DHT Holdings, Inc. (NYSE:DHT) Q2 2022 Earnings Conference Call August 11, 2022 8:00 AM ET
Company Participants
Laila Halvorsen – Chief Financial Officer
Svein Moxnes Harfjeld – President & Chief Executive Officer
Conference Call Participants
Omar Nokta – Jefferies
Frode Mørkedal – Clarksons
Jon Chappell – Evercore
Anders Karlsen – Kepler Cheuvreux
Climent Molins – Value Investor’s Edge
Operator
Good day and thank you for standing by. Welcome to the Q2 2022 DHT Holding’s Inc. 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] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speakers today, Laila Halvorsen. Please go ahead.
Laila Halvorsen
Thank you. Good morning and good afternoon, everyone. Welcome and thank you for joining DHT Holdings second quarter 2022 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 18th. 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.
The company continued to show a very strong and healthy balance sheet and the quarter ended with $106 million of cash. At quarter end, the company’s availability under both revolving credit facilities was $188 million, putting total liquidity at $294 million as of June 30th. Financial leverage is about 28% based on market values for the ships and net debt per vessel was $15.7 million at quarter-end, which is well-below current scrap values.
Looking at the P&L highlights. EBITDA for the second quarter was $32.5 million, and net income came in at $10 million equal to $0.06 per share. The results include the gain related to sale of vessels and a non-cash gain in fair value related to interest rate derivatives. The company continues with a good cost control with OpEx for the quarter at $18 million, equal to $7,800 per day and G&A for the quarter at $4.2 million.
In the second quarter, the company achieved an average TCE of $24,300 per day with the vessels on time charter earning $33,800 per day and the vessels in the spot market, earning $21,200 per day. For the third quarter, 68% of the available days have been booked at an average rate of $23,600 per day, and 58% of available spot days have been booked at an average rate of $18,400 per day.
We sold two vessels during the quarter, DHT Hawk and DHT Falcon for $40 million and $38 million, respectively. The sales generated a combined gain of $12.7 million. In connection with the sales, we repaid outstanding debt on the two vessels of $13.3 million. Both vessels were delivered during the second quarter and net proceeds amounted to $62.9 million.
Following these sales, the average age of our fleet has been reduced and our AER and EEOI metrics improved, part of the net proceeds were used to reduce debt. In June, we prepaid $23.1 million under the Nordea Credit Facility. The voluntary prepayment was made under the revolving credit facility tranche and may be reborrowed.
On the next slide, we present the cash bridge for the quarter. We started the quarter with $58.6 million of cash and we generated $32.5 million in EBITDA. Ordinary debt repayment and cash interest amounted to $9.1 million, while $19.2 million was allocated to shareholders through share buyback and dividend payment. $4.5 million was used for maintenance CapEx, while net proceeds from sale of vessels amounted to $62.9 million. $23.1 million was, as mentioned on the previous slides used to prepay long-term debt. $8.3 million was the initial cash recognition from Gida [ph] and we ended the quarter with $105.8 million of cash.
Switching now to capital allocation. During the second quarter, the company purchased $2.8 million of its own shares equal to 1.7% of the outstanding number of shares as of March 31 for an aggregate consideration of $15.9 million. In addition, the company will pay a dividend of $0.04 per share for the quarter. It will be payable on August 30 to shareholders of record as of August 23. This marks the 50th consecutive quarterly cash dividend.
With that, I’ll turn the call over to Svein.
Svein Moxnes Harfjeld
Thank you, Laila. Following the share repurchases conducted during the second quarter, as discussed by Laila, we continue to buy back stock after quarter end under the 10b5-1 rule. We have third quarter-to-date acquired some 1.5 million shares at an aggregate cost of $8.8 million at an average price of $5.87 per share.
Considering buybacks conducted in 2021 and buybacks made year-to-date, we have in total, bought back close to 10 million shares, equaling some 6% of the company’s capital. The total consideration of $57 million, the average price of these repurchases is $5.77 per share. We consider this to be a great and an accretive investment. And all shares have been retired upon receipt.
During the quarter, we agreed to refinance the bilateral credit facility for the DHT Tiger with existing lender Credit Agricole. The structure is in line with the DHT Stallion financing. $37.5 million made up of $2.5 million per year of the remaining life of the ship. The six years tenor and a 20-year repayment profile. The pricing represents a new low for DHT’s borrowing costs at the secured overnight financing rate also referred to as software plus a margin of 2.05%. It includes a historical credit adjustment spread of 26 bps between software and LIBOR. As this is a new structure and that will replace LIBOR, you should note for reference that this pricing is equal to a LIBOR plus a margin of 179 bps.
We typically have a mix of spot and fixed employment for our fleet. However, it is not formulaic with the percentage of the fleet employed one way or another but the focus on the nominal rates and tenors that, in our view, will contribute meaningfully to the business.
We have entered into a five-year time charter for the DHT Osprey at $37,000 per day. Delivery is planned for August and the customer has options to extend for an additional two years at 40,000 and 45,000 per day, respectively. The key attraction to this time-charter is the tenure, as we would not find this rate attractive for a two or three-year charter.
We see an increased level of inquiries for time-charters and will selectively engage with our customers, if and when meaningful business can be conducted. We have committed $25 million to retrofit an additional a chips with scrubbers. The combination of decreased scrubber costs, early delivery of equipment and continued elevated spreads between heavy fuel oil and very low sulphur fuel oil makes this a compelling investment in our view.
Considering the current average spreads in Fujairah & Singapore, the payback on these investments should be inside a year. The work will commence in the fourth quarter, and we expect completion during the first quarter of next year. We plan to take each ship out of service for 30 days give or take. This is a highly efficient schedule that will be executed by our experienced team at one of our go-to shipyards. Upon completion, we will have a total of 23 vessels fitted the scrubbers with these additions expected to boost earnings for the company.
So to sum it all up, we continue to stay disciplined, focusing on execution of our business model and strategy. This includes key building blocks in delivering value for our shareholders. We are well structured for cyclical markets with probably the strongest balance sheet amongst the peer group. Ample liquidity, enabling us to invest in the business and act on opportunities should they arise, all with robust downside protection without having given away the upside.
The tanker market recovery has started. And we are tuned for this recovery through our actions and structure to create value. This includes a reduced number of outstanding shares through buybacks and an expanded and fast-track scrubber program that will boost earnings. We have substantial operating leverage in the business, combined with a significant capital distribution potential.
And with that, we open up for questions. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We will now take the first question. And the first question comes from the line of Omar Nokta from Jefferies. Please go ahead. Your line is open.
Omar Nokta
Thank you. Hi, Svein. Hi, Laila. Good afternoon. Yes. I just wanted to ask, Svein, you sort of touched on the five-year contract and the durations that made it so compelling. Clearly, we haven’t seen this much sort of time charter activity or at least that type of duration for the past — I don’t know, several years or at least, I would think, a decade-plus. How would you characterize the liquidity in the charter markets today, as you mentioned, the recovery has begun. We haven’t necessarily seen a resurgence in VLCC spot rates, but how would you say the time charter market is at this point?
Svein Moxnes Harfjeld
The liquidity for this sort of time really is very, very thin. So — but there is quite a few clients asking for one, maybe two years, and we also want a lot of options for sort of shorter durations. We don’t find that very attractive. And we are very constructive on what to expect for next year in 2024. Obviously, beyond that, it’s always hard to sort of have a specific number. Hence, we found this five-year charter to be attractive.
There are some additional discussions or incoming discussions to us. So, it could be that we, over time, will build more fixed income. But hopefully, that will be at increased rates going forward, and it will also maybe be with forward delivery. So let’s see. But to your point, liquidity is thin for now, so.
Omar Nokta
Okay. All right. Thank you. And then, just a follow-up sort of maybe a bit more broadly on the market itself. We’ve seen clearly the midsized crude tankers and the product tankers lifted, as you highlighted in the release. On the VLCCs, can you give maybe a sense of just how the market here recently, maybe within the past, call it, four to six weeks, how that’s been developing in terms of what you’re seeing from your lens in terms of activity levels out of maybe — out of the Middle East and then maybe the Atlantic Basin?
Svein Moxnes Harfjeld
So the market is clearly on the rise and the rates are moving up. So, the sort of latter part of what we have booked, are at higher rates than the earlier part. We are in discussions as we speak, negotiating spot voyages at the rate meaningfully higher than what we have on average booked quarter-to-date. So — and this looks to be robust. It’s not like a fast-moving super volatile change in rates, as you can see on smaller ships, but it’s certainly going in the right direction.
And there is a mix of [indiscernible] both in the Atlantic and in Asia. I think a key point here is that oil has been steeply backwardated for quite a while. And the backwardation between the fourth quarter this year and fourth quarter next year is about half in the last few weeks. And this will enable more Atlantic barrels to go long haul into Asia. And we see some of that already and some requests to load in the US and then to discharge in Asia. And of course, this will certainly be good for our markets.
Omar Nokta
Okay. Thank you for that color, Svein. I’ll turn it over.
Svein Moxnes Harfjeld
Thank you.
Operator
Thank you. We will now take the next question, please standby. And the next question comes from the line of Frode Mørkedal from Clarksons. Please go ahead. Your line is open.
Frode Mørkedal
Thank you. Hi, Svein. Regarding the final comment you made on the backwardation, actually I read the IEA report this morning, and they now actually predict global inventory build of close to one million barrels per day in the second half of this year and 0.5 million barrels in the first half of next year. To me, this seems to be very positive for tankers, but I just wanted to hear from you, how you would expect this to be impacting the tank market dynamics going forward?
Svein Moxnes Harfjeld
We certainly agree with you. So we think that the inventory cycle is the key metric in understanding the tanker cycle. And as you all know, the oil inventories have been brought down over many, many years now. And at some point, there has to be more feedstock, we spoke about this on our prior call and also during Marine Money conference.
So we certainly think this is a positive. There will likely be more new ones or more supply, if you like, into the refineries, and this should certainly be good for large tankers. VLCCs are really the real workhorse of the crude market. VLCCs have on average handled about 46%, 47% of all crude being transported, and with Atlantic still being long oil, and the big demand picture being in Asia. This is truly VLCC business from a fundamental perspective. So, although, of course, some of the smaller ships will still enjoy benefits from the disruptions, we are seeing following volatilities between Russia and Ukraine. But overall, we are very constructive on this period going forward.
Frode Mørkedal
Agree. Yeah, you’ve been buying back shares and now announced investment in your own ship with scrubbers, which makes totally sense to me. That’s great. On the scrubbers, I’m curious to know if there’s been any development in the technology since you last did the retrofits seems to me to be a quite good price versus the obvious benefits.
Svein Moxnes Harfjeld
No, it’s not really in the development. The scrubbers are fairly simple. These are essentially washing machines or the model of washing machines with the capacity to handle sort of 30,000 cubic meters of water per day, a handy-size tanker, right? So — but the cost of building them has come down. I don’t think the cost for the producer, very much higher a few years back, but it was a new thing, it was very high and they probably had a higher profit margins on them. So they are available to us now at one of our two key suppliers at a much lower cost than what we did last time. So by 2025 year, you will see that we budget just over €3 million per ship to do this, right, which is a significant improvement in CapEx. So our technology is basically the same. So there’s no change.
Frode Mørkedal
Perfect. Thank you. That’s it.
Operator
Thank you. We will now take the next question. And it comes from the line of Jim Masaga from FactSet [ph] Please go ahead. Your line is open. Jim Masaga from FactSet please. We will go to the next question. Please standby. And it comes from the line of Jon Chappell from Evercore. Please go ahead. Your line is open.
Jon Chappell
Thank you. Laila, can I start with just a couple of modeling questions for you. First of all, my apologies, I missed the spot today. I thought I caught 18,400 for the third quarter. Is that correct? And what percentage is that for?
Laila Halvorsen
Just a spot?
Jon Chappell
Yes, just the spot part.
Laila Halvorsen
Yes. So the — yes, the spot was 58% at 18,004.
Jon Chappell
Okay. Thank you. And then, Svein, you said turn days roughly for the scrubber retrofittings, should we assume four in the fourth quarter, four in the first? And then my other question regarding to the scrubbers and the model is, how should we think about the depreciation of those? How much will it reset the depreciation higher once completed?
Svein Moxnes Harfjeld
So, it’s exactly which day we will enter this will depend a bit how we schedule the ships in the spot market, and we want to discharge as close to the yard as possible. So if we can do six ships in the fourth quarter, we will do it in the fourth quarter. But — so it’s a bit hard to say this, Jon. So sorry not being able to be more precise, but we are very confident in the fourth and the first quarter schedule. So you will sort of be at limited to do this the way you want, but we can’t give you a more precise guidance. I’m afraid. But equipment is ready and the yard is ready.
So if we can do it sooner, we will do it sooner, but if we want to optimize the fleet to get as little off-hire and positioning cost as possible, it might be dried out, it will not be beyond the first quarter.
On the — yes, on the depreciation profile, we will communicate this quarter on the third quarter results, but I think it’s a reasonable lead to look at what we did last time, which was a three-year depreciation profile, but it’s not finalized yet, so
Jon Chappell
Okay. And then final bigger picture question. I mean, we talked about this last quarter sign on the deployment of cash as it comes in. It seems asset values have moved and at least in the situation with the VLCCs far before the rates have themselves. So ships was an attractive investment, maybe six to nine months ago, just mathematically, there probably even less so today. You’ve made significant headway with the buyback, and there’s a ways to go there. Clearly, would you say that at this point, you’re remain firmly in that your stock is less than NAV and capital return is the top priority of cash, or do you think that at a certain point, you have to start pivoting to thinking longer-term and start making investments in assets even if the rates don’t necessarily catch up to the asset values in the short-term?
Svein Moxnes Harfjeld
I think when it comes to investments, we are not excited about the current trial values from a buying perspective. So it has to be a very special opportunities if we are going to buy something. When it comes to buying back our own stock, of course, NAV is also moving element here. So we are very happy with what we have done all sort of below $6 mark and which compares well to where the stock is trading today.
But as I think everybody knows, our capital allocation policy stayed minimum 60% of ordinary net income to be distributed. It could be that we will reduce the debt level even further. So I think those are sort of the key metrics. But I don’t think you should expect us to one, buy ships in the current valuations. And two, we will probably not buy stock at the current level side. We will leave that to our investors and then focus on returning money to shareholders in the sort of future.
Jon Chappell
Okay. My last one is kind of a follow-up to that last point. $0.04 dividend is certainly off your minimum, so to speak of $0.02, and in a quarter where if we take out gains, it was still a loss. So should we think about now as we’re in the early stages of a recovery, assuming all else stays the same is $0.04 kind of the new base dividend and then we’ll transition to that minimum 60% payout once you’re more sustainably in the profitability?
Svein Moxnes Harfjeld
No. The 60% in this quarter is actually based on the net income reported because compared to some of our peers, we don’t exclude sort of elements in the P&L that is cash inputs, such as the sale of a ship profit, we tend to include that when we consider the dividend. So for us, this is just the way we’ve always done it. So it’s not a new law. It’s just a pure reflection of what was the income for the quarter.
Jon Chappell
Okay. That makes sense. Thank you, Svein. Thanks, Laila.
Operator
Thank you. We’ll now take the next question. And the next question comes from the line of Anders Karlsen from Kepler Cheuvreux. Please go ahead. Your line is open.
Anders Karlsen
Thank you. A quick question on your fleet. I mean, you sold in 2006 and 2007 built ship, you have more or less to the same ones with the firming market are you considering more sales, or is that off the table now?
Svein Moxnes Harfjeld
I think for now, we will be very selective. It could, of course, be that we elect to sell one or two ships. But I think we’d like to see in particular, for the scrubber 50 units, appreciation in both asset values, but also have these ships give them the opportunity to earn money, which we expect them to do. So I don’t think you should plan for our fleet to be much smaller than what it is today.
Anders Karlsen
Okay. And then just a quick one on the market, you were mentioning liquidation as one factor that is holding back. What other important drivers do you see in the short term here?
Svein Moxnes Harfjeld
Of course, there is supply. So OPEC is a bit tight on handing more oil into the market. Their key argument is that, they feel that they’re sort of meeting current amount. And they are questioning the macroeconomic picture. I think these last couple of days, we’ve seen some pivots here and there, suggesting that inflation might sort of be leveling off and maybe getting some ease to some of the prior macroeconomic concerns. If that is the case, maybe we’ll have more oil to the market. But I think that’s been the key reason holding things back is that OPEC has been tight, which we assume is they wanted to enjoy the ride of the strong prices for as long as they can.
Anders Karlsen
Okay. Thank you. And then just a final question on – have you seen any pool from the EU in terms of building inventory? I mean, from an energy security perspective, I guess, EU is short energy and would require to build substantial inventories of everything they can get their hands on. So have you seen any signs of that as we are?
Svein Moxnes Harfjeld
No, I can’t say I’ve seen that. So of course, the gas has been more of a hot topic for Europe. So – because oil is not really used so much for heating or for energy production, like – it’s more for transportation, and for petrochemicals. So I think there are other areas where you’ve seen this focus.
Anders Karlsen
Okay. Thank you. That’s all for me.
Operator
Thank you. We will now take the next question. Please stand by. Next question comes from the line of Climent Molins from Value Investor’s Edge. Please go ahead. Your line is open.
Climent Molins
Good morning. And thank you for taking my questions. I wanted to ask about the disruptions you’re seeing from the sanctions in Russia, the effect mostly revolve around smaller vessels, considering VLCC’s heading to Russia’s Western ports. But could you provide some commentary on the ship-to-ship transfers and their effect on the overall market?
Svein Moxnes Harfjeld
We are not involved in those types of operations, but we are aware that they’ve been taking place in the Atlantic Basin. So there’s been, say, Aframax is coming out of the Baltic and Black Sea could also potentially do use mass, but this is mainly we think it’s a Baltic business.
And then, we load it on to the VLCCs and then transport it to the Far East and China in particular being the destination. But to our knowledge, it’s not a huge business tying up with many, many ships. There’s been a few of these transactions being done. So it’s a bit on the sideline of the conventional market.
Climent Molins
All right. That’s helpful. And considering the high energy prices in Europe, do you expect to see any additional crude import substitution for natural gas volumes during this coming winter?
Svein Moxnes Harfjeld
It could, of course, happen. So there are some suggestions that the fuel oil will be used for heating this winter. So — but we haven’t seen any sort of clear evidence of it or at least not to our knowledge. So — but I think this will be defined also by the cost differential between heating oil and gas.
Climent Molins
All right. That’s all for me. Thank you very much for taking my questions.
Svein Moxnes Harfjeld
Thank you.
Operator
Thank you. [Operator Instructions] We will now take the next question. It comes from the line of Michael Masco from MRM Capital [ph]. Please go ahead. Your line is open.
Unidentified Analyst
…question-and-answer. Thank you.
Operator
No problem. Thank you. There are no more questions at this time. I would like to hand the conference back to the speakers for final remarks.
Laila Halvorsen
Well, thank you to everyone who’s been on the call and are following DHT. That’s greatly appreciated and wishing all of you a good day ahead.
Operator
That does conclude our conference for today. Thank you for participating. You may all disconnect.
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