DHT Holdings Inc

NYSE:DHT

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to today's Q3 2020 DHT Holdings 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]. I must advise that this conference is being recorded today, and that's Tuesday, 10 November 10, 2020.

I now would like to hand the conference over to your speaker today, Laila Halvorsen, CFO; Trygve Munthe; Co-CEO; and Svein Moxnes Harfjeld, Co-CEO. Please go ahead.

[Laila Halvorsen, Chief Financial Officer]

Thank you. Good morning and good afternoon, everyone. Welcome and thank you for joining DHT Holding's third quarter 2020 earnings call. I am joined by DHT's co-CEOs Svein Moxnes Harfjeld and Trygve Munthe, and Wilhelm Flinder, Head of Investor Relations.

As usual, we will go through financials and some highlights before we open up for your questions. The links 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 November 17. 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; forecast of 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's EDGAR system, including the risk factors in these reports for more information regarding risks that we face.

Looking at the P&L highlights, EBITDA for the quarter came in $92.9 million and a net income of $50.7 million or $0.32 per share. Adjusted for non-cash gain in fair value related to interest rate derivatives of 2.6 million and a non-cash impairment charge of $4.9 million, net income would be $53 million or $0.34 per share for the quarter.

OpEx for the quarter was $20.5 million or $8,200 per day average for the fleet and G&A for the quarter was $4.1 million.

EBITDA for the first three quarters of 2020 came in at $399.3 million and a net income of $258.7 million or $1.72 per share. Adjusted for non-cash loss in fair value related to interest rate derivatives of $10.5 million and a non-cash impairment charge of $4.9 million, net income would be $274.4 million or $1.82 per share for the first three quarters of 2020.

Moving on to the balance sheet, the quarter ended with $75.1 million of cash. During the quarter, we prepaid $79.2 million under the ABN AMRO and their credit facility. The voluntary prepayments were made under the revolving credit facility tranches and may be reborrowed.

In addition, we've prepaid the outstanding loan on DHT Scandinavia of $12.7 million and total prepayments during the quarter amounted to $91.9 million. Further, $125 million of convertible notes were converted into shares during the quarter and interest-bearing debt has been reduced with $227 million during the quarter from $719 million as per June 30 to $492 million as per September 30.

Current availability under all our revolving credit facilities is $170 million, putting total liquidity $245 million at quarter-end. DHT has continued to strengthen the balance sheet with the prepayment done during the quarter and the conversion of the convertible bond. Financial leverage is 30% based on market values for the ship.

Looking at the cash bridge, the quarter started with $138 million of cash and we generated $93 million in EBITDA. Ordinary debt repayment and cash interest amounted to $26 million, $82 million was paid in dividends; $3 million was used for maintenance CapEx; and $92 million was used for debt prepayment. Changes in working capital amounted to $45 million and the quarter ended with $75 million of cash.

Let us now turn to capital allocation. For the 43rd consecutive quarter, we will pay a cash dividend. $0.20 per share will be paid on November 25 to shareholders of record as of November 18.

As already mentioned, we have during the quarter prepaid $91.9 million in bank debt. And as of September 30, net debt is $417.3 million, which equals an average net debt of $15.5 million per vessel.

With that, I will turn the call over to Svein.

[Svein Moxnes Harfjeld, Co-Chief Executive Officer]

Thank you, Laila. During our last earnings call, we talked about how DHT has managed through cycles and stay disciplined in allocating capital. We illustrated how we have successfully invested during the troughs and followed up by investing in the balance sheets and returning cash to shareholders during strong markets.

Another important component of our counter-cyclical strategy is how we position and employ the fleet. Large tankers are [indiscernible] business. Hence one should not expect to be able to cover the entire fleet on long-term contracts at meaningful numbers.

Considering this, the size of a company and its fleet is important. There's always been another talk about building larger companies. The key argument has been that the capital market would welcome this.

Maybe the discussion should rather be about what is the right size. We like the size of DHT. Our size, give or take a few ships, allows us to service our customers and have a meaningful presence in the market. Our size enables us to dynamically position the company for what is ahead. That's clearly demonstrated this year.

We currently have 16 of our 27 ships on time charter, representing 60% of our feet. At an average rate of just below $43,000 per day, it offers premium income in what is a lackluster spot market.

It offers premium income in what is electrolysis for markets. We have for the fourth quarter covered 79% of our total days at $38,400 per day. This equates to $70 million in TCE revenues and north of what the P&L cost for the quarter is expected to be.

Some of our time charters are shorter in nature and will come up during the first half of next year. Assuming a rebalancing of the oil markets by the second half of next year, our fleet will build soft market exposure ahead of such a prospective event. In the meantime, we will simply enjoy the revenue stream we have built up.

You will note the continuation or a competitive cost structure reflecting well on our hard working seafarers and shore-based teams delivering day in and day out. We have a no nonsense company culture, with a dislike for inefficiencies and with everyone looking to contribute.

This year involves additional OpEx related to spares and consumables in relation to IMO 2020. Further, and influenced by COVID-19, OpEx over the last two quarters also involve extra costs in order to make crew changes happen. Time and money well spent in our view.

So, in sum, out of a top line $118 million in TCE revenues, we made a net profit of $61 million, a solid profit margin of 43%.

And with that, I turn over to Trygve. Thank you, Svein.

[Trygve Munthe, Co-Chief Executive Officer]

Thank you, Svein. The last 12 months have been extreme in the tanker market. Rates reached the highest of highs and now the lowest of lows. Through these volatile times, we have stuck to our strategy.

We are returning significant capital to shareholders. Including the $34 million that will be paid in two weeks' time, the total dividends over the last 12 months comes to $215 million. That equals $1.35 per share.

Since the beginning of last year, we have reduced the debt by $0.5 billion. And we have been able to secure significant time charter coverage at attractive rates.

Okay, let's now look at cash breakeven and time charter coverage. Debt prepayments and fixed income work wonders for spot breakeven levels naturally. We have been unsure about the short term market outlook and have therefore continued to add short-term time shorter contracts during the third quarter.

On this slide, you see that, for the first half of 2021, 35% of the tanker days are committed on time charters. The spot ships need to generate only $3,400 a day in order for the company to cover its cash costs. For the second half of the year, TCE coverage is 18% and spot cash breakeven is $16,400 a day.

We like the fact that the first half for all practical purposes is taken care of. We do not expect much of a winter market this season. And even with the great news yesterday about vaccines not being far away, we think it's going to take some time to get oil consumption back up and oil inventories back down.

We also like the fact that we'll have more spot exposure in the second half of next year. If things develop as we all hope, it is not unlikely that the tanker market will approach some form of normality next fall and winter.

So, to sum it all up, at this point in the cycle, DHT is in an excellent position. Total liquidity of about $250 million, net debt just over scrap values and leverage of 30%, 16 ships on time charter at an average base rate of just under $43,000 a day, spot cash breakeven for next year, the full year, of $10,600 per day. And finally, we have five unencumbered VLCCs.

The low cash breakeven gives us excellent downside protection, whilst the liquidity and low leverage allows us to get on offense whenever we want to. This favorable positioning is a consequence of executing our strategy. Pure and simple.

The next step in our counter-cyclical strategy would typically be to expand and renew the fleet. However, at this point, we are in no rush. We think there is more uncertainty out there than normal, with COVID, peak oil and propulsion technology being the biggest uncertainty factors.

So until the picture clears or changes, you should expect us to continue to return capital to shareholders and invest in our balance sheet.

And with that, we'd like to open up for your questions. Operator?

[Operator]

Thank you. [Operator Instructions]. And your first question comes from the line of Chris Tsung from Weber research.

[Chris Tsung, Webber Research & Adv. LLC]

Thank you for the prepared remarks. A lot of good color, lot of good context. Kind of want to just touch on one thing that Trygve spoke about just recently regarding fleet renewal. Definitely, the obstacle [ph] in this regarding propulsion technology seems to be the gating issue if adding some tonnage. I guess, just trying to think about this. Would that mean that DHT would lean a little bit more towards secondhand – not secondhand to 5 to 10 year old ships, in instead of going after, like newbuilds. I just know that the rates have come down quite a bit. There's been reports of a Chinese Korean JV that signed an LOI for I think 10 newbuilds at a Korean shipyard for about $85 million. And just kind of wanted to see just thoughts around that.

[Trygve Munthe, Co-Chief Executive Officer]

I think the main point there is that we're not there to do anything at the moment in terms of renewing or expanding the fleet. As we just said, we're on the fence for now. Propulsion is certainly one issue. Prices is another one. But it's really unusual circumstances there we're in. The drop off we've seen in in global oil consumption following the pandemic is unprecedented. So, we think it's okay for things to shake out a little bit before we actually go out and commit ourselves to either secondhand or newbuilds for that matter.

[Svein Moxnes Harfjeld, Co-Chief Executive Officer]

Let's not forget that the way the company is put together today, it doesn't have to do anything. It's in an excellent position to deliver fantastic returns, even without additional investments. So, 27 ships, it's not a small fleet by any means.

[Chris Tsung, Webber Research & Adv. LLC]

Those are both great points. You could stay on the sidelines and just do nothing. You guys are in really good position. Just kind of second question – second last, I guess, for me, is the roughly 80% that's been fixed today for Q4 at $38,000, it's a bit higher than some of your other competitors. And I'm just trying to get trying to get a sense of – does this more or less reflect maybe spot fixtures that were done in like Q3 that are rolling off into Q4 that could possibly expose your fleet to spot rates in like the mid to late December timeframe? Or is that not the right way to think about this?

[Svein Moxnes Harfjeld, Co-Chief Executive Officer]

This coverage ratio is a mix of time charter income and spot income. So, our sort of trading guys have done a phenomenal job in also securing some of these shorter-term time charters. That's also at meaningful, higher level than spot market. So, it's really a mix of those things together.

[Trygve Munthe, Co-Chief Executive Officer]

I think it's important to recognize that, with 16 ships on time charter, obviously, your coverage is going to be much higher than some of the peers that have zero or close to zero time charter coverage.

[Operator]

And your next question comes from the line of Randy Giveans from Jefferies.

[Randy Giveans, Jefferies & Co., Inc.]

First question. You mentioned capital allocation and continuing to return capital to shareholders here. I guess before you get to that, can you talk about the decision to convert the 4.5% notes and also prepay so much in debt during the quarter? I guess how low are you trying to get your net debt to cap and to maybe avoid or reverse some of the dilution from the converts? Will you repurchase more shares here in the fourth quarter?

[Trygve Munthe, Co-Chief Executive Officer]

As you know, we called the convert at the earliest opportunity we had under the indenture. So, we were eager to get that out of the way simply because we foresaw significant dividends also going forward. And for every dividend that's paid, the conversion price is adjusted. So, if we had waited for another two quarters, it could be at a much lower conversion price and hence the dilution is bigger.

And as far as the second part of your question on the debt prepayments, we think that this is just building internal financial muscle, so that when we think it's the right moment to go out and commit to additional tonnage or do renewals or what have you, then we can do that without placing additional equity, which we think is in everybody's benefit that we have that firepower built into the balance sheet.

So, we don't have a particular target on net debt to total assets or anything like that. But as we finished up with in our prepared remarks, for now, expect us to continue to give 60% to shareholders and invest the rest in the balance sheet, and that's probably going to be additional prepayments.

[Randy Giveans, Jefferies & Co., Inc.]

In terms of sharing purchases, would that only be out of the 60% of net income? Is that even an option here? You're fully committed to the dividend. Or what are your thoughts on share repurchases?

[Trygve Munthe, Co-Chief Executive Officer]

We do have a program in place, so we can do it. We have done it in the past when we've seen significant dislocations between the fundamentals in the business we're in and what's going on in the equity markets, last time in the fourth quarter of 2018. But as you have seen over the years, our preference is really to pay it out in cash dividends and only in extraordinary circumstances that we really use on common equity buybacks. We're done on the convert side. But that's all history now, as you know.

[Randy Giveans, Jefferies & Co., Inc.]

I guess, last question for me. With the weak spot rates, obviously, the time charter rates have also fallen substantially. But good to hear that you were able to sign some short-term ones at good levels.

But on the other side of that equation, is there an appetite for maybe additional tonnage via time charter ins for one to two years to maybe take advantage of the poor sentiment now compared to what should be a relatively decent market next year?

[Svein Moxnes Harfjeld, Co-Chief Executive Officer]

We will not do a time charter any tonnage in. We want to own all the ships 100% ourselves and be in full control on the operating side of it. And also, chartering ships in, it's essentially a levered deal, if you like, and it will negatively impact the cash breakeven levels of the fleet. So, this is not something you should expect DHT to do.

[Operator]

And your next question comes from the line of Omar Nokta from Clarksons Platou.

[Omar Nokta, Clarksons Platou]

Maybe just on the growth topic, early on in the call, you mentioned you like the size of the fleet today, 27 ships, give or take a few vessels. Obviously, a lot of questions still need to be answered before really shifting gears away from returning capital to shareholders. And you guys are obviously in a very strong position to take your time. But I guess one thing I did want to ask is, should we view your comments as meaning, basically, at least if there's one thing you do know that you have confidence in, is that any acquisitions you do do on the horizon will be coming basically hand in hand with selling older ships?

[Svein Moxnes Harfjeld, Co-Chief Executive Officer]

No, this is not sort of a mathematical formula, right? So, there's always some flexibility in that. If we were to divest, say, a handful of older ships, maybe reinvest in 10 newer ships, right? So, there's always some flexibility in this, but we don't see a need to become sort of a 100 ship company. That will take away a lot of the ability to maneuver and reposition the company and the fleet very quickly. So, there will be some flexibility in that. So, don't take it sort of one for one.

[Omar Nokta, Clarksons Platou]

Last quarter, you mentioned that you're thinking about becoming a bit more acquisitive, potentially something in 2021. Still a lot of questions, obviously, on the outlook. But you did mention that newbuilding prices were a bit too high relative to what you'd consider attractive. Since then, we've seen pricing come in down towards the bottom half of $80 million. Has that changed or intrigued you to an extent?

[Svein Moxnes Harfjeld, Co-Chief Executive Officer]

We haven't been in specific negotiations with any yards. But for how we saw the market, we noticed that the prices are sort of heading south, albeit a bit slowly. And it seems to be very little activity across the border on newbuildings. So, we would expect more attractive prices to maybe become available if we wait a little longer, if you like. So, there is quite a lot of capacity available at the shipyard, and they don't seem to be able to fill it up. So, I think in normal circumstances, that should mean that prices might come up a bit further.

[Omar Nokta, Clarksons Platou]

This is a bit more – probably like a bigger picture and probably tough one to answer and its' what's prevailing in the industry. But when you do think about placing a newbuilding order, how does the propulsion fit into that equation? Do you think you need – if you're to go down that path, do you think you need dual fuel? Or because newbuildings, in essence, basically, are going to be the most efficient vessels out there, it's really not that big of a concern as with older ships that need to be really thinking about how to comply with the upcoming IMO and the EU, and potentially the US carbon rules? How do you think about that?

[Svein Moxnes Harfjeld, Co-Chief Executive Officer]

Propulsion is certainly a very important component when we make these considerations. But we think that the conventional technology is able to sort of meet the targets that we set out for 2030. But there could still be improvements to be made on not just main engines, but also axillaries and other sort of aspects of being more energy efficient on more of the ships. We do not think that dual fuel is the way to go. We think it might be sort of a short-term fix. It's a basic technology.

But the sort of proposition in – the way the market works is that the ship owner will take the residual value on that technology maybe already being outdated after five, six, seven, eight years. So, to make such a big CapEx commitment up front without having anybody to sort of support it with income, we don't think that's a good investment decision practice. So, from that regard, we'll wait.

I think for other types of fuel, the biofuel, ammonia and so forth, there's still a lot of sort of lack of clarity, if you like, and not really something available for these type of big ships just yet. So, that we think is something to come maybe way down the line.

[Operator]

And your next question comes from the line of George Berman [ph] from KO Securities [ph].

[Unidentified Participant]

I've got a few questions. Congratulations on another great quarter, setting you well apart from all the other shipping companies. Are you planning to remain a predominantly VLCC company? Or would you consider also branching into the Suez and Aframax area?

[Trygve Munthe, Co-Chief Executive Officer]

As you may be aware, the company certainly has a history in Afros and Suezmaxes as well. But over the years, it has developed, so that we have become a pure VLCC company. And frankly, we have no regrets. We think that this is the most exciting part of the crude tanker market. And when a market is strong as we've seen over the past 12 months, the profits and cash flow generated from the largest tankers is simply the best in our humble opinion. So, no, there are no immediate plans to get into the smaller sizes.

[Unidentified Participant]

Next question, in general on the valuation of your company, I was very pleased with your announced time charter revenues for the quarter as well as the spot rates that you seem to be achieving are well above the average or at least proposed rates. But I'm a little bit disappointed that you did not go in and take advantage of the currently depressed stock price in your company. Looking in light of currently record and unprecedented low interest rates, I'm wondering if it would make sense to buy back your stock at half value, half net asset value and, on the other side, locking in some of the very low interest rates that we're currently experiencing for a longer period of time, thus making it very much amenable and giving all the existing shareholders some positive action in terms of stock appreciation.

[Trygve Munthe, Co-Chief Executive Officer]

I think the interest rate part of it, we actually have entered into interest rate swaps a couple years back. So, unfortunately, they're sort of out of the money at the moment. But in terms of exposure, it means that we are well covered for any uptick in interest rates. So, that's where we stand on that side.

And again, on buybacks, a lot of people urged us just to do it. As we said earlier, we have elected to do it when we see significant dislocations between what we see in the market we are in and what we see in the equity market. What we see now is that, over the past several months, shipping equities have been – and tanker equities have been drifting down. So, it's really the shipping market or the tanker market. So, we've seen freight rates coming off, we've seen values coming down. So, at some times, the equity market is ahead of the shipping market. And other times it's the other way around. But we don't really see a massive dislocation, and we are a bit apprehensive or hesitant to think of NAV as a point – NAV is in constant movement. And over the recent past, it's been in a downward spiral. And you see some of our peers that have been active buying back their own equities. If you look at what they paid and what it is worth today, it's not really been a massive success.

[Unidentified Participant]

My question on the interest rate was not so much your current position, but if you refinance your debt or locked in the current low interest rates for longer at a very, very lower price, that would definitely help us in the future, especially when rates start coming back up. And on the buyback side, you called your converts early. That put additional 23 million shares into the marketplace by people that are not necessarily looking for capital gains. And apparently, a lot of us decided to sell the shares. So, I feel that your company is tremendously undervalued. On that note, do you have any anti-takeover provisions in your records?

[Trygve Munthe, Co-Chief Executive Officer]

No.

[Unidentified Participant]

Okay. And maybe last question, how do you feel about the continuous demand for crude oil? Do you see it as many so-called experts predict that we're going to be slowly but steadily going away from crude oil overall worldwide? Or do you expect the demand side to move back up in the 100 million barrel a day range?

[Svein Moxnes Harfjeld, Co-Chief Executive Officer]

This is all the biggest questions we look at right now. Was 2019 – was that sort of peak demand or not? And I guess, this COVID situation has raised a lot of new issues and put maybe some more speed into a lot of ESG trends, if you like. So, we would anticipate that sort of the coming year to give us maybe a better clarity and to what extent demand is coming back to 2019 levels or what maybe the future could behold in that regard. So, it's a bit early to sort of to say, but it's something we're certainly working very closely.

[Operator]

And our next question comes from the line of Lukas Daul from ABG.

[Lukas Daul, ABG Sundal Collier]

I had a question, you talked about the uncertainty regarding the newbuilding with respect to propulsion, oil demand, et cetera. And I agree with all of that. But I was wondering, when you talk about improvement in the current engine system, being able to carry out storage to 2030 and fulfill the compliance there. Do you think that if the industry on a grand scale does nothing, is it still going to be liable for public equity money?

[Trygve Munthe, Co-Chief Executive Officer]

Well, that's an interesting question. I'm not sure we have a good answer to that. And so, the way I understood you, Lukas, is that if the industry does nothing and we come to 2030 and we haven't really reached the targets that IMO has set out, if we then can sort of continue to be a public company, is that the essence?

[Lukas Daul, ABG Sundal Collier]

It doesn't only apply to you. I think it refers to the industry as a whole. So, I totally see your point of why it's very risky to do anything at this point in time. So, I just wonder what your thoughts are on whether this is sort of a strategy that can carry us on for the next decade.

[Trygve Munthe, Co-Chief Executive Officer]

I think, quite frankly, some of the bigger stakeholders in this market need to show the way and it needs to be in terms of more than three year time charters for a dual fuel VLCC that some of the old majors are trying to [indiscernible]. These are the ones that have the ability to go out and say, we believe in this type of propulsion, it's going to be helping in terms of reaching the IMO targets and we're there to do a 10 year or 15 year deal based on that.

But for a sort of independent tanker on a company to go out and bet on a technology over another [indiscernible], I just don't think we as independents are going to be the sort of the leaders in this. I'm not sure there's going to be sort of a first mover advantage on it either.

[Svein Moxnes Harfjeld, Co-Chief Executive Officer]

I think also, in relation to this, we should not forget that some 85% of world trade is carried on ships. And the industry at large is primarily on private hands. So, there needs to come some sort of capital interplay to deal with this. And it might even be return driven. So I think the question of whether it's private or public [indiscernible]. It's a question of what the returns are going to be. So, if returns are attractive, it will I think attract capital either way.

[Operator]

Your next question comes from the line of Robert Sylvia [ph] from Sylvia and Associates [ph].

[Unidentified Participant]

Sven, I would like to compliment you, first of all, on the format in which you presented your financial highlights right at the beginning of the report. Very well done. And of course, it's pointing out your strategy of reducing debt significantly. And as you said, this has a tremendous impact on the profit margin for running the ships. I'd like to compliment you on that strategy, and hope that you will continue it, of reducing the debt.

Let me ask you a question about rates. Where do you think rates have to go before your profit sharing kicks in on the four ships?

[Svein Moxnes Harfjeld, Co-Chief Executive Officer]

So, the base rates on those four time charter with profit sharing – three of them rather is around our sort of P&L breakeven level. So, that's in the very high 20,000s. So then, in the last upturn there, all those charters made meaningful impact or the contribution above those rates. So, yeah, that's it really. The fourth ship is higher. It's almost $40,000 a day. But that charter expires towards the summer. So, we don't expect really a profit sharing from the next few months on that charter.

[Unidentified Participant]

With the rates being as low as they are now, are you seeing bargains in used ships at this point at all, even though they may not be at the levels you wish to purchase ships at? Are you seeing bargains beginning to appear?

[Trygve Munthe, Co-Chief Executive Officer]

We have seen some distressed sales out of Singapore where a large fuel oil trader who also has a significant tanker fleet has hit the ropes. And these ships are auctioned out. And the prices achieved are, of course, reflective of the distress situation. So, those are bargains in a way. But it hasn't really tickled our interest too much simply because these are ships about 10 years old. And on top of that, they are consuming more fuel than ships of the same vintage. So, to the prior question here about becoming more fuel efficient, these are certainly not the ships for that. So, what you're seeing there are some private ship owners have been really picking up these ships rather than the public companies looking at them.

[Unidentified Participant]

With the age of our fleet and the nature of it, when do you see the need for new ships?

[Trygve Munthe, Co-Chief Executive Officer]

I think the average age of fleet is just south of what I think is the average age of the world fleet. And so, we certainly service all the prime customers with our fleet. So of course, we can't – we keep this s just running out if we still want to run the business. So, we certainly have a clear focus, if and when we decide to invest, that it will also be a fleet renewal in terms of age and also even better efficiency on the fleet. So, always sort of improve what we have. It's a bit too early to think, so we are in no rush.

[Unidentified Participant]

I know you're in no rush. But from a practical standpoint, are we looking at being able to run the business with the current fleet for two years, three years before you would have to do something?

[Trygve Munthe, Co-Chief Executive Officer]

You could run the current fleet for much longer than that without committing to new ships. And stating the obvious, but if we sold out some of our older ships, then you're certainly bringing down the average age as well. So, it's not only about filling up in the young end of the fleet, it's also retiring older units. So, as you know, we currently have three ships over 15 years of age. And traditionally, we've been selling those ships before they reach retirement age. But as we've said before, this is very much a trade-off between the current trade market opportunities and what the secondhand values are. But we are in no way stressed to – we have to get the ship – or renew the fleet right now because the age is such and such. We're very far from that. We can very well run this fleet for quite a few years without doing anything.

[Unidentified Participant]

That's very good news. Thank you. Anyhow, I thought you said this, but I wanted to confirm that I heard it right that, in the future, you will avoid convertible shares for raising capital.

[Svein Moxnes Harfjeld, Co-Chief Executive Officer]

That's correct. We are happy to have that out of our capital structure.

[Unidentified Participant]

Congratulations on a very well-engineered quarter and a very well-engineered philosophy for the business going forward. Really approve of it. Not getting rid of all the debt.

[Operator]

[Operator Instructions]. We do have another question, sir. And it's from the line of David Bruce, a private investor.

[David Bruce, Private Investor]

First time I've heard your presentations. Very serious approach. Very serious company. And, of course, as an investor, I want to ask whether I heard your thoughts correctly that perhaps the reason for the drift downward in your shares and perhaps other similar company shares is some lack of clarity as to what 2021 will bring and also some lack of clarity as to the position of petroleum in the energy business in the future. Is that a correct understanding of your description of why the stock might be drifting down?

[Svein Moxnes Harfjeld, Co-Chief Executive Officer]

I think we alluded to that. The stock market tends to front-run sort of the reality, if you like. This year, COVID-19 in particular puts a big dent in oil consumption in the world, so i.e. demand for oil. So, refiners have to cut their runs significantly. And this, of course, reduced the demand for transportation, i.e. to bring feedstock from the production areas and into the refiners. And this has sort of driven freight rates down quite meaningfully. And of course, at least in the near term, it also puts a question on demand for next year. And so, in that sense, you could argue that the stock market was correct. But our industry has a history of being very cyclical and volatile, and we don't think it will necessarily stop being cyclical. So, it's a question really of understanding when the oil market will rebalance being a combination of the cuts that OPEC+ is currently doing and, of course, that – to what extent – to what level oil demand will raise up again compared to where we were in 2019.

So, keep in mind, also in this picture, that the fleet of tankers without anything – new investments happening now, the next couple years, it's likely to shrink because the order book for new ships is rather low, around 7% of capacity. But some 25% of the fleet is older than 15 and will retire in due course. So, you have some self-adjusting forces here, if you like.

So, in our mind, it's more a question of when things will return rather than if.

[David Bruce, Private Investor]

It's certainly a presentation by serious people and the company that's seriously attempting to protect itself for the future. And as an investor, that's good news. Thank you so much.

[Operator]

And you have another question and that comes from the line of Scott Jefferies [ph] from Scott Asset Management [ph].

[Unidentified Participant]

I'd like to ask a question about the recycling. We've had virtually no recycling for 2020. There's a large number of ships which might be eligible for recycling. We also have what you talked about peak oil and perhaps a reduction in the overall seaborne trade for crude oil going forward. Question specifically is, is there enough recycling capacity in the subcontinent, in Pakistan, India and Bangladesh, to take care of the number of old ladies that may need to be recycled? With the regulations on recycling becoming more difficult, are we going to be capacity constrained in the recycling side, which would leave those older ships around a little bit longer? Thanks.

[Svein Moxnes Harfjeld, Co-Chief Executive Officer]

We think sort of from a facility perspective, there is enough capacity to retire a significant portion of sort of the commercial fleet. COVID has a lot of impact. And it's sort of made it almost impossible to beat vessels and receive the crews on board ashore, and so it's sort of hampered a lot of activities across the subcontinent. We also understand it might have had some restrictive measures on the people working ashore to actually do the job. So, for a while, it was sort of piling up a few ships, and then, of course, people that buy ships for recycling stopped buying. So, that sort of is one aspect.

But I think from a commercial perspective, in 2020, the market has simply just been too good for people to retire ships. So, you normally need to see really a lousy market, as you can say right now it is lousy, but it needs to be painful for a little longer. And people need to sort of need the decision time on when they have to spend CapEx on the ships, i.e. the dry docks, ballast water treatment systems and so forth. That tends to be the decision time. And there's been a quite a lot of – pace of older sips over this past six to nine months for some storage activity and also for some trades that are maybe, I wouldn't say, obscure, but maybe close to it. And so, so maybe some of these ships are actually already leaving the commercial fleet, if you like, although in a sort of slightly different fashion. But if this trade market continues like it is now, I think it's reasonable to expect 2021 to have a quite a lot of scrapping.

[Trygve Munthe, Co-Chief Executive Officer]

We do think it's going to be some herd mentality out there that, once it gets going, it's the sort of the catch up effect that when things get normalized in terms of COVID and people are up against these special survey requirements, we expect – the numbers are just such that there are going to be a fair amount of scrapping once things normalize. And as I said, we're not too concerned about the capacity to do it.

[Unidentified Participant]

Let me ask one more question. The debt per ship is down to $15 million or so and it's approaching scrap value. Is there any real reason to reduce debt much below that? Or would you reconsider the 60% dividend payout and perhaps increase that since there's less emphasis on debt reduction? Thanks.

[Svein Moxnes Harfjeld, Co-Chief Executive Officer]

The 60% is minimum 60%. So, the board can certainly decide on paying out more even with a dividend policy that we do have in place today. But the lower debt you have, the stronger is your ability to pay regular dividends, to pay every quarter even if the freight market is below everybody else's cash breakeven. So, that has some merit and some attraction as well, especially in these environments with interest rates being so low and it's difficult to find investments with cash yields. So, as we have touched upon earlier in the call, we don't have a particular target for debt levels and expect us to continue to prepay more than regular installments in the near term.

[Operator]

And you do have a follow-up question from the line of Robert Sylvia.

[Unidentified Participant]

One thing you just said, which I think answered my question. And that is, given the current rate environment, can you continue to prepay debt at sort of the rates you've been going at during this past quarter? Or do you see it having a lesser ability in this current quarter?

[Trygve Munthe, Co-Chief Executive Officer]

As you've seen in the material, the current quarter is not going to be as strong as the third quarter. But as also pointed out that income secured for the quarter is bigger than the expected cost for the quarter. So, we're going to be profitable in the fourth quarter as well, barring any unforeseens. So, the answer is yes, we expect to generate cash this quarter as well, so that we can continue to accelerate debt repayments. And as we also pointed out, first half next year, the spot ships only need $3,400 a day. That's lower even than the market we're in right now. And that's due to covered cash costs. So, we think we're in excellent position to continue to pay dividends that are meaningful to shareholders, and to continue to invest in the balance sheet.

[Unidentified Participant]

And I think that your strategy for continuing to pay extra debt down is a very sound one because, ultimately, rates will change. And when we're in a position to borrow money to do whatever we want to do, we will be able to do it at a lower interest cost because we are so secure on the balance sheet. So, continue on paying that extra debt down and getting that rate per day down, so we can compete in the market in a much more efficient way. Very well done. Svein. Thank you.

[Operator]

There are currently no further questions on the phone line, sir.

[Svein Moxnes Harfjeld, Co-Chief Executive Officer]

Okay, thank you to all for being interested in DHT and following our business. And have a good day.

[Operator]

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may now disconnect.