DHT Holdings Inc

NYSE:DHT

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Q3 2024 DHT Holdings, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

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

[Laila Halvorsen, executive]

Thank you. Good morning, and good afternoon, everyone. Welcome, and thank you for joining DHT Holdings Third Quarter 2024 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 on our website, dhtankers.com, until November 20. In addition, our earnings press release will be available on our website and on the SEC EDGAR system as an exhibit to our Form 6-K.

As a reminder, on this conference call, we will discuss matters that are forward-looking in nature. These forward-looking statements are based on our current expectations about future events as detailed in our financial report. Actual results may differ materially from the expectations reflected in these forward-looking statements. We urge you to read our periodic report 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.

As usual, we will start the presentation with some financial highlights. Our balance sheet remains in excellent health, with low leverage and significant liquidity. At quarter end, financial leverage was 17.6% based on market values for the ships and net debt was $13.9 million per vessel, well below estimated residual ship values. The third quarter ended with total liquidity of $264 million, consisting of $74 million in cash and $190 million available under our revolving credit facility.

Now over to the P&L. We are pleased with the results for the quarter. We achieved revenues on TCE basis of $92.6 million and EBITDA of $70.4 million. Net income came in at $35.2 million, equal to $0.22 per share. Vessel operating expenses for the quarter were $19 million and G&A for the quarter was $4.2 million.

For the third quarter, the average TCE for all vessels in the spot market was $43,700 per day, while the spot vessels under 15 years of age achieved earnings of $47,600 per day. The vessels on time charters made $38,800 per day, while the average combined TCE achieved for the quarter was $42,400 per day.

Net income for the first 9 months of 2024 was $126.7 million, equal to $0.78 per share. For the first 9 months, our spot vessels achieved $50,100 per day, while the average combined TCE came in at $47,400 per day. The spot vessels under 15 years of age achieved earnings of $52,800 per day for the first 9 months.

And then over to the cash flow. The cash flow for the third quarter of 2024 was stable, and we started the quarter with $73 million in cash. We generated $70 million in EBITDA. Ordinary debt repayment and cash interest amounted to $15 million, and $43.6 million was allocated to shareholders through a cash dividend, while $2 million was used for maintenance CapEx.

We paid second installments for 2 of the newbuildings amounting to $25.8 million, while $15.3 million was related to positive changes in working capital, and the quarter ended with $74 million in cash.

Switching to capital allocation. DHT has a well-defined capital allocation policy. And in line with our policy, we will pay $0.22 per share as a quarterly cash dividend equal to 100% of ordinary net income. The dividend will be payable on November 29 to shareholders of record as of November 22. This marks the 59th consecutive quarterly cash dividend, and the shares will trade ex dividend from November 22.

On the left side of this slide, we present an update on estimated P&L and cash breakeven rates for 2025. P&L breakeven for the full year is estimated to $26,500 per day for the fleet, where the cash breakeven is estimated to $20,000 per day, with a projected $6,500 per day per ship in discretionary cash flow after dividends. So assuming the vessels earn P&L breakeven, this means about $56.5 million in discretionary cash flow for the year.

On the right side of the slide, we illustrate the quarterly cash dividend we have returned to shareholders since we updated the dividend policy in the second half of '22. This amounts to a total of $2.19 per share.

And with that, I will turn the call over to Svein.

[Svein Moxnes Harfjeld, executive]

Thank you, Laila. Following up on Laila's capital allocation slide, we here present an overview on how our balance sheet has developed over the past 10 years in combination with accumulated quarterly cash dividend we have paid for the same period.

Importantly, the company has also invested in its fleet in this period, including newbuildings, secondhand acquisitions and an exhaust gas cleaning system program for the entire fleet. [indiscernible] for the ships for shares transaction in 2017 when we acquired BW's VLCC fleet, which proved to be an excellent investment. We have not issued equity in the market since the fall of 2014.

The leverage level is illustrated by the yellow line and measured in percentage of book values. It was 48% at the start of this period and went up to the mid-50s in 2018, following the mentioned fleet expansion in 2017. The general freight market in 2020 enabled us to reduce the debt level by about half to some 28%.

The green bars present the accumulated quarterly cash dividends for each year in which the quarterly cash dividend was paid. Again, you will note that 2020 was a generous year, with substantial profits resulting in significant dividends. Stating the obvious, we paid out significant dividends and invested in the balance sheet at the same time.

Over the 10-year period, we have paid out a total of $750 million in quarterly cash dividends. The last 2 periods, 2023 and 2024 year-to-date, illustrates how the present capital allocation policy implemented during the fall of 2022 with 100% of ordinary net income being paid in quarterly cash dividends has played out.

Here with the updated bookings to date for the fourth quarter for the company. We expect to have 596 time charter days covered for the fourth quarter at $40,000 per day. This rate assumes the base rate and profit sharing for October and November for the 2 time charter contracts that have this feature and the base rate only for December.

We assume 1,610 spot days in this quarter, of which 64% have been booked at an average rate of $41,000 per day. Our ships that are younger than 15 years of age have been booked at $44,800 per day. You will note that we have improved the rates on the bookings when compared to our business update on October 9, an excellent effort from the DHT team given the general market softened during this period.

The spot P&L breakeven for the quarter is estimated at $21,500 per day, a number that should assist in estimating the net income contribution from our spot fleet.

And some market commentary. Everyone is, of course, waiting for the seasonal upturn. We note that during the last 2 years, the first quarter offered the highest rates.

Chinese economic growth and oil demand have year-to-date not met projections. Whilst China is deploying various inducements to its economy, we are yet to see whatever it takes levels of economic policy changes and stimuli. The stimuli announced last week focused on resolving debt levels. It did not address a needed boost to consumption. Chinese officials indicated that the next step would be significant and endeavor to, amongst others, address lackluster consumption.

It has been suggested that China will, to some extent, seek to tailor the next step in response to anticipated policies to be implemented by the incoming Trump administration. As the world's second largest economy, we do think it's reasonable to expect efforts from China, which should revitalize the economy and lead to increased consumption, including an uptick in oil demand.

The result of the U.S. election leads us to expect certain policy changes that we think will be constructive for our business: tightening of Iranian sanctions that should reimpose pressure on Iranian oil exports, barrels that could be replaced by other Middle Eastern producers. Should this play out, the transportation work which shifts from the shadow fleet to the compliant fleet; reversal of current decarbonization regulations, implying higher medium-term demand for fossil fuels in general towards 2030; and pro-drilling policies should further stimulate U.S. production growth and exports.

By restraining production, OPEC+ aims to balance the market and support prices, especially in the face of increasing competition from Atlantic Basin producers. This strategy also includes targeting Asian customers' inventory levels of crude oil below the 5-year average, creating a tighter market for when economic conditions improve.

However, limited transparency in China's crude oil inventory data complicates assessment of actual levels. If Chinese inventories are indeed low as indicated and as Western inventories are relatively higher than in Asia, one should expect Atlantic-based barrels to increasingly go east. Additionally, recovering refinery margins in Asia in combination with increasing Chinese crude oil import quotas heading into next year should shift the dynamics in favor of a stronger freight market.

Based on positive feedback and encouragement from our key stakeholders, namely shareholders, customers and lending banks, we believe we have an appropriate strategy tailored to the structure of our markets, focusing on solid customer relations, offering safe and reliable services, maintaining a competitive cost structure with robust cash breakeven levels, a solid balance sheet and a clear capital allocation policy.

The whole DHT team appreciates the encouragement, and continues to work hard and operate with leading governance standards and a high level of integrity.

And with that, operator, I'll turn it over to you.

[Operator]

[Operator Instructions] And your first question comes from the line of Frode Morkedal from Clarksons Securities.

[Frode Morkedal, analyst]

Svein, I wanted to ask you about what you see in the physical sale and purchase market, secondhand value specifically. And the reason for asking is when I look at the stock price developments, given huge discounts to NAVs, the stock market seems to be factoring in quite a large decline to ship values. So basically, what are you seeing actually happening in the market today?

[Svein Moxnes Harfjeld, executive]

There is very limited activity, to be frank. So the last sort of transaction we have for modern ships was when Marinakis, a Greek shipowner, sold his fleet to Bahri, the ship-owning arm of Saudi Aramco. And that transaction was, for what we know or expect, was around $1 billion, which would sort of price a 5-year-old ship at around [ $114 million, $115 million, $116 million ], depending on how you sort of differentiate the different age groups.

So since then, no sort of modern ships have changed hands and no real sellers out there either. I'm not so sure that, that many buyers at those levels also, but there could be a couple of 3. So -- but I think in general, the people that sit on these assets, they own them with very low acquisition costs, and they are also very constructive on the market. So I don't think there's a reason for those sort of -- those prices to change meaningfully. What could change that, of course, if people really lost faith in freight market, but I don't think there's any reason to do that.

In the older end, say, ships that are between 15 and 20, it's a bit sideways, I would say. You had a 2007 built ship sold some 10 days ago at about [ 45 ]. This was a Japanese seller, a ship without a scrubber. So a ship of similar vintage with a scrubber 2007 built should probably then be worth [ 48 ], [indiscernible] number.

In between that, it's a long time since we've seen any transactions. And again, there are limited proper ships on offer. Again, I think supporting the statement that people are constructive or at least holding out for what is expected.

Time charter rates are also quite attractive. So the alternative, I think, for at least some owners, is then of course, to secure time charter contracts for a year, say, to buy time if they want to sell at a later point in time.

[Frode Morkedal, analyst]

Okay. That's good color. Good to hear.

The second question is you mentioned a lot of good supporting factors on the, let's say, supply/demand picture here. But what do you think about inventory buildup? We've been through like a fairly steep backwardated market. Now it seems more flattish, and people expect will come back to a [ contango ] situation quite soon, right? So what is the impact on the tanker market from that developments in your view?

[Svein Moxnes Harfjeld, executive]

I think when you look at inventory levels, the levels in OECD is a bit different to some of the key economies in Asia. So -- but there's more data available on OECD and then, of course, people tend to look at that, what's available.

From what we gather from people that watch this very closely is that inventories in China are indeed not very high. And as we talked about on our prior call, inventory levels on gasoline and diesel did increase, and that [ has ] really kept a lid on crude oil inventories as runs sort of [ were ] reduced in response to very tight or lower refining margins.

So I think it doesn't take much change in demand side to really make quite a dramatic change on how the market will respond. And I guess this is OpEx game in a way. Also when we say -- I think they really have inventory levels in Asia, a strong focus on that and how they manage supply now and why this postponed. So let's see what the next meeting on December 1 will bring. But I think the longer this lasts, the stronger recovery you will likely have. That's my sort of two cents on it.

[Operator]

Your next question comes from the line of Jon Chappell from Evercore.

[Jonathan Chappell, analyst]

Svein, first time I recall you specifically calling out your sub-15-year-old vessels in the chartering activity, I think you did it twice. Clearly, a couple of older ships left in the fleet. You just talked about asset values, maybe it's a bit more squishy for vessels at that age. But given maybe that the cycle is a bit longer than the 2, if you're seeing a differentiation in the rates you can earn based on the ages of those vessels, is there a plan to modernize the fleet and maybe use proceeds for some of those older ships to help finance those new builds you have in order?

[Svein Moxnes Harfjeld, executive]

So I think the #1 observation is that when you are in sort of soft patches in the freight market, then the older ships, they suffer more than a more modern ship. So you do get the sort of deltas, and part of the third quarter was certainly softish.

But keep in mind also that this summer, we fixed out one of these older ships for a 1-year time charter at $49,500 per day. And at that point, the freight market was a bit more balanced. So I would not -- certainly not rule out good freight opportunities for these ships, but you need the sort of sentiment to be at the right time. And these older ships, they are technically very, very good conditions. They have hardly any debt, very low book value. So in a way they would sort of contribute meaningfully if they were to be sold at some point.

As you know, as we mentioned, we do have the new buildings coming in the first half of 2026, so we think sort of that delivery schedule jives well with sort of when these older ships close in on 20. So it might be that we will elect to divest a couple of them in the next few months or 1 year. And that capital can, of course, be used to the new buildings, it can also be used to other things. So it's part of our plan, but it has to be the right opportunity, and there could also be other good opportunities to charter out these ships. So let's see what makes more sense when the decision time is up.

[Jonathan Chappell, analyst]

Okay. And also, I mean you mentioned the time charters, not only did you get the [ $49,500 ], but for the Lion, you got $55,000. I understand it was different market sentiment again. But given the little softness right now, have you seen a vast change in the rates that are available for time charter? And again, would you look for other opportunities, like which you have for the Lion, to lock in more given maybe some of the greater volatility in the spot market today?

[Svein Moxnes Harfjeld, executive]

I would say that the bid ask spread has widened a bit. So the ask is probably unchanged, but the bids are a tad lower, reflecting the stock market. But I think increasingly customers, big oil, they recognize the demography of the fleet, whereby it's aging quite quickly and that significant portions of the fleet are controlled by state-owned entities that service their own needs.

So if you want to sort of go for the VLCC for that matter, to go through a shipowner, who has a sizable fleet that can service them with many types of services, not just spot voyage or one time charter, I think they recognize they need to engage more with customers, and that's something we are working closely.

And it's -- our stated ambition is to build more fixed income for the company, and we will spend some time in doing that. But we expect that the next sort of, call it, a year or 2 will offer interesting opportunities to build more fixed income for the company. And that, again, we think will be well suited given our capital allocation policy, and offer more predictability on earnings in the longer term. So that's our sort of lifting the beams a little bit, how we think about continuing to build the business.

[Operator]

[Operator Instructions] And your next question comes from the line of Omar Nokta from Jefferies.

[Omar Nokta, analyst]

Just a couple of questions for me on more on the geo macro and geopolitics side of things. And you mentioned outcome of the U.S. elections and the potential for tougher sanctions on Iran. How do you think the -- potentially the -- if those volumes from Iran, export volumes diminish and get replaced by OPEC, clearly, that sets up a positive backdrop for tankers or at least, say, the free market tankers. Is there a risk you think on your side, kind of how you see things in terms of the shadow fleet following those barrels into the free market barrels? Is that a risk?

[Svein Moxnes Harfjeld, executive]

I think it's an academic risk, but I don't think it's a real risk. Almost all the ships in that business is older than 20 years of age. And when they transport oil today, they either load in Iran or Venezuela for that matter or they do transshipment. They're not approved to enter into terminals, they lack vetting, proper insurance. There's a lot of things that has to fit the bill to get approved to do -- to operate in the compliance markets, I think that is really unrealistic.

So I think this will almost 100% certainly be a positive for the market if this plays out. And I see now people that are expected to come in to Trump's administration, they are already on making statements on how they want to approach Iran. So let's see how it plays out. But I think it's a reasonable probability of some of this taking place actually.

[Omar Nokta, analyst]

Okay. Makes sense. And then maybe I guess, obviously, Russia, Ukraine, it's had an impact on the broader tanker market, perhaps not so -- or clearly not so on VLCCs. But it's been a question basically is how does this tanker market look pretty much since the war broke out and you've had the surge in overall dynamics. But since the war broke out, the question is then how does this market look like without Russia, Ukraine? So I guess in your eyes, how do you think the VLCCs would act if there were a peace deal reached between Russia and Ukraine?

[Svein Moxnes Harfjeld, executive]

I think the market actually did impact VLCCs, but on a relative basis, it impacted them negatively. So the smaller -- our smaller siblings to sort of enjoy the higher earnings for a good period of time. But that has sort of come down to earth after a while.

I'm also sure that if there was a -- if it is a peace deal, it depends how it all plays out, how does it become a [ peace ]? And I'm not too sure Europe will venture out buying Russian oil sort of immediately after a peace deal has been agreed. I think the sentiment in Europe, as this war goes on in the backyard of Europeans, are a bit different to maybe what people might feel in the U.S., right? So I think it will be a long and winding road to get those barrels back into the market, that's how I would think it will play out. So it's not an immediate change.

[Omar Nokta, analyst]

Okay. And maybe just a quick just follow-up on that. You did mention that it was perhaps a negative development for VLCCs. So is it conceivable then that it could be a positive if the war ends?

[Svein Moxnes Harfjeld, executive]

Yes, I think so because -- and refiners, in general, what they care about is the most cost-efficient way of transport, and there's nothing that can beat the VLCC in that regard.

[Operator]

There are currently no further questions. I will now hand the call back to CEO, Svein Moxnes Harfjeld, for closing remarks.

[Svein Moxnes Harfjeld, executive]

Thank you to all for listening in on DHT and following our company. Have a good day.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.