yeah. Thank you. About the $35 million prepayment you did on that. Is this just like cash management and, say, an interest or if you're also seeing that you also want to delever going forward? I mean, do you also see like attractive investments opportunities today?
That's a good question, Frode, and it's really the first alternative we offered. So it's just good cash management that we see, cash coming in, and there was actually more cash than needed sitting around, and we elected to just to pay down on the revolver. And the key point is that we can draw that back if and when we want to deploy differently.
Okay. Just to follow up, based on the current asset value, do you find that attractive? Would you be buying some second hand tonnage?
Well, we really think that the expansion we did in 2017 at very attractive levels is sort of our effort in anticipation of this upcycle. So you should not expect us to make any other investments now going forward.
Sounds good. And yeah, and finally on the guidance for 2Q. That was pretty strong numbers of close to 30k. But compared to peers and also the spot market, as quoted by brokers, can you give some color on what's driving that - those rates? I mean, do you…
It's based on a high-level view. This just shows you that the combination of a quality fleet with some of the best people in the world on the chartering desk and operations desk. They can provide very solid numbers. And I think our team has really played their hand exceptionally well both in the first quarter and so far in the second quarter.
There's no like specific routes that you did this quarter, that's driving up those rates?
No. It's not. We've sort of been developing our trading patterns over time. We have a number of sort of regular customers that gives us ample opportunity.
And I think this is really a reflection from them that we are servicing them well. And the true result of a great marketing is repeat business, and we have a lot of repeat business from our core group of customers that we are really proud of.
Great. Thank you very much.
Thank you. Your next question comes from the line of Michael Webber from Wells Fargo. Please go ahead and ask your question.
Hey, good morning, guys. How are you?
Very well. Thanks. How are you?
Good. A salient point referencing kind of few operational highlights as you guys are kind of poised heading into the IMO 2020, just on a ton of moving pieces to the DHT story at this point. But just curious, operationally, I guess, from a broader market perspective, with the Iranian waivers getting pulled, I'm curious if we started to see some of that fleet moving back into storage. And is that something you think we would see more likely, I guess, in Q3 than Q2 just based on that timing?
I think from what we know, but there's little sort of access, a lot of satellite information on the IEA's side [ph] is unavailable. But we do get a sense from the intel in the market that an increasing number of their ships are being engaged in storage.
So I think our expectation is that other OPEC countries is likely to fill that void, and so that will be a net positive. But it's sort of yet to really happen, so this is something that you should expect to see over the next month or two, we think.
Got you. Okay. And then, I guess, along the same, I guess, line of thought from a storage perspective. It might be a bit early, but are you starting to see any interest probably from commodity traders and any of your assets as floating storage as people start to kind of gear up for the transition to lower sulfur fuels, either HSFO kind of building inventory around kind of secondary or tertiary bunk reports or otherwise?
Yes. There's been a number of inquiries from traders to sort of get short-term charters or charters with a lot of optionality and sort of keeping ships getting filled with some sort of cargo. We are not entertaining that at all as we want to sort of have our quality ships moving. But that has been done, some of these already, and I'm sure there's going to be more to come over the next sort of six to nine months.
Sure. And out of curiosity, what's the pricing structure on those? That interest, what is it like? Is it on par with what you would get in the physical market and you're just not interested in tying your vessel up? Or is it already kind of a premium and they're getting closer to kind of teasing you into a point where you might entertain it for a vessel or two?
The rates that have sort of been presented are time-charter rates. And these traders, they are shooting for bargains and, of course, they're trying to sort of hit some of the weaker ships out there. For us, it's not a business that we are willing to entertain at all because to have ships sitting still will then deteriorate the quality of the hull and structural consumption, performance and all that.
So in order to really continue to deliver strong results as we have shown in this quarter, we will continue to trade our ships, and they will not sit still.
If I may just add to that. I think, Mike, that the peels we have seen done in this has really been on older units than what you'll find in the DHT fleet.
Got you. Just keep moving. Okay. Thanks for the time, guys. I appreciate it.
Thank you.
Thank you. Next question comes from the line of Randy Giveans from Jefferies. Please go ahead and ask your question.
Hey, guys. This is Chris Robertson on for Randy. Thanks for taking my call. You mentioned earlier, other OPEC countries may be filling the void of Iran production. Can you talk about how you're positioning your fleet for the expected increase in cargoes in the coming months?
With 27 ships in our fleet, we are certainly trading globally. And I think over the last year, year and a half, you've seen increasing positioning in our fleet toward Atlantic. An exact ratio, I think it's hard to say. But the market is relatively efficient, right? So you won't see sort of big dislocation in freight pricing between the Pacific and Atlantic over time.
But some are sort of very fuel-efficient. More modern units have tended to do a lot more Atlantic long-haul trade that - like what we have done in the past. So we have to sort of serve all these markets.
That's great. And then just with regard to scrubbers, can you speak to kind of the cadence or pacing of the retrofits during the rest of the quarters in 2019? And is there any way to maybe pull forward some of the retrofits if you have them completed by 4Q to kind of take advantage of the market dynamics at that time?
We have done two retrofits so far, which we did in December, and we have three to four ships that we will do at the end of this quarter. And then the sort of balance 10 ships will be done through the second half. I think you should have no expectations that things can really be brought forward at this point. The manufacturers of our equipment are running a very tight show, and there's been a lot of demand. The yards are getting very, very busy and tight. You need to sort of show up on time and be prepared when they expect you to be there.
So -- and also in this regard, I think the market in general should expect that there could be some delays in some of these projects. Sort of the schedules and voyages and deliveries and all this is not exactly as expectations. But I think so far on our plan, we have good developments, and then we'll keep working hard on delivering everything as tight as we can.
Sure. And then last question for me, I mean, obviously, people are pretty hyper-focused on the spot market. But what are you seeing in terms of the one to three-year charter market? Are there any attractive deals out there or charters out there or no?
I think as we have said numerous times, the depths of the longer-term time charter market at least beyond 12 months is quite shallow for VLCCs. So we haven't seen a tremendous uptick in interest quite yet.
And as we have said before, the traders aren't really big players in taking VLCCs on time charter for freight trading. They may be there for storage as we just talked about.
So it's really end users. And their mindset very much at the current spot market is very cheap, so why don't we just pay that and then they typically change mind once the spot rate is way above the time charter rates, and then you may see some more volume than what you have seen recently.
Got you. Appreciate the time. Thank you.
Thank you. Your next question comes from the line of Ben Nolan from Stifel. Please go ahead and ask your question.
Yeah, thanks. Hey, guys, nice quarter. I appreciate that you'd said earlier that you are sort of well-positioned with respect to where you want your fleet to be and how many ships and you've done your acquisitions.
But I know that you guys have a very defined set of criteria and matrix, which you are buyers or sellers of assets. Kind of given where we are and the state of the market where asset prices are, just curious where things stack up. If you were to be in a market, is everything's a bit expensive for your taste or not?
We think it's - we are sort of in the recovery phase, we think. So asset values are up some 10%, 15% from the loss that you saw when we made our last expansion. So it's sort of in the territory where we've lost interest to buy frankly. And with expectations of a very healthy freight market over the time to come, you should also expect, I guess, asset values to move along that.
So the next thing you should expect from us and that may be one or two or three years out is there will be some divestments at some point in the long run. But you should not expect us to expand further or invest anymore at this point.
Okay. And then that sort of leads to the next question. Obviously, in the quarter, there was a split on return of investment between the dividends and a little bit of a share repurchase. As you pointed out earlier, the share price is a bit higher now, arguably, maybe a little bit above NAV, but - and perhaps in the second quarter won't be as big of an issue given the softness in the spot rates.
But as we go into the back half of the year, given your outlook, given where the share prices are, any thinking about how that split might transition or between dividends and share repurchases given where we are, given the price of the shares, given your expectations for asset base?
I think given our outlook and what we expect going forward, you should expect us to focus on cash dividends, and then we can leave it to, of course, our shareholders to employ capital in our company so…
Okay. That's very helpful. And then lastly, just coming back to the scrubber issue. Just for modeling purposes, any color on the cadence of CapEx in the back half here? How much over the course of the remainder of the year is left?
Well, our total program for the 16 retrofits is $70 million. We've done two ships, and we have three to four ships at the end of this quarter and then the remainder in the second half. So I think you should sort of view that on CapEx program on 16 and spread it out accordingly. That's sort of a reasonable approach.
Okay, very good. Thank you, appreciate it.
Thank you. Your next question comes from the line of Fotis Giannakoulis from Morgan Stanley. Please go ahead and ask your question.
Yes. Hi, gentlemen. And thank you. I think that most of us in the market share your optimistic view about next year. I just want to ask you, what are the things that they could go wrong? What are your major concerns about the anticipated recovery? And can you explain why the asset prices have moved so much compared to two to three months ago at the same time that the freight market has weakened?
I think, to the first part of your question, Fotis, on what can go wrong, our bull expectations are based on we do believe that the global consumption of oil is still increasing and is going to increase every day, every year. Of course, if there's a change to that that's going to have an impact on the rate outlook.
IMO 2020, to some extent, plays in. That seems -- for certain, that's going to happen, so I don't think there's much downside in the -- from that factor.
And then we're also quite bullish on the whole US export situation. And of course, you could see a situation where they wouldn't export as much as all indications are currently, so that could be a negative. But I think it's really - it needs to be a macro shock that surprises.
And lastly, on the supply side of things, we take note that no VLCCs have been ordered for the past three months. We don't anticipate any big ordering spree anytime soon. So I think the supply side is looking pretty robust as well. So it's really - in our book, it has to be a very negative macro event that would disappoint us - or could disappoint our rate expectation.
I think on your last part, on asset values, I think there's an increasing number of people appreciating the story Trygve just sort of laid out that this market looks very, very promising. And people, of course, would like to position themselves and get some assets and participate.
And today, in particular, maybe resales with prompt delivery is what has at least been, in theory, moved up the most. And this is reflected that, if you go to the shipyards, they -- in all earnest, they are talking 2021 delivery. And people, of course, are keen to try to participate much earlier than that.
Can you also explain why we haven't seen this increase in order book compared to the previous cycle? We saw in the previous cycle, even before rates started improving, thus from the expectation, a lot of orders came in. Is it the lack of capital in the sector?
Is it the fact that the shipowners are much more disciplined right now compared to three years ago? Is it because asset prices, they have run up faster than market fundamentals?
So can you explain if you have any concerns about the potential increase on the order book? And how does this compare with scrapping candidates that you see in the next two, three years?
I think there are a few factors that we think are important in terms of why we haven't seen any ordering spree as you open up with. Last time around, there was a lot of private equity money, I think. And it seems to us that these guys have burned their fingers to some extent, and they're not there to do at this time around.
Normally, big waves of contracting happens at the tail end of an upcycle when the private owner has generated enough cash so that he can go out and renew his fleet. Well, we haven't even been really through the top of the first inning, in our opinion, on this recovery.
So the private players probably aren't in a financial position to go up and do it. So you have to wait for them. The private equity guys, the institutional money is not there.
And then lastly, I think for the more true shipping people, it is a big issue. If you were to order, what are you going to order, is it going to be LNG propulsion, or is it going to be the current design and so on and so forth.
And we think quite a few people are sitting on the fence because they don't want to be the first mover on a new design, and they don't want to be the last mover on the old design. And of course, this is all very good news for the coming upcycle.
Thank you very much, guys. Appreciate it.
Thank you. The next question comes from the line of Dennis Anghelopoulos from ABG. Please go ahead and ask your question.
Hi. A quick question about the Lake, the Raven and the Condor. They're built in 2004, around 15 years old. And with oil major approval becoming potentially an issue in the near future, do you think that they'll be potential sale candidates?
No. All major approvals with the exception of potentially two very specific customers. It's not really an age issue. So all our ships are very well approved. Company like Exxon, for one, have no age restriction. They are more concerned about the integrity of the ship and in particular also the quality of the operator of the ship.
But as we mentioned earlier on the call, there will be a point in the cycle where we will consider to divest some ships. And then typically, as we've done - we did in the prior upcycle, our first sort of focus will be then on the older spectrum.
That being said, of course, the capital in old ships is very limited. Lake and Raven has just gone through their third specialty service with CAP I status. Condor is entering now anytime soon. And all these three ships will also have scrubbers onboard, so they will have very decent potential in making very handsome profits over this cycle. So there's also a possibility to trade them out.
Okay. And related to the US exports you're talking about, what are the potential bottlenecks you guys have been seeing? Is it on the export capacity pipelines?
I think at this point, the big debottlenecking that everybody is waiting for is the increase in pipeline capacity between Permian and the Gulf Coast. And there are some people, as you -- I'm sure you're aware, three, four projects that are coming to operation by the end of the year, early next year. And we believe that the port infrastructure is there to handle it. The majority is currently happening with reverse lightering, i.e., ship-to-ship transfers.
That's a very flexible way of doing it. So I do not think -- or we do not think of the lack of ports that can load VLCCs fully as a constraint in the export of domestic or U.S. crude for destinations.
So reverse lightering isn't cost -- extremely cost ineffective, it shouldn't deter it if the pipelines come online as expected.
Correct. I think lightering rates are inside of $1 a barrel. And I think to use -- if you were to build an offshore terminal to load VLCCs, I'm sure your cost is not going to be any lower than that.
But of course, the whole lightering is a little bit exposed to adverse weather in the winter and so forth, so there are times when it feels very inefficient. But overall, it's proven itself over time to be flexible and reliable and safe, and we think it will continue that way.
I think in order for people to sort of commit to an offtake for, say, 10 years or so for infrastructure, the prospective cost needs to be significantly lower than what flexible and variable cost is and by using the lightering operation. As Trygve mentioned today, it's not really there. So this is again, it's not a constraint, so…
Okay. Thank you very much. That’s all I had.
Thank you. Your next question comes from the line of Robert Silvera from R.E. Silvera & Associates. Please go ahead and ask your question.
Hello, gentlemen. Thank you very much for doing such a good job and anticipating this market. My question has to do with the retirement of debt. Do you see the possibility in this coming quarter that you're in now that you'll be able to, again, retire additional debt beyond the normal schedule as you did in this past quarter?
I think it's too early to provide any guidance on that. And of course, we have our regular debt repayments, which, of course, we will do. And the prepayment that happened in the first quarter, as we discussed in the beginning of the call, it was more of a cash optimization move rather than sort of premature delevering or, excuse me, a prepayment of debt. It was just to reduce interest expense because we had surplus cash sitting around.
Yes, which I highly approve of. Anyhow, so you can't answer that question exactly. On the buying of shares, share buyback, have you contemplated the use of selling put options so that if the stock price does not go down, you'll just enjoy the premium of the option? And if the stock does go down, you'll own the shares. Have you thought about using that methodology of share buyback?
We looked into it ever so briefly, and we got very quick feedback that the volume in that wouldn't be really sufficient to make any dent in our financials, so we have not focused on that.
I see. Okay. On those, that’s the end of my questions. Thanks for doing such a good job.
Thank you.
Thank you. There are currently no further questions. [Operator instructions] There are no further questions at this time. Please continue.
Well, it remains to say thank you to all for having an interest in DHT and following us, and we look forward to speaking with you again in the future. Thank you. Have a good day.