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DHT Holdings Inc
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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's second quarter 2019 DHT Holdings, Inc. earnings conference call. At this time, all participants are in listen-only mode. There will be a presentation followed by a question-and-answer session [Operator Instructions]. I must advise you that this conference is being recorded today on 7 August, 2019.
I would now like to hand the conference over to your first speaker today, Laila Halvorsen. Please go ahead, madam.
Thank you. Good morning and good afternoon, everyone. Welcome and thank you for joining DHT Holdings' Second Quarter 2019 Earnings Call.
I'm joined by DHT's Co-CEOs, Svein Moxnes 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 $38 million and a net loss of $10.5 million or $0.07 per share. Adjusted for a non-cash change in fair value related to interest rate derivatives of $7 million, the net loss would be $3.5 million or $0.02 per basic share.
The average earnings for VLCCs came in at $26,400 per day in the second quarter with ships-on-time charter earnings $$27,500 per day and the spot fleet earnings $26,200 per day.
OpEx for the quarter was $19.1 million or $7,800 per day average for the fleet and G&A for the quarter was $4 million, equal to $1,600 per ship per day.
For the first half of 2019, the fleet generated $31,100 per day in revenue on a TCE basis. OpEx per day for the first half of 2019 was $7,600 per day average for the fleet and G&A for the first half of 2019 was equal to $1,600 per ship per day.
As of today, we have got 65% of our third quarter at $21,100 per day.
The company has elected to pay a cash dividend for the 38th consecutive quarter. A dividend of $0.02 per share for the quarter is payable on August 29 to shareholders of record as of August 22.
Moving over to the balance sheet, the quarter ended with $71 million of cash. This does not include $83.9 million currency available under our revolving credit facility. As previously disclosed, we have also [indiscernible] scrubber financing of $50 million where only $5 million is drawn as of quarter-end.
Financial leverage is moderate with interest-bearing debt to total assets just below 50% based on market values for the ships.
Looking at the cash bridge, we generated $38 million in EBITDA and positive cash flow from operations. Following dividend and CapEx, the quarter was essentially cash neutral, ending with $71 million of cash.
With that, I will turn the call over to Trygve.
Thank you, Laila. Allow us now to just say a few words about our convertible bond coming to maturity on 1 October. The total outstanding is $33 million. The conversion price is currently $6.04. We currently have no plan to extend or exchange this bond. So, depending on the share price development, this will either convert or redeemed in cash on maturity.
We will now give you a status report on our scrubber retrofitting project. As you will recall, we will have scrubbers 18 [ph] of our ships, equivalent to two-thirds of our fleet.
Two ships were delivered from yard with scrubbers and the retrofitting program includes 16 ships. To date, we have completed six ships. We currently have two ships in the yard and we will have two more coming in later this quarter. That leaves six ships that will commence their retrofits in the final quarter of the year.
We are generally pleased with the work done on the first six retrofits. Cost and time spent have been in accordance with budget and expectations.
With that said, we do recognize that the yards and manufacturers are getting increasingly busy which may have an impact on the efficiency of future retrofits.
Total CapEx for the retrofitting project is budgeted to be $70 million. To date, CapEx paid is $21.4 million. And as previously announced, we have a scrubber finance facility of $50 million in place. To date, only $5 million has been drawn.
With that, I'll pass it over to Svein.
Thank you, Trygve. We will then, from where we are sitting, give you some color on recent developments on market. One, refinery margins stayed weak for longer, potentially extending an already deep refinery maintenance periods.
I retain the view that the current quarter should offer a significant increase in throughput and hence the amount of transportation. Refinery margins are on the rise and this last week has already seen an increase in cargo inquiries that might be the early innings of their predictions.
Two, trade tensions affected the macro picture and demand. This is, of course, an aspect hard to predict and offer any credible guidance on.
We do note, however, with interest, that despite the noise, that two leading economists state ambitions to engage in negotiations and possibly getting a deal done. Of particular note is China not putting any tariffs on oil imports from the US.
Three, incidents in the Middle East spurred short-term increases in the oil price, but as owners we're apprehensive in entering the area during these periods. An overhang of ships build up in the area negatively impacting the freight market.
Four, following a busy first quarter, with 20 VLCCs delivered, the second quarter followed in similar fashion with 19 deliveries. As such, two-thirds of the planned order book for 2019 was delivered during the first half. We believe that only a handful of ships have left the fleet so far this year.
Five, there are very few ships undertaking scrubber retrofitting during the first half. We are, however, seeing a meaningful increase in this activity and expect a large number of ships going out of service to undergo these projects over the coming 6 to 9 months.
From what we are picking up through the grapevine, the yards are very, very busy and some potentially chaotic and delays in manufacturing and project execution should be expected.
We retain our view that from a shipping [technical difficulty] things look very promising with several factors set to play into the hands of the shipowners. Key factors worth mentioning are a fleet getting older as retirement has slowed down, new regulations imposing CapEx related to ballast water treatment, a declining order book now at 11%, and expanding transportation business.
Stating the obvious, we are, however, as with most industries, reliant on a positive macroenvironment, offering growing economies and demand growth.
And with that, we open up for Q&A. Operator, please.
Thank you. [Operator Instructions]. The first question comes from the line of Randy Giveans from Jefferies. Please ask your question.
How are you, gentlemen? How is it going?
Good. Thanks.
So, first, looking at the time charter market, we're seeing one-year time charter rates of $35,000 maybe even $37,000 a day for ECO VLCCs without scrubbers. So, have you seen that kind of market similar to those numbers? And also, what you are hearing for one to maybe three year time charter for a scrubber-fitted VLCC?
Yes. For ECO fitted with scrubbers, there has been time charters in excess of $40,000, in the low 40s. And there is demand for those ships at probably similar numbers. I think for non-ECO with scrubber, there is also demand. The numbers would be marginally below that. So, there is interest in time charter in general. But I think over this past few weeks, now summer holidays maybe have impacted this, it's been a little bit more quiet [indiscernible] ahead of the summer, but [indiscernible] general engagement with customers. So, it's interesting. There is interest still to cover. But I guess, from the [indiscernible] expect the freight markets are all rising through the fall before we engaged in further discussions.
Perfect. That answers my follow-up there. So, I'll go over with a different follow-up. So, you have recently – the president has been out there saying – questioning maybe the development of bunker fuel costs and maybe availability of some different, either HSFO, VLSFO, what have you. So, have you kind of seen that HSFO, VLSFO spread developing, now that we're getting four-and-a-half months from January? And also, would you look to purchase some of your fuel, either your HSFO for your scrubber-fitted vessels or your VLSFO for your non-scrubber fitted vessels early or you just kind of wait and see how prices react in the next 4 to 6 months.
It's really the latter. We have no plans to take a position in the fuel market, be it for compliance fuel or for a high sulfur before we really need a product. But as we've talked about before in these calls that, of course, for the nine ships that will not be scrubber fitted, it's a transition from the high sulfur to the new compliance, and that will probably start in earnest towards the end of the current quarter.
Okay. And then, as far as the kind of spread development, how have you seen that in terms of kind of forward curve price for the HSFO versus VLSFO come, let's call it, January?
We frankly don't see anything else than what you can see yourself. So, we don't really have any comments on that.
Alright. Well, that's it for me. I'll turn it over. Thanks.
Thank you.
Thank you. Our next question comes from the line of Jon Chappell from Evercore. Please ask your question.
Thank you. Good afternoon, guys. I want to follow-up on kind of Randy's first line of questioning. You have some of the first VLCCs that are out of the yard with this scrubber fits. And when you announced the strategy, I guess, around 13 months ago, you had mentioned the phrase super profit. A lot has changed in the meantime. I think there's a lot more uncertainty on the market, although we're still as optimistic as you are. And you only have four time charters right now across your entire fleet which is kind of light from a historical perspective.
So, how do you think of balancing the coverage of your fleet and using that within the scrubber strategy, maybe even if you do think there is a super profit for the scrubbers, using some of the non-scrubber-fitted vessels to lock at more coverage on the operating days?
We will, of course, look to maximize earnings on whatever we have on our hands. And as you can read from the previous upturn in 2015 and 2016, we did take advantage of the market and secured a numerous times charters at what we deemed at the time to be very attractive rates. And that's certainly something we would look to do again if that presents itself. So, you really need to sort of a market with healthy spot market earnings for this really to develop, we think, at levels that are effective. So, we remain sort of – waiting for now. But I think you should certainly expect us to be active in the [indiscernible] market and build more fixed income in due course.
Okay. And then, thanks for the update on the remaining CapEx for the scrubber fitting program. Your comments about the yards becoming a bit more busy, what are you modeling out for off-hire time associated with the retrofits on the final 12 ships, both those that are in the yard today and those that will be in through the rest of this year?
I think our plan has been for about 30 days on every one of them. And for the first six, our average is right in that neighborhood. So, what we wanted to convey in our general comment here was that there is, of course, an increasing danger that you are going to run into some snafus and incur more time. But we haven't really changed our planning on it. We're just being aware that it could be unforeseen factors that are going to play into this. But we're not aware of anything at this point.
I think also, just to add to that, that our [technical difficulty] generally is not specific from the yard that we are doing the work at. So, we're at our sort of [indiscernible] yard with all our ships, with our own people. We think we're well prepared for this. Of course, barring any unforeseen circumstances, I think we're well prepared. But we are taking up – things happening at other areas that are sort of challenging for people and the yards in general. And this is only going to get busier through the fall.
So, kind of the read between the lines theme there is that other ships may be off-hire for significantly longer which could tighten the market even further going into the end of the year?
Yeah. Chances are that the average is going to go up for sure. There is a few times more ships that are going to be retrofitted in the second half than what was done in the first half.
Maybe a total of 140 of these to be retrofitted. And it's hard to pick out exact number how many have done the work so far. But probably not more than 20 plus. So, yeah, a good chunk of ships now that's going to be heading to yards over the next 6 to 9 months.
Okay. That's all I had. Thanks, Svein. Thanks, Trygve.
Thank you.
Thank you. The next question comes from the line of Frode Mørkedal from Clarksons Securities. Please ask your questions.
Yeah. Hi. Guys. Following up from the IMO 2020 theme there, what do you see in terms of tank cleaning on the off-hire days associated with that?
We foresee that it's going to be maybe 4 days or something like that. If you elect to do this in port with sort of specialists cleaning out your tanks, then something in that neighborhood of 4 days. But there is also a possibility that some of these can be done on the way and, of course, then less off-hire.
I think, last week, there was a Bloomberg article arguing that [indiscernible] shipowners are totally unprepared for the fuel switch. Do you agree with that? Or do you – what's your view on the preparedness?
We can, obviously, think ourselves and DHT is certainly well prepared for this. So, of course, the scrubber program is only one aspect of this. But, operationally also, we have planned out well, with everybody involved, both on shore and on-board of ships on how to get cracking on this. So, we'll certainly try to minimize downtime and be as efficient as we possibly can.
Final question is on the rates. Again, you seem to be leasing with benchmark rates both for Q2 and also, as far as we can see, 3Q to date. And that was also the story last quarter. And, obviously, then why are you doing so much better or relatively better than the market? Any further color on that?
I think we'll answer in the same tone as last time that we have an excellent fleet and we have excellent people. And combined, it gives good results.
Okay. It's not like you're having different trade routes or you're more exposed to, let's say, US exports or…
That is sort of the – the detail of what Trygve is saying is that we have equipment and people and procedures and the way we're operating that certain customers certainly like and a lot of repeat business. And in that – all this is sort of connected, right? And it is not like we have a sort of a secret client that is paying front haul, for back haul or anything like that. We're in competitive markets wherever we go.
Yeah.
Great. That's it. Thank you.
Thank you.
Thank you. The next question comes from the line of Robert Silvera from R.E. Silvera. Please ask your question.
Yes. I'm sorry. I missed a little bit of the early presentation. But as you review the third quarter right now, would you say that the third quarter will be kind of a carbon copy of what your second quarter has been and there's no real improvement overall till we get to the fourth quarter?
[indiscernible] because going into the second quarter, we were somewhat benefiting from the rates that was booked in the end of the first quarter. And then, the quarter got weaker. And then, the third quarter starts, of course, with bookings made in the second quarter at those numbers. And now, we see a rise in freights and it's a bit early to say whether it's going to sort of get similar levels or potentially beat or not. But I think what is important for us now is to continue to have very good control of our cost structure, delivering superior OpEx and admin cost numbers. And our trading guys sit very much – sort of sitting at the edge of their seats and doing whatever they can to maximize things. So, it's hard to predict a particular result.
Okay. But you don't see it's falling off sharply, do you?
I think as we alluded to, the market has been lackluster at the get-go this quarter and we've seen, over the last week or so, an increase for business and rates are certainly up. But whether this is the beginning of [indiscernible] in the refining industry as predicted by IEA or not is a bit hard to – it's a bit early to say. But things looks promising, we think so.
All right. Are you having any problems with particular routes? Even though you have scrubbers and those routes will not allow ships with scrubbers that you'll just have to have reduced sulfur fuels to be acceptable on those particular routes?
No. I think the news flow on areas where scrubbers are not permitted is related to coastal areas and ports. And in DHT's plans for scrubbers, we never anticipated to use scrubbers in ports or in these coastal areas. So, our game plan has always been to use the scrubbers in the open sea and that remains very much the case. The scrubbers are not in operation yet. This is something that will take place by the switch of the year into 2020.
I see. Okay. That's all for me. Thank you very much. And congratulations on doing as well as you've done in a market that's a stressful market, especially with all these tariff talks. Thank you.
Appreciate the kind words.
Thank you. [Operator Instructions]. The next question comes from the line of J Mintzmyer from Value Investor's. Please ask your question.
Hi. Good morning, everyone.
Good morning.
Yeah. Good results as the previous questioner was mentioning for such a difficult market. I notice you mentioned 65% of the VLCC spot days were at little bit over $21,000. I just to clarify, that's just the spot days, right? Is there any sort of guidance including the fixtures for your time charters?
You're correct. That's just for the spot days. And that's the way we've been communicating in the past and we don't really have any update on the variable elements on the time charter fleets.
Understandable. Understandable. Of course, those time charters are a little bit higher than the spot rate. So, that'll be a decent help going forward hopefully. There has been some notes in the market about some time charters being done in the mid-30s to lower 40s, especially those with scrubbers. Have there been any specific interest towards your company or anything that you've seen available?
As Svein said earlier, I think it's fair to say that it's a bit of summer doldrums at the moment, that there is not that much activity in the period markets. We did see some more activity and interest in the second quarter. Some of that didn't come to fruition and we wouldn't be surprised if the activity picks up again after Labor Day.
Okay. Excellent. And the rates have been pulling back a little bit seasonally, right? Q3 is always the weakest quarter. So, that's not a huge surprise or anything there. But when the rates do start picking up – I noticed you were repurchasing stock earlier this year at a healthy discount to NAV. As those rates do pick back up hopefully this winter, how do you think about your primary uses of cash going forward with the stock where it's at? Are repurchases still on the table? Are we looking at those converts at all? I know the converts have recently pulled up above par. I think they're sitting around like 107 [ph] right now. Is there a certain way you think about that trade off?
I think our capital allocation policy is robust and stays in place. So, minimum 60% of net income to be returned. Over the years, we've been certainly paying back more in the form of dividends than in buybacks. However, in the fourth quarter last year, particularly with big dislocation between the fundamentals of our business when rates were going up, the ship values were being marked up, yet the stock was trading down graphically, and we saw some good value creation opportunities in buying back. So, I think it's too early to say, but we definitely will stick with our 60% minimum. Whether it comes in the forms of buybacks or dividends is really too early to say. First thing now is to get back with the black bottom line and then we can start paying out a little bit more or returning a little bit more than $0.02.
Yeah. Definitely understandable. And I know investors aren't jumping for joy for $0.02, but it is nice to have at least a little bit of stability when the markets do have their seasonal weaknesses. So, yeah, definitely good job this quarter. About as good I think as you could do considering the market rates. And we're looking forward to an increased winter season. Thank you.
Thank you.
Thank you. [Operator Instructions]. The next question comes from the line of Nick Linnane from Sefton. Please ask your question.
Hi. Thanks for taking my question. Can you talk a bit about how testing of 0.5% sulfur fuel is going and how much of that testing you've done?
And also, to the extent that you know this, how the refineries are making the compliant product, whether it's mostly through kind of running very, very low sulfur crude through their refinery system or whether it's through particular blending techniques and whether you see a kind of consistent pattern in the product that's being offered for testing or whether there's kind of a lot of different products?
I think to your first part of the question, our technical department has tested compliant fuels and they have not experienced any instability or problem with those. But there's been limited testing so far. But we don't really have any worries, so to speak, if you have a proper quality assurance program in place, as we have.
So, I think the latter part is more a question for a refining analyst of the refining industry, frankly. But from talking to our customers, I think the compliant fuel will come in different shapes and form, whether it's through cracking or vacuum or blending or whatnot. And they will be different and they might not be compatible. So, that's the sort of fuel management challenge that might come up that fuel from one supplier produced in a certain way might not be compatible with another from another supplier produced in a different way. So, that's an area where we will have strong focus to ensure good operations of all our ships.
Okay. And if I can ask one follow-up, for anyone placing – looking to place new orders from the yards of VLCCs, when do you think now they can get those ships?
Early 2021. So…
Yeah. Okay, thanks. Thank you.
Thank you. [Operator Instructions]. Dear speakers, there are no further questions at this time. Please continue.
Then it remains for us to just say thank you to everyone for your continued interest and support of DHT. Thank you.
That does concludes our conference for today. Thank you for participating. Please have a nice day.