DHT Holdings, Inc. (DHT) Q1 2024 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Q1 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 speaker today, Laila Halvorsen, CFO. Please go ahead.

Thank you. Good morning and good afternoon, everyone. Welcome, and thank you for joining DHT Holdings' first 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 at our website, dhtankers.com until May 22. 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 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. We will start the presentation with some financial highlights. We maintain a very strong balance sheet represented by low leverage and significant liquidity. At quarter end, financial leverage was 17.8% based on market values for the ships, and net debt was $13.5 million per vessel. The first quarter ended with total liquidity of $289 million, consisting of $73 million in cash and $216 million available under our revolving credit facilities. Now over to the P&L, we achieved revenues on TCE basis of $106.3 million, and EBITDA of $83.7 million. Net income came in at $47.1 million equal to $0.29 per share. We continue to show good cost control, and operating expenses for the quarter were $19.2 million, and G&A was $4.7 million. We are pleased with the result for the quarter and the vessels in the spot market achieved robust earnings, with $54,000 per day, and the vessels on time charters made $39,500 per day. The average TCE achieved for the quarter was $50,900 per day. And then over to the cash flow highlights. We started the first quarter with $74.7 million in cash, and we generated $83.7 million in EBITDA. Ordinary debt repayment and cash interest, amounted to $15 million and $35.5 million was allocated to shareholders through a cash dividend, while $3.9 million was used for maintenance CapEx. We prepaid $24 million on the ING revolving credit facility, while $7.2 million was related to changes in working capital. And the quarter ended with $73 million in cash. Switching to capital allocation, DHT has a defined and predictable capital allocation policy and in-line with our policy, we will pay $0.29 per share as a quarterly cash dividend, which is equal to 100% of ordinary net income. The dividend will be payable on May 31, to shareholders of record as of May 24. This marks the 57th consecutive quarterly cash dividend, and the shares will trade ex-dividend from May 23. On the left side of this slide, we present an update on estimated P&L and cash breakeven rates for 2024. P&L breakeven for the full year is estimated to $27,500 per day for the fleet, while cash breakeven is estimated to $18,300 per day, resulting in $9,200 per day per ship in discretionary cash flow after dividends. So assuming the vessels are in P&L breakeven, this means about $79 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 $1.70 per share. And with that, I will turn the call over to Svein.

Thank you, Laila. This slide compares DHT's spot market performance over the last 12 months with a quoted TD3c index. The TD3c index is the most prominent index representing the largest VLCC trade, namely loading in Saudi Arabia and discharging in China. The green lines and the numeric ledgers illustrate our spot earnings for each quarter in the period, and the orange lines show the index earnings. Several reports refer to the index when assessing the VLCC market. As one could clearly see from these numbers, the index is not an appropriate reference for DHT's spot earnings. The earnings power of the ship used in the index calculation is inferior to our average vessel, but this does not represent the whole delta. The other part reflects our customer base and related trading patterns, and what we actually get out of the market. The average delta during this period is about $15,000 a day. On this slide, we have an additional reference to DHT producing competitive spot earnings, and that is when compared to peers. The peer group consists of the usual suspects listed in the U.S., all with similar trading policies with respect to geographical areas and origin of oil. One of the 4 in the peer group is yet to report for the first quarter of this year. We illustrate quarterly spot earnings for each peer over the same period as the previous slide, and the numbers speak for themselves, with DHT coming out on top. And now to the outlook for the second quarter. As per usual, we provided our business updates on 10 days into the current quarter. The spot market softened a bit following our update, but is now on a strengthening path again. Of the total estimated spot days for the second quarter, we have booked 72% at $51,000 per day. You should see this number in relation to the spot P&L breakeven for the second quarter being estimated at about $25,300 per day. As stated in the report, the freight market continues to show steady and reassuring conduct. The slumps in the market are grinding higher, with recent lows leveling out above $40,000 a day for an ECO vessel fitted with exhaust gas cleaning systems. We assess the current spot market for the 3 main routes on average to be in the mid-to-high 50s for DHT's average type weighted fleet. U.S. Gulf to the Far East is currently a tad behind Arabian Gulf, South America and West Africa, but is likely on the rise. The North Sea to Asia has been absent for close to 2 years, but is now back in the market with a couple of cargos per month. We understand that VLCCs are gaining market share, now about 50% of seaborne crude oil transportation, underscoring end users increasing focus on cost per unit transported. This is in particular for the long haul trades, but is also now a result of the Red Sea challenges, with parts of the AG to Mediterranean trade having moved from Suezmaxes to the VLCCs, sailing around Cape of Good Hope. There's limited time charter activity for periods in excess of 1 year. However, we currently estimate the 3-year time charter market for a good ship to be in the mid $50,000 per day. And there is one client in the market now asking for bids on this. And there is a field of owners offering on this, although higher than our estimated markets. In sum, we are increasingly confident about what is ahead of us. The discussion of fleet development and demographics might be repetitive. We have here a presentation of the development with a somewhat different illustration. We have applied some key market observations and assumptions. One, over 90% of the ships now over than 20 years of age are engaged in the southern markets. Two, this fleet's productivity is estimated to be some 50% of its nominal capacity. This is largely due to these ships rarely calling ports, but often doing transshipments of cargos involving numerous ships and hence, delaying the delivery of cargo. And three, we assume ships will disappear from the shadow trade when they reach 25 years of age. As we had stated on numerous occasions, we expect the fleet to shrink over the coming years. The blue bars represent the fleet that has been or is below 20 years of age. This part of the fleet is employed in the compliant markets, and it's sizable -- its size probably peaked in 2021 with some 768 ships. When applying our observations and assumptions, we estimate a sub-20 year old fleet to shrink to less than 730 ships by the end of 2027. As most of you well know, this happens at the time of growing oil demand and expanding transportation businesses. The ships in the shadow trades are serving a purpose in A markets, but with a significant haircut in its productivity. We also take note that following the recent contracting of VLCCs, the activity has receded with apparently limited interest from ship owners in contracting large tankers now. We are being told that interest is being directed to other ship types and classes. The VLCC order book now stands at some 5% of the sailing fleet supporting our constructive markets view. On that note, we will discuss our newbuilding projects. As announced, we have contracted 4 VLCCs, all for delivery in 2026. They are contracted at what we deem to be the top quality shipyards for large tankers. The ships will be of Super Eco-designs implying premium earnings power and related reduced emissions. These ships will have a new engine model that is different from what is being adapted to most of the other newbuilding orders that have been reported over the past few months. Further, our newbuilding orders are of larger carrying capacity both in deadweight and cubic terms, again, when compared to most of the other orders that have been placed. This is expected to offer better economics for both customers and DHT. For sake of clarity, we have no plan to declare the options for the additional vessels. Our next priority would be second on acquisitions should we be able to identify opportunities attractive to DHT. As stated, we do not intend to issue any new capital in relation to these newbuilding projects. And our financing plan consists of cash flow from operations, available liquidity and new mortgage debt. With respect to new mortgage debt, our base case assumes about $60 million per vessel with a DHT style financing structure. And importantly, the project of our strategy assumed that the dividend policy with 100% of ordinary net income shall remain in place. This last slide is familiar, so we will round up by saying that our markets are robust, providing good support and are steadily, albeit gradually, improving. Our team is doing a great job in getting the most out of what the markets have to offer, delivering premium earnings for our ships. Contracting on new ships seems to have receded, and supporting the highly constructive supply outlook. And we'll stick to our meeting with a focus on first rate operations and related financial results in anticipation of increasingly awarding times ahead. And with that, operator, over to you.

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

I had a question on the VLCC and the trading patterns. I feel like the smaller tankers, we all know have been benefiting from diversion around Africa and longer ton miles. But what do you see on the VLCC trade pattern? I think you mentioned briefly that VLCCs are taking Suezmax cargos. Maybe you can elaborate on that? And are you seeing any other changes?

Yes. It's really related to the Red Sea. As I stated that -- some of that Suezmax trade that typically went through the Suez Canal into the Mediterranean are now being sort of put together on large ships on VLCCs and thereby sailing around South Africa. So this is a smallish part of the market, but it's nevertheless sort of adding distances, if you like. So it's -- I would say, this is the primary change in the current environment. We have one trade that is on sort of the doorstep of evolving, and that is the TMX project out of Vancouver, West Coast, Canada, where we expect a meaningful portion of that crude oil to head further south for transshipments over to VLCCs and then to head to Asia, to China, in particular. And we base this partly on the fact that one of the big -- or the one of the 2 Chinese state owned oil companies, they own a 1/4 of the equity in this project, and they have been discussing this with us and I'm sure with others, and expect that trade to evolve. So that is an interesting addition to the VLCC market. But beyond that, it's just a general trend of really -- there's more barrels coming from the Atlantic. Petrobras is increasing production. Guyana will also, at some point, get more involved in VLCCs. So -- and as I mentioned, the North Sea seem to be back, although sort of only with a couple of cargos a month, but there's some new incentives in Korea, in particular. We understand that, that will maybe stimulate that trade to potentially grow.

Okay. That's interesting. That's good color. On the newbuilds, you mentioned that there are Super Eco. Can you quantify the fuel consumption versus existing fleet you have?

I think the simple answer is no. So we know what it is, obviously, and we will be in detailed discussion with some of our key customers that are interested in these ships on those particular sort of features. But it is a marked improvement from the 5 ships that we have, that were all built in 2018, which is sort of the last class of these large vessel ships. So it's a marked improvement. So we're very excited about getting these assets into the water and get to see what they can deliver.

It will be interesting to know those facts when this arrives. Well, my last question is on, let's say, sentiment. I feel like in the stock market, at least, the investor sentiment has improved a lot recently, basically switching from let's say, cautious approach to basically reflecting the fair fundamentals as we see at least. But how do you see the sentiment among shipowners in the physical world so to speak? What's the mood right now?

I think some of the traditional tanker owners have -- at least a couple or 3 of them, have sort of made their bets on the newbuilding side and they seem to be sort of content with what they have done. There seem to be still interest in the medium age to maybe older spectrum on the product side, but I'm not the authority on that market, so it's not our market, so you should challenge all the people on that. The asking prices for modern ships are quite -- on the large tankers are quite elevated, and there are some interest around, in particular, from a couple of state owned actors, so one being Bahri, which is Saudi Aramco's shipbuilding arm. And I think that's sort of an encouraging sign because they are, of course, very close to a significant state owned oil company who plays a very important role in the oil market in general. So if they are in need of more ships, I think that might be an indication of what their expectations are. They are focusing on modern secondhand ships.

Our next question comes from the line of Omar Nokta from Jefferies.

I just wanted to just ask about the VLCCs. You mentioned and we've seen that the market for new orders is kind of cooled from other shipowners. You decided not to exercise the call option. And I just wanted to ask just in terms of, I guess, perhaps maybe on sentiment, but maybe just in general big picture. Why do you think there's been a cooling in terms of new orders? And then also, is that cooling -- has it transitioned towards DHT or was the plan all along not to really exercise those options?

Cooling has nothing to do with DHT. I think we stand independently in making our decisions. So this is sort of a coinciding event. I think there's sort of a couple of other markets that maybe now are looking attractive for some reason or another. And this is maybe a market that are not falling so much. So I can't give you all the details on that, but that seems to be the case. But I think also at the get go now, there were not sort of a big hoard of owners ready to order ships for a variety of reasons. I think they had other maybe projects and ambitions or priorities when they came to allocation of capital, then so LNG seems still to suck up a lot of capital from the ship-owning industry. And as you all know those ships are cost at least twice as much as a VLCC. So yes, it's probably a mix of reasons. I think lastly, deliveries now are really 4 years, no, no 3 years out, at least. So you're looking into '27. I think that could also be a bit of a turnoff for most people. They would like to have ships -- earlier delivery. And which is why we were a bit sort of keen to get that -- our deal done quickly because we had deliveries, which is now -- the first ships is less than 2 years to deliver. So we found that attractive. So it's probably a mix of things.

Okay. That was very helpful.

But just to add. So you know our decision is more that, when you go to yard, you typically are offered options. And of course, you would like to have them. We've been -- if we had a long-term project for several of these ships, then we will probably have -- gone ahead with one or so several of them, but that is maybe not really stick in the short time. And this newbuilding project is north of $0.5 billion, so it's already a big commitment financially for the company. So to sort of double up on that, we think it would be a too big a commitment on this point. Hence, the priority would be secondhand if we can find it. And there's a big if on that, because it's not a given.

Yes. Clearly, it makes sense. And maybe just one quick follow-up. Just you mentioned -- which I thought was interesting, the discussion of the vessels that are over 20 years of age having 50% productivity. Is that an assumption you're making on perhaps the future? Or is that something you're actually seeing now? And is that -- is there anything similar for maybe vessels over 15 also in line with that?

For the ships over 20, as we mentioned, over 90% of those ships are in the shadow trade, and this is what we see now. This is happening because many of these ships are not fit to go into many of the load and discharge ports that is being used. So there's a lot of transshipment from smaller and into smaller ships. And this all takes a lot of time. It's very inefficient. So that fleet, sort of, very quickly is not as productive as its nominal capacity would suggest. When it comes to ships between 15 and 20, the utilization is the same as for younger ships. We have 4 ships in this category, and there is no difference in utilization and productivity. The only thing is, from time-to-time, the freight rate that you are offered for a ship that is between 15 and 20, is then mostly at the marginal discount to what a more modern ship would achieve. But there's no change in the productivity or efficiency.

[Operator Instructions] Our next question comes from the line of Ben Nolan from Stifel.

Yes, actually, I wanted to follow-up on the question about the options that Omar was talking about. I was just curious how long you have those options or assuming that they're still outstanding. Just trying to think about sort of the possibilities as if would it be possible to maybe flip those, should they get becoming the money and you can place the order and then resell it at higher price? Or is there any way to potentially monetize that? Or is the option duration just not probably long enough?

No, we did not communicate the time line of those options, so they had various declaration times and sort of a staggered schedule. So we will leave it at that. I think the options would be in the money today, if you say that. I think realistically, to sort of resell those contracts or berths, you would have to declare them and make them a firm contract for that to really be realistically possible. So it's hard to sort of sell that paper and think you can sort of get, a few million in between. So I think that's not an unrealistic case. And if we were to sort of pursue that avenue, it meant we had to commit to the contract first, right? And as I mentioned, we have other priorities if we are going to invest an additional money now going forward, than to add newbuildings at this point

Okay. That's helpful. I appreciate it. And then just secondly, on the time-charter contracts. You mentioned that the charter market was especially thin, which -- it seems it's a little bit surprising given that -- to me, at least, the discount between where the spot market has been trading for a while and the kind of rate that you put out there. Is that something you expect the margin to narrow or -- especially as we move into the back half of the year and things normally get tighter? And just sort of how are you thinking about where you would like the fleet to be positioned from a spot versus contracted standpoint?

I think one aspect here is that shipowners with sort of in-house operations, quality ships that are, so to say, eligible for these term businesses, they have quite solid expectations for the future. So the bid ask spread is quite wide. There is currently one project in the market where an oil company is looking for a 3-year charter for one or more ships. All the bids, came in at average, let's call it around 60, we believe, although we don't have the details. But we believe, so asking prices. And I think a project like that might clear in the sort of mid-50s. That's where the market probably is. So let's see if this project will happen. So I think it's a result of bid ask, but I think eventually there will be more end users coming to the market to try to secure tonnage, because as this market evolves, it will be attractive for them to secure ships for 3 years, also 5 years I would think so, but it's a bit early in upcycle for that to truly evolve.

And where do you -- how are you thinking about sort of where you would like to be positioned from a percentage of your fleet?

So as we stated before, it's -- we have a clear ambition of building more fixed income for the company, but we prefer that fixed income to be of longer term nature. So, we are not entertaining, say, inquiries for 1-year charters or 2-year charters. And we also, of course, looking for the right money for the right ship, so there are finer details there for us to do things. But -- so -- but our customer base involves customers that typically will look for term charters. So assuming that we are right in this market evolving, then you should expect us to work hard to try to put some of that to bet.

[Operator Instructions] Our next question comes from the line of Petter Haugen from ABG Sundal Collier.

A quick question from me on prices here. So in the newbuilding markets, We've been told that, there are discrepancies between geographies, obviously. But could you please, Svein, help us quantify what it would actually mean now if you were to not with options, but coming fresh to the yard ask for a VLCC. And also then what timing of deliveries should expect?

As if you go to Korea, the yards are asking north of $130 million, and that is for essentially for '27 delivery. Those ships will be of 300,000 ton designs. So i.e. smaller than the ships we have ordered. And the sort of headline price also excludes the scrubber. So this is, of course, all the basis for negotiation, right? But I would -- I think it would have to start with 1, 3 handle for it to make it happen. If you go to China, to the top yards in China, I call that 3 of those yards, they will be asking 123-ish I think, today, also for '27 delivery. That is also a smaller ship. And also typically, the asking price excludes the scrubber, but it will be sort of, again, down to negotiations. So that is their price delta and the delivery. Some of the top yards in China are running out of space for '27. So they actually have a tighter backlog than at least one of the Korean yards, whereby all the 2 other Korean yards seem to be more content to their backlog and not really entertaining inquiries and that with any excitement, so.

Okay. That's very helpful. And just as a quick follow-up, in the gray fleets or black fleets, if you will, what sort of TCE equivalents would you retrieve if you were to do [ illicit ] trading business?

We're not venturing into that. So we're not even trying to smell it. So it's -- but we -- of course, we are being told a little bit here and there what it is, and some of the lump-sum freights that are being paid are, call it, sort of twice what is being done in the compliant markets. And then it's sort of down to how long time does it take to deliver cargo and so forth? But the capital, of course, invested in those ships are very different to what sort of the big public companies and the leading rigs are running. So I guess, the returns are quite attractive, which is why they're doing it.

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

Well, thank you very much to everyone who's been on the call and listening to us, and thank you for staying tuned to DHT, wishing all a good day ahead. Bye-bye.

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