DHT Holdings Inc

NYSE:DHT

Earnings Call Transcript 2022-Q1

[Operator]

Good day and thank you for standing by. Welcome to the DHT Holding’s Q1 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded to May 10, 2022 [Operator Instructions]

I would now like to hand the conference over to your speakers today, Laila Halvorsen, CFO, and Svein Moxnes Harfjeld CEO and President of the company. Please go ahead.

[Laila Halvorsen, CFO]

Thank you. Good morning and good afternoon everyone. Welcome and thank you for joining DHT Holdings first 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 May 17th. 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 reporting. 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.

The company continues to show a very strong and healthy balance sheet and the quarter ended with $58.6 million of cash. At quarter-end, the company's availability under both revolving credit facilities was $476.8 million, putting total liquidity at $235 million as of March 31. Financial leverage is about 30% based on market values for the ships and net debt per vessel was $17.8 million at quarter-end, which is a below current scrap price.

Looking at the P&L highlights, EBITDA for the quarter was $14.4 million and net loss came in at $17.3 million. The results includes the non-cash gain and fair value related to interest rate derivatives of $7.9 million. The company continues to show a very good cost control with OpEx for the quarter at $18.3 million equals to $7,800 per day per ship. G&A for the quarter was $6.8 million and includes non-recurring accruals related to the retirement of the previous co-CEO.

In the first quarter of 2022, the company achieved an average TCE $17,100 per day. For the second quarter of 2022, 69% of the available days have been booked at an average rate of $24,800 per day, and 59% of available spot dates have been booked at an average rate of $19,900 per day.

On the next slide, we present the cash bridge for the quarter. We started the year with $60.7 million of cash and we generated $14.4 million in EBITDA. Ordinary debt repayment and cash interest amounted to $7.2 million or $3.3 million was allocated to shareholders through dividend payment, and $2.3 million was used for maintenance CapEx. Changes in working capital amounted to $4.5 million and we ended the quarter with $58.6 million of cash.

As you all know, despite the very challenging freight market, we did not earn any cash.

Switching now to capital allocation, the company will pay a dividend of $0.02 per share for the quarter. It will be payable on the May 26 to shareholders of record as of May 19. This marks the 49th consecutive quarterly cash dividend. And for the three remaining quarters of 2022 we estimate cash G&A of $3.3 million and non-cash G&A of $0.8 million in average per quarter. Following the sale of DHT Hawk and DHT Falcon. Depreciation for the three remaining quarters of 2022 is estimated at about $31.5 million on average per quarter. After scrubbers will be fully depreciated at the end of 2020, we expect annual depreciation for 2023 to be about $100 million.

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

[Svein Moxnes Harfjeld, President and CEO]

Thanks, Laila. We have entered into agreement to sell the DHT Hawk and DHT Falcon, with the delivery set to take place during the second quarter. Price is $78 million for the pair and compares favorably to the combined price of $98 million that we paid for them some eight years ago. The fleets are expected to generate some $12 million in combined profits and they will repay the remaining outstanding debt of the vessels amounting to about $13 million in total.

Following these sales, the average age or fleet will be reduced and our AER and EEOI metrics improved.

On this slide, you will find an update of our cash breakeven levels for the remainder of the year. As per usual, all crew cash costs are included in our presentation, i.e. OpEx, debt amortization, interest, G&A and maintenance CapEx. The numbers are best in class with a required rate of $15,100 per day for the fleet as a whole. And importantly, $8,500 per day for the spot ships specifically in order for the company to be cash neutral for the remaining three quarters of 2022.

On this next slide, we wanted to share an observation of the peer group within large tankers. As you will see, there's a distinct change in the development of financial leverage within this group. DHT is represented by the green line and the lowest financial leverage. As you will recall during the last chapter, not only dividend return significant moments to shareholders through quarterly cash dividends, but we also invested in the balance sheets and reduced interest bearing debt by about 60%.

Despite the recent tough markets, we have retained our balance sheet strength. And you could also note that we have no newbuilding CapEx commitments. Our takeaway here should simply be that DHT has the strongest balance sheet in the group.

I will now offer some commentary on the markets. We believe a market recovery to be underway, but delayed and troubled by COVID in China and geopolitics generally impacting macroeconomics. Admittedly and given all the noise, it is very difficult to predict the near term freight markets. But trying to look through all this noise we see fundamentals developing towards what we expect to be common rewarding markets for large tankers.

While inventories are low and are likely more pronounced as energy security is increasingly becoming an issue. OPEC is so far sticking to its plan, but underperformance by the respective members quote us, the much talk about Iran deal takes longer than market observers have suggested. And Russia Ukraine conflict is reducing supply.

The U.S. however, announced released from the SPRs [ph], a released that will offer the market a double benefits, firstly through additional barrels to the market over the coming six months, and then likely retail in due course. Further, we don't think it's unreasonable to expect Saudi and the UAE-led OPEC response to higher oil prices at some point maybe in the second half of this year. As you all know shipowners make their living by transporting supply has a danger of talking our own book and stating the obvious more supply would be most welcome.

To the sanctions and ensuing trades trade disruptions coming out to the rest of the Ukraine conflict seems to be increasing transportation distances. So far most visible to ships smaller than VLCCs. If freight differentials become too wide, freight tend to flow up and down between the different ship sizes. We saw some of this at the outset of the conflict and should regulate trades see these differentials come back the theory that the tide lifts all boats to hold true.

The popin freight rates for VLCCs that you saw a few weeks back is a good indicator that underlying balance is not as bad as the current rates are indicating. Keep in mind that VLCCs typically transport almost 45% of all seaborne crude oil volumes, that closer to 60% on a ton mile basis. This is truly the workhorse of the oil industry.

The trade disruptions are changing sourcing of refined oil products, elevating freight rates for product tankers. As this happens at a time of low inventories of both crude oil and refined products, it backs the question whether product tankers are front running crude tankers suggesting the amount for feedstock and thus crude oil transportation to come next. There are currently too many ships in the markets. The road fleet is whoever getting older by the day in combination with low ordering of new ships. The VLCC order book consists plowed 54 ships to be delivered through the remainder of this year and next. This equals a major 6.3% of the existing fleet very low by any reference.

With very limited scrapping, the current number of ships older than 20 years has now become significant. These parts of the fleet could grow close to 100 ships by the end of the year assuming low scrapping. You find it discouraging those older ships are not retiring from the fleet, in particular with very healthy demolition prices being offered. Until not long ago, there were hardly any commercial prospects for ships older than 20 years. But sadly, it is only sanctioned trades that keep all these older ships currently in business.

These sanctions have simply developed new trades for ships that do not comply with rules and regulations. We do think, however, that something's got to give us dry docks and all the capital expenditure eventually will force all the ships out of the markets. So in sum, all this would lead us to envisage the fleet to potentially shrink at a time when demand for transportation is expected to recover, creating a very rewarding freight environment. It would be a very bold move to bid against large tankers.

And with that's we open up for Q&A.

Thank you. [Operator Instructions] Your first question comes from the line of Jon Chappell from Evercore ISI. Please ask your question.

[Jon Chappell, Evercore ISI]

Thank you. And afternoon, or good morning, Svein. I’m going to ask all my questions and kind of one multiparter. The vessel sales make 100% sense given the asset values also given, where equities are trading right now, and didn't have much debt on them. So the first part is what's the use of proceeds from that net $65 million? And then secondly, you've kind of indicated in the past that you're not interested in buying assets at this point. And again, if you're selling then the price is probably indicate, you're not into buying. If we are in the beginning of this upturn as you've laid out, you're probably not going to have other opportunities to buy either.

So do you kind of envision the next several quarters, the next beginning of the upturn in the cycle, to be a kind of cash harvesting period and with more aggressive capital returns to shareholders. And then look to purchase when we're kind of peaked or past the cycle?

[Svein Moxnes Harfjeld, President and CEO]

Thank you, Jon. Just to be clear, we didn't say that we're not interested in buying at this time, but we have not been interested in buying at some of the prices that people have been asking. So there's this sort of reasonable distinction in those two observations.

So we're always sort of looking at opportunities. And it's been really hard, we think to find something that has made good sense, but it should not really rule that out. And I think with our balance sheet, we are more than able to fund any acquisitions that we sort of would like to look at without relying on additional capital. So if we do something it will certainly sort of improve the earnings in the company.

But as you also noted, we do like to have a low leveraged balance sheet. We think our business is sort of suited for that or the balance sheet is suited for the business depends on which way you look at it. As you also point to when it comes to capital allocation, our policy is a minimum 60% of ordinary net income. And we have demonstrated in the past that when sort of earnings or cash flows are committed, we are certainly rewarded shareholders with more than 60%. So that's also possible.

And of course, with sort of low cash breakevens, low leverage overtime, it could put the company in position to be more generous than what the specific numbers, and suggests that is sort of, we will not be drawn on getting -- giving a specific outcome of that, but that's how we sort of think about it in general.

[Jon Chappell, Evercore ISI]

Okay. That's very helpful. And I lied before, I do have one more additional question. It seems like other segments have been more immediate direct beneficiaries of some of the new trading routes developing from what's happening in Europe right now. Are the VLCCs just a laggard in that regard? Or do you see, maybe China comes back online, reverse lightering from the Baltic or the Black Sea, that could be a big VLCC beneficiary? How do you kind of see the map redrawing to the benefit or not of the VLCC market overtime?

[Svein Moxnes Harfjeld, President and CEO]

Prior to the conflict, you have some four to five VLCCs cargoes going out to the Baltic and they were all loaded to transshipment in the in the Danish straits. So that business, of course, have become very difficult now for most people. And from what we understand also, the initial pilots are not so interested in assisting that type of social transshipment to take place. So people are needed sort of further away to try to do this.

But currently, it's really some of the traders buying this oil and it's not a business at the detachment. I think it's -- this whole conflict situation changes, one should expect that trade to come back at some point. This has not really been the case out of the Black Sea, where you have more sort of Suezmaxes trading directly out to Asia.

What we did see immediately after the conflict, we had some B2C loadings after the U.S. Gulf going to Europe. And with notable port discharges, so two to three year discharge ports in -- Iberian Peninsula et cetera, so that. And those were dominant, very good freight rates up in the $40,000 a day sort of territory. So that might well sort of increase at some point once these U.S. barrels are coming to market. There seems to be appetite for in particular the night crude in Europe, which is driving a lot of West African barrels now going to Europe?

So, there's so many moving parts here. And it's very hard to have a precise view on exactly how it will play out, other than just saying that disruptions and increased distances will serve our business well. And I do think, right now, we are probably the last ship type to benefit from this. But eventually it will also come to continue to cease and then it should be quite forcefully we think so.

[Jon Chappell, Evercore ISI]

Okay. That's very helpful. Thank you, Svein.

[Operator]

Thank you. Your next question comes from the line of Chris Robertson from Jefferies. Please ask your question.

[Chris Robertson, Jefferies]

Hello, Svein. Thank you for taking my questions.

[Svein Moxnes Harfjeld, President and CEO]

Good morning.

[Chris Robertson, Jefferies]

Good morning. Yeah, you guys have done a good job in the past with counter cyclical investing and divesting. So you have a handful of ships with the same age profile as the two that were just sold. Can we see some additional vessel sales this year? Or do you think that that's over with at this point?

[Svein Moxnes Harfjeld, President and CEO]

If we see sort all these that we think are attractive to divest say one or two more ships that have to certainly happen. So the challenging part also in sort of selling chips in this age bracket is that not all buyers that a company like DHT can entertain to do business with. So on this occasion this was a known entity to us somebody you've done business with in the past and they performed very well and so it's a proper company. So for us that's worked out and that in connection also with a good price.

So I will not rule it out. There is not like a heavy marketing or effort in sort of getting rid of ships. We have a high quality fleet and they're also ready to dance, wants the music it can really start.

[Chris Robertson, Jefferies]

Sure. I guess just thinking about the pre pre-Eco built ships, especially the pre-2010s, kind of what's the incremental CapEx needed to bring them up to speed for IMO 2023 and beyond? And does it very heavily by age bracket or is it about the same price?

[Svein Moxnes Harfjeld, President and CEO]

I think, for all those ships, they have a large engines. And we've gone through the exercise of calculating sort of the EXI and what we -- we done -- would need to do with the ships. There will be some minor sort of power reductions. But the power reductions ends up in sort of cap speeds, which are still way higher than what is the service speed in the market.

So basically all these ships are designed to run at 17.5-18 knots. And we might have to really Capital speed at call it 15.5 knots or maybe closer to 16 knots, whereas the service speed in the market is 13-13.5 knots. So I think commercially, we'll have hardly any -- may be on the limited impact on VLCC’s earnings capability. And there's not any CapEx to speak of, so this is really a pocket money. So --

[Chris Robertson, Jefferies]

Great. Yeah. Thanks for that color. That's all for me.

[Svein Moxnes Harfjeld, President and CEO]

Thank you.

[Operator]

Thank you. Your next question comes from the line of Frode Morkeda from Clarksons Securities. Please ask your question.

[Frode Morkeda, Clarksons Securities]

Yes, thank you. Hi, Svein.

[Svein Moxnes Harfjeld, President and CEO]

Hi, Frode.

[Frode Morkeda, Clarksons Securities]

Few questions on daily rate [ph]? Looks like a very good price, you achieved. I guess -- and they of course, include the scrubbers, right? So one question I had is, did the value of the scrubbers come up in discussion? And if so, how much would you ascribe this scrubber value to be in today's market?

[Svein Moxnes Harfjeld, President and CEO]

And there was no specific discussions about the scrubber value. This buyer wanted ships with scrubbers. So it was not an alternative discussion. So do you have the ships without scrubber? And what is the price differential? So it was sort of very straightforward. And we had that sort of rough idea of what we wanted for the ships and they were able to -- willing to meet our price expectation.

So, there's been some volatility in the spreads. It's been sort of at 100, they've been up to 250. So depends what you put in the thing for sort of ease of reference at the $100 spread than the nominal value in the year on the ship that is vintage is in the sort of $1.5 million to $1.7 million incremental earnings. So then you need to have a view on how long do you think the spreads will stay. But I forget -- as I said, again, there was no specific good discussions on any value per se. So --

[Frode Morkeda, Clarksons Securities]

Okay. Now, the reason I asked is that, if you look at the broker quote, they usually do not want a scrubber-free value typically.

[Svein Moxnes Harfjeld, President and CEO]

That's right.

[Frode Morkeda, Clarksons Securities]

Yeah. In general terms, how do you see the sale and purchase market for VLCCs today? And in combination with that, can you also talk about the timing of this vessel sale. I guess, given the outlook you have, which seems to be quite optimistic, would definitely prices more even higher in the future? Or do you think like there's new carbon regulation is coming in to play next year has an impact for these older vessels.

[Svein Moxnes Harfjeld, President and CEO]

There seems to be reasonable liquidity and the older realm [ph]. But as I mentioned that, to the on the prior question, because all these counterparties that we could do business with, so they might work out for a private buyer, so to say. So there are sort of regular transactions happening in that space. And for all the ships that are trading anywhere, depending on the age and the condition from sort of the high-20s up to sort of the high-30s

As we know or maybe even forecasts are demonstrated, so depends on the value position, ballast water treatments, scrubbers, prior history, et cetera. But there was a regular transaction taking place in a sort of very modern. And there are a few things being talked around. And one can do something if one wants to. But it's seem to sort of be a bit, I would say sideways, after a lot many transactions taking place and not that many players.

So there's also real big movement and it's a bit disconnect from newbuilding prices. I think the reason for this is that the asking price from the shipyards at 220 plus/minus is just a derivative of what they can get for a gas carrier, LNG carrier or a large container ship. So it's not really driven by a strong demand to build tankers. And that's really great news for our space, because you don't really see a lot of people wedging in on building large tankers now so that we leads us to a good benefit.

And so in the middle of brackets, called ships around 10-year mark, now very -- not that many transactions taking place not much for sale or purchase. So you have to sort of move over to sort of starting at 13-14 years old ships before you see much movement. That's it's also been a bit sideways, I would say.

Again, here, it depends very much on the specific ship yard, it's built at how it's equipped, et cetera. But some of the private owners are so keen to venture in that area. And I understand why they do that. It doesn't sort of offer any fuel economic benefits compared to Eco ship, but it is nevertheless, some quality chips in those vintages in the market. And they will also have a reasonable time I think in a market recovery.

[Frode Morkeda, Clarksons Securities]

Yeah, sure. Thank you for that color. That's it for me.

[Operator]

Your next question comes from the line of Robert Silvera [ph] from Associate Marine. Please ask your question.

[Unidentified Analyst]

Hi. Very good job as usual. You guys are conservative and have gone -- reduced your interest cost, which is always positive. You did have extra shares outstanding of about 672,000 plus. And I was curious where those shares went? Were they in fulfillment of option buying or where did they come into existence for?

[Svein Moxnes Harfjeld, President and CEO]

So, the company on a regular basis has long-term sort of incentive program for directors and officers. And there are allocated shares that could be rewarded on -- typically rewarded annually with vesting criterias. So that is a reflection of that.

[Unidentified Analyst]

Okay, so it's all management, then, directors and management?

[Svein Moxnes Harfjeld, President and CEO]

Correct.

[Unidentified Analyst]

You also noted a number called -- and you called it the share profits from associated companies. Can you give us some color on what that is?

[Svein Moxnes Harfjeld, President and CEO]

So we own -- in the first quarter, we own 50% of our ship management company, Goodwood in Singapore that runs all our ships, that’s an associated company. We have now subsequent in the second quarter increased our ownership position to have an economic control of the company and also have the two or three directors of that company. So increasing our position.

So we will then change the accounting treatment of that company going forward. That will be visible from the second quarter results onwards.

[Unidentified Analyst]

Okay, but that will increase profits. So -- can you ---

[Svein Moxnes Harfjeld, President and CEO]

The company is profitable, but the change in ownership from 50% to 53% is not significant in sort of nominal incentive space. So, it's a small -- it's a small part of the P&L in DHT.

[Unidentified Analyst]

Right. In one of the earliest questions, there was a cash from the sale of the ships. What was your allocation for it? And I missed -- I didn't pick up what your answer was on that. What did you -- what are you using that -- those millions for?

[Svein Moxnes Harfjeld, President and CEO]

So, initially, the cash flow going to the company's sort of cash reserves. We are -- we have not communicated a specific use of that cash. We are you know, sniffing around if we can find a good investment opportunity. Although we must admit they're very hard to find right now. So, that is one alternative.

We could also do as we have done in the past is to prepay more depth. So that's also an opportunity that we have. And I think in the next quarter or two that will become more visible to investors as we move ahead, and to see what we have decided to do. So it also, of course, the mix of both. So --

[Unidentified Analyst]

Yeah, I liked on alternatives of reducing the debt. So it was a good one in my mind. One last question, the large number of ships that are over 20 years and so. How is that playing right now with the scrap steel market? Is the scrap steel market still high and attractive to take the ships out? Or has it been dropping?

[Svein Moxnes Harfjeld, President and CEO]

Prices to sell the scrap for the ship for demolition is still very high, which all makes it a bit puzzling that you don't see more ships heading into the scrap yards. But as I mentioned, it's really driven by the fact that they have some commercial opportunities that are almost exclusively available to people willing to take these risks and not be compliant.

So as these sanctions have overtime created sort of separate markets. And you can be -- many can be concerned that for the smaller ships, like Afras et cetera that if Russian cargo sells allow sanctions you could create an additional pocket for similar types of businesses in the future. So it's not an ideal outcome, the flip side of sanctions, which we understand why they're being made. But unfortunately, IMO and relevant flag states are not able to really enforce these regulations and get rid of the ships.

[Unidentified Analyst]

Okay. With your experience, though, with the ship ages that are out there, when do you see it kind of being economically forced, that they be scrapped, a year out or two years out?

[Svein Moxnes Harfjeld, President and CEO]

With the new regulations coming on from 2023, I think the next hardline will be 2026. And I think by that time, it's going to be very, very difficult. It’s not impossible to operate older ships. And if you look at sort of the demographics of DHT’s fleet, you will note that our ships will sort of new out of the commercial picture well within that time. So we have sort of a natural retirement, either by selling or also potentially scrapping in due course. So we will sort of pass through. And what will what we will own beyond that will be a very efficient fleet, assuming nothing else happens.

[Unidentified Analyst]

Right. Well, thank you. Thank you very much for doing such a good job.

[Svein Moxnes Harfjeld, President and CEO]

Thank you. Appreciate that.

[Unidentified Analyst]

That’s it for me. Thank you. Yeah.

[Operator]

Your next question comes from the line of Climent Molins from Value Investor's Research. Please ask your question.

[Svein Moxnes Harfjeld, President and CEO]

Hello?

[Operator]

Climent Molins, your line is open. Please ask your question. As there is no answer, I'll move on to the next question. Next question comes from the line of Chris Tsung from Webber Research. Please ask your question.

[Chris Tsung, Webber Research]

Hi, Good afternoon, Svein. How are you?

[Svein Moxnes Harfjeld, President and CEO]

Good. Thank you.

[Chris Tsung, Webber Research]

Thanks for the question. I wanted to ask about just your -- all the good ones are taken already. So just moving on to the drydocking schedule. I think there's one left for the second half of this year. I know, and in 2021, in light of a soft freight market, you guys pushed up several drydocking. Is there -- do you guys have that [indiscernible] available if you guys --for the rest of the year or is just one the most you can do.

[Svein Moxnes Harfjeld, President and CEO]

There's only one super left for this year. We might start with one that's due in January later this year. But if you want details, please make contact with our CFO, Laila. And she will assist you with more details.

[Chris Tsung, Webber Research]

Okay, great. And just on your vessel sales. It looks like the outstanding debt on the two were about $13 million given the DHT self-financing $2.5 million over the remaining economic life. That to me comes out to be about two-two and half years remaining on these vessels. So is it right -- am I thinking about it correctly that the economic life that you guys build in is about 18 years for these VLCCs.

[Svein Moxnes Harfjeld, President and CEO]

No. What we did in finances is that we like to cap the borrowing ownership to be maximum $2.5 million per year in amortization for the remaining commercial life of that vessel. So for newbuilding for 20 years life it will be $50 million sort of maximum debt. If you buy a 10-year old shape it will be $25 million. That is also a reflection as we have done some prepayments on that early loans. So there's a mix of sort of regular amortization and some prepayments as the debt was a bit lower.

[Chris Tsung, Webber Research]

Okay. All right. That's it for me. Thank you.

[Operator]

[Operator Instructions] There seems to be no further questions please continue.

[Svein Moxnes Harfjeld, President and CEO]

Well, thank you very much to everyone for listening DHT and your support and interest in our company is most appreciated. Wishing you a good day ahead.

[Operator]

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