DHT Holdings Inc

NYSE:DHT

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Q2 2023 DHT Holdings, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Laila Halvorsen, CFO. Please go ahead.

[Laila Halvorsen, Chief Financial Officer]

Thank you. Good morning and good afternoon, everyone. Welcome, and thank you for joining DHT Holdings second quarter 2023 earnings call. I'm joined by DHT's President and CEO, Svein Moxnes Harfjeld. As usual, we will go through financials and some highlights before we open up for your questions. The link to the slide deck can be found on our website, dhtankers.com. Before we get started with today's call, I would like to make the following remarks. A replay of this conference call will be available at our website, dhtankers.com until August 16. In addition, our earnings press release will be available on our website and on the SSE EDGAR system as an exhibit to Form 6-K.

As a reminder, on this conference call, we will discuss matters that are forward-looking in nature. These forward-looking statements are based on our current expectations about future events as detailed in our financial report. Actual results may differ materially from the expectations reflected in these forward-looking statements. We urge you to read our periodic reports available on our website and on the SEC Edco 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 million per vessel. The quarter ended with total liquidity of $359 million, consisting of $131 million in cash and SEK 228 million available under our revolving credit facility. Now over to the P&L highlights.

It was a strong quarter with robust spot rates for the VLCCs and we achieved revenues on a TCE basis of $113 million and EBITDA of $90 million. Net income came in at $57 million, equal to $0.35 per share. Reported vessel operating expenses for the quarter was $19.7 million and G&A was $4.5 million. Included in OpEx number for the quarter were some advanced costs for spares and consumables associated with ships that have been in the order in connection to some nonrecurring 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. Earnings were impacted by 61 scheduled off-hire days in connection with the installation of exhaust gas cleaning systems for 3 vessels and unscheduled offer mainly related to the repair of a metal.

On this slide, we present the cash flow highlights. We started the second quarter with $117.5 million in cash, and we generated $90 million in EBITDA. Ordinary debt repayment and cash interest amounted to $13.6 million and $38 million was allocated to shareholders through the cash dividend pertaining to the first quarter of 2023.

In addition to the cash dividend, we also allocated $9 million to shareholders through share buybacks during the quarter. $20 million was invested in our fleet with $1.8 million in maintenance CapEx, $8.6 million for installation of exogas cleaning systems and $9.5 million through a deposit for the acquired pistol.The quarter ended with $130.6 million 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. This marks the 55th consecutive quarterly cash dividend and the shares will trade ex-dividend from August 22. In addition to the cash dividend, we repurchased 1.1 million of the company's shares during the quarter for a total consideration of $8.9 million. The average price for the shares was $8.25 per share and DHT's policy is to retire the shares upon resi. With that, I will turn the call over to Svein.

[Svein Moxnes Harfjeld, President and Chief Executive Officer,]

Thank you, Laila. As announced, we entered into agreement to acquire a 2018 build B2C for EUR 94.5 million. The vessel is a design was built to a high specification as a large deadweight capacity and is fitted with an exhaust gas cleaning system. This addition is expected to be accretive to our earnings and will further improve our fleet efficiencies, including our AER and our EEOI.

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.

Subsequent 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 [ph] was financed with available liquidity, but we have received commitments for a new secured credit facility of $45 million, which we expect to draw during the third quarter. The new facility has a DST style structure, which includes a 20-year repayment profile and a 60-year tenure. The facility will be priced at the sulfur plus a margin of 180 basis points.

Here with a brief fleet updates. The DST Appaloosa was delivered last week and is currently in dry dock for a first special survey. We have 4 time charter contracts that either have ended or are due to end this quarter. The DC Mustang and the DSC Stellan have both been delivered back to us. The DSD Cote 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 Dan 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 fourth quarter. In our view, we are taking advantage of the current freight market to position these vessels for what we think is ahead of us to the result of having no drydocks planned for the fourth quarter

We will now go to the third quarter outlook. We expect 530 days to be covered by our term contracts at an average rate of 3,500 per day. We expect to have 1,560 spot days for the quarter, of which about 1,090 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 stop booking numbers with our estimated spot P&L breakeven of 25,000 per day for the third quarter, allowing you to model a net income contribution based on your own assumptions for the unfixed spot base -- the market thus far this quarter exceeds the general idea of what the weak third quarter 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. This is in addition to increased transportation distances, driven by seaborne crude volumes being in the upper band of the fear 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.

he current market is a bit lower than the start of the quarter and now mostly moving sideways. And 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. Gulf -- we maintain our robust breakeven levels. The estimated P&L breakeven for the second half of the year for the fleet as a whole is about $27,000 per day. When adjusted for the fixed income that we have, the P&L breakeven for the spot fleet is about 25,900 per day.

The reason the spot P&L breakeven is marginally increasing for the second half when compared to the year as a whole, it's because we will have less vessels on time charter contracts. 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&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.

This potential discretionary cash flow will be allocated to general corporate purposes -- we know you all can townships, so please excuse us from maybe stating the obvious. But this picture is quite remarkable and still deserves some airline. 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% in older than 20 years of age.

To make this fleet development picture even more compelling from a shipowner's point of view, there are some 90 ships that will turn 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, great buying interest from Asia for older ships. 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 portage 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 interest.

As we have suggested earlier, some of these older vessels might end up retiring from the market, thereby starting to reduce the sailing fits. This supply picture should become a meaningful tailwind for our business. So let us sum up on our thoughts for our markets and our business. As just mentioned, we have an exceptionally constructive vessel supply picture. OPEC plus cutting production are typically not good for the tanker markets.

But there are some side effects that is softening the current low 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.

The cuts are also driving refineries to drawn inventories. Assuming the agency forecast of increased amount listed this year is reasonably correct. One would not only expect a need to satisfy demand, but also a potential stock rebuilding. Keep in mind here that we make a living of transporting supply. And in situations when supply exceeds consumption, tanker markets 10 to lock. Refining margins are on the rise again, expect this to drive refinery runs and then product tanker rates only to front-run crude tanker rates. And if we may wrap up this call with a little twist on allowing Churches many great faults, stay calm and buy tanker stocks. And operator, over to you.

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Frode Morkedal from Clarksons Securities. Please go ahead.

[Frode Morkedal, Clarksons Securities]

Thank you., 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'd have the potential for reversal in OPEC volumes, but one reason with growth in the past year has been in the U.S. Gulf, right? And it seems to be a clear trend of more VLCC taking U.S. crude into Europe. Do you have any thoughts on this going forward? Maybe you see a potential shift in this trade towards Asia?

[Svein Moxnes Harfjeld, President and Chief Executive Officer,]

You're right, there's been more these transporting crude from the U.S. into Europe is the past 1.5 years. And I think we have expectations that, that will continue. 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. guys and the traders are selling to Europe or to Asia is also somewhat driven by the level of backwardation and pricing. And now also, of course, with higher interest rates, when you transport longer, there's more costs 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.S. growth, that's so importance here. It's also Guyana and Brazil, in particular, has increased their production. So all this combined is really expanding transportation businesses.

[Frode Morkedal, Clarksons Securities]

Okay. That's good. On the bigger picture, I guess one topic we haven't talked about in a long time, I guess, is 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 basically forecasting a slowdown in oil demand starting next year and a peak before 2030. And I guess the key issue for tankers is trading distances right? So what's your perspective on this broader topic? And do you think it has any influence on the sentiment and investment decision today?’

[Svein Moxnes Harfjeld, President and Chief Executive Officer,]

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 satisfied by seaborne crude

And as we shown here in the slide, seaborne is now sort of at 43 million barrel a day level where the fiber average is around 4.5% [ph] and is really to understand where is the future oil going to come from? And is the depletion is it steeper on non-seaborne crude production? Or is it deeper on what is seaborne production? And we are working hard to understand this picture, and we have a particular project in place to try to rise 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 seaborne 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. 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 2055. So it depends who you ask and 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.

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's maybe be politically core to some extent in support for sort of a green transition rather than being actual real numbers in what we expect will happen.

[Frode Morkedal, Clarksons Securities]

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

[Operator]

Thank you. Any questions.

[Operator]

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

[John Chappell, Evercore ISI]

Thank you. Good afternoon. In 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. And as we think about your comment about moving supply, even if demand were to recover in the fourth quarter as it typically does seasonally, if the Saudis were to hold back increasing production for whatever the reasoning is, do you think there'll be a more muted winter season? Or is the change in trade flows associated with what's going on with Russia still provide upside?

[Svein Moxnes Harfjeld, President and Chief Executive Officer,]

This is a difficult question - a complex question. But I guess, I think from my chair, and I should be - I'm humbled often say that I'm not an oil analyst. But I think Saudi's main objective, obviously, is price. And now there's sort of - is working for them, price is now up in the '80s. Of course, if they continue to hold back barrels, and you see the forecast demand coming into the fourth quarter and oil price will rock it. And that could, of course, also help our 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. And it, of course, remains to be seen what the case period 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 dip is due to the cuts or not. It's hard to put that into a spreadsheet and get an actual number. 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 7,000 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 the Russian fuel oil for that consumption and maybe allowing the cut to be less than 1 million barrels per day. And I think you've seen some estimates that the cuts 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 life, frankly. So if I can be more precise, John, but I think these are sort of the components of it in some shape or form.

[John Chappell, Evercore ISI]

It's still very helpful. Also may explain the higher floor during the third quarter if they're really not hitting full million 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'm just want some clarification on that buyback program. 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 n the buyback?

[Svein Moxnes Harfjeld, President and Chief Executive Officer,]

Omar Nokta 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 to continue to buy in the blackout period. So in this case, we put up a maximum nominal amount to be bought, and we also put up a price grid for how much we want to buy at what prices, 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 was 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.

[John Chappell, Evercore ISI]

Okay, very clear. Thank you,

Operator

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

[Omar Nokta, Jefferies]

Thank you. Good afternoon, I just wanted to ask maybe just a bit more on the market and say the VLCC supply side of things. In the release, you mentioned that in ship 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 to what was in the shadow fleet maybe at the start of the year and perhaps how it looked pre-use Ukraine war?

[Svein Moxnes Harfjeld, President and Chief Executive Officer,]

I think Ukraine or call is now 2 years back. We estimated the VLCC fleet and the shadow trade to be sort of around 60 ships. So it's a meaningful increase. And in addition to this, of course, you had a lot of Suezmax and Aframaxes also now being employed in the shadow fleet. So overall, the site fleet has grown meaningfully.

I think an interesting aspect for this, in our view, is that these 2 markets do not operate in the way that ships can sort of move from one market to another, which would be very efficient, right? So they tend to stick to their own markets because it's basically it's 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. And we think it's not only Russian barrels, of course, it's also Venezuela [ph] has increased a bit of their production. And Iran is now also has increased production, and this is also going on t-ship. So that's sort of the 3 main oil suppliers utilizing these fleets.

[Omar Nokta, Jefferies]

Okay. Thank you for that. And I guess that - you mentioned, obviously, we've seen it that rates have thus far in the third quarter, 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?

[Svein Moxnes Harfjeld, President and Chief Executive Officer,]

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

[Omar Nokta, Jefferies]

Yes, yes. And then maybe just a follow-up kind of 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 are 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?

[Svein Moxnes Harfjeld, President and Chief Executive Officer,]

No, we have no plans to pursue new buildings. I think there's sort of two key elements to that, 3. And one is price, as you said. The other is that if we were to invest like we just did, we like to have assets in the water that can make money now. The delivery in N26 or into '27 is way out. So you end up having a lot of debt capital on your balance sheet, and that's not a very efficient use of money, we think.

But also, of course, the last component here is what are the future fuels and people talk about they have [indiscernible] ready and ready this and read that. That's not a big chunk of CapEx. The big CapEx will actually come when you need to add fuel tanks and fuel delivery systems on boarding ships.

So we don't think there is clarity on this yet. It's not a question of whether you like one full model, 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 industry in buying these fuels that can impact the price.

So one example is the Redlon report that seems quite confident that the agriculture industry will definitely be a competitor for green [ph] So what will that do with the price [indiscernible] once it hits the market in volume. So then you need to have some confidence in all this, right? 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, to answer your question, we have no plans to ownerships.

[Omar Nokta, Jefferies]

Very good. Thanks, 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 Tsung of Webber Research. Please go ahead.

[Chris Tsung.]

Hi, good afternoon. How are you>

[Svein Moxnes Harfjeld, President and Chief Executive Officer,]

Good, thank you.

[Chris Tsung, Webber Research]

I wanted to ask for that new vessel [indiscernible] finance for $45 million in line with the HT cell financing. And just working back was that implies an expected remaining life of 18 years to this 5-year vessel tree for total 23 is slightly longer than the average to I think how would this vessel be depreciated and -- does that change the useful life for the vessels in the fleet/

[Svein Moxnes Harfjeld, President and Chief Executive Officer,]

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, our facilities that the repayment profile of the loan is also up to year '20, so to max 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, sort of 3 million per year in Amor, right? But it's a 6-year tenure. So after the 6th year, there will be a balloon equal to 6 years' time, 3 million. So - sorry, equal to to 9 years time of EUR 3 million. So that's how we put the financings together.

[Chris Tsung, Webber Research]

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

[Svein Moxnes Harfjeld, President and Chief Executive Officer,]

So we put in place in March a $100 million 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.

[Chris Tsung, Webber Research]

Okay. All right. Perfect. Thanks. I turn it over. Thank you

Speaker 0

[Operator]

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

[Svein Moxnes Harfjeld -]

Thank you very much to all for listening in on DHT thank you and we wishing you all a great day ahead. Thank you.

[Operator]

This concludes conference call. Thank you for participating. You may now disconnect.+