DHT Holdings, Inc. (NYSE:DHT) Q2 2024 Earnings Call Transcript

DHT Holdings, Inc. (NYSE:DHT) Q2 2024 Earnings Call Transcript August 13, 2024

Operator: Good day, and thank you for standing by. Welcome to the Q2 2024 DHT Holdings, 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 speaker today, Laila Halvorsen, CFO. Please go ahead.

Laila Halvorsen: Thank you. Good morning, and good afternoon, everyone. Welcome and thank you for joining DHT Holdings’ second quarter 2024 earnings call. I am 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 August 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 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. As usual 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 18.6% based on market values for the ships and net debt was $14.2 million per vessel. The second quarter ended with total liquidity of $263 million, consisting of $73 million in cash and $191 million available under our evolving credit facilities.

Now over to the P&L. We are pleased with the results for the quarter. We achieved revenues on TCE basis of $103.7 million and EBITDA of $80 million. Net income came in at $44.5 million, equal to $0.27 per share. Vessel operating expenses for the quarter were $20.4 million, which included some one-offs in addition to timing of purchases of spares and consumables. G&A for the quarter was $4.5 million. The vessels in the spot market achieved robust earnings with $52,700 per day and the vessels on time charters made $36,400 per day. The average TCE achieved for the quarter was $49,100 per day. For the first half of 2024 our spot vessels achieved $53,400 per day, while the average combined time charter equivalent earnings came in at $50,000 per day.

Net income for the first half of 2024 came in at $91.6 million, equal to $0.57 per share. And then over to the cash flow highlights. The cash flow for the second quarter of 2024 was stable and we started the quarter with $73 million in cash. We generated $80 million in EBITDA. Ordinary debt repayment and cash interest amounted to $16 million and $46.8 million was allocated to shareholders through a cash dividend, while $0.8 million was used for maintenance CapEx. We paid first installments for all four new buildings amounting to $51.5 million and we drew $25 million on the ING revolving credit facility to partly fund the installments together with our discretionary cash flow. Further, $8.8 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 $0.27 per share as a quarterly cash dividend, which is equal to 100% of ordinary net income. The dividend will be payable on August 30 to shareholders of record as of August 23. This marks the 58th consecutive quarterly cash dividend and the shares will trade ex-dividend from August 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 $27,700 per day for the fleet, while cash breakeven is estimated to $18,500 per day, resulting in $9,200 per day per ship in discretionary cash flow after dividends. So, assuming the vessels earned 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 $1.97 per share. And with that I will turn the call over to Svein.

Svein Moxnes Harfjeld: Thank you, Laila. Here is the updated outlook for the third quarter for the company. We have 552 time charter days covered for the third quarter at $37,700. This rate assumes only the base rate for the two time charter contracts that have profit-sharing features. The forecast includes the time charter for DHT Europe built 2007 at $49,500 per day that commenced at the end of June. We expect to have 1,630 spot days in this quarter, of which 75% have been booked at an average rate of $42,100. The current spot market is below this level, hence there is a risk that the average for the quarter will come down from this number. The spot P&L breakeven for the quarter is estimated to be $23,600, a number that should assist you in estimating the net income contribution from our spot lease.

Here we present you with an update for our Newbuilding program. We have achieved meaningful improvements in the delivery schedules for all four ships. The delivery schedule is now February, April, May, and July in ’26. This results in a significant increase in revenue days for the year. When compared to the schedules at the time of entry in entering into the contract, we now expect the increase in revenue days to be in the range of 550 to 600 days for the year. As you will note, the ships and the construction have been all allocated names. As indicated during our previous earnings call, the options for additional ships were not declared and have as such expired. The advanced schedule was made possible as certain projects for other ship types have been revised at the shipyards.

We are very pleased to this outcome and that our relationship to the yards results in us being afforded this priority. The spot market is currently in a seasonal weak period. As many analysts and research reports are suggesting, we are now in a waiting game for refinery maintenance to complete and for runs to increase. On the graph to the left, you will see that seaborne transportation of crude oil hit about 41.7 million barrels per day in February and March this year. In the past two months, this has come down to about 40.3 million barrels per day, i.e. down some 1.5 million barrels per day. As you will see in the graph to the right, this development resulted in inventory bills largely in April and we understand in China in particular. This reversed in June and July as refiners started to draw on inventories, being the key culprit behind the reduced demand for transportation.

We believe the prior slide to jive well with this illustration. On the left, you can note that refining margins softened during the second quarter. In the graph on the right, you can see that refiners have built inventories of diesel and gasoline during the same period. The forward curve suggests that refining margins could improve and would offer an opportunity to reduce these inventories. We think it is logical to assume that this will play out and that it will generate increased demand for crude oil feedstock and our services to rebuild crude oil inventories. In general, our markets offer attractive fundamentals and prospects with continued oil demand growth, longer transportation distances, and a limited supply of new ships in combination with rapidly aging fleet.

Our strategic pillars remain with disciplined execution. We believe we are well-structured for the markets we operate in, focusing on solid customer relations, offering safe and reliable services, supported by a solid balance sheet, strong liquidity, robust breakeven levels, all matched up to the defined and shareholder-friendly dividend policy. With that, operator, over to you.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Jon Chappell from Evercore ISI. Please go ahead. Your line is open.

Jon Chappell: Thank you. Good afternoon. A bit of a housekeeping one first. With the new accelerated schedule on the new buildings, what’s the payment schedule look like between now and delivery? Any more payments this year, and the cadence for next year? And then also, is this all going to be cash-funded, or do you plan on drawing down debt at delivery for the floor?

Laila Halvorsen: Yes. So in our press release, I think under Note 5, we’ve included a table with future expected payments. So you see there that within the next 12 months, we expect payments of $89.9 million, and then the rest after that. We’ve looked into different financing projects, and we are very pleased with the suggestions that we have, but nothing is decided yet. So, we will get back to you with that once we have finalized.

Jon Chappell: Okay. And then…

Svein Moxnes Harfjeld: Maybe if I just may add to that, Jon, is that there is, of course, some timing differences when we generate the cash flow that, we’ll use for the equity component of these ships. So, the [Hennessy] is sort of on time-from-time-to-time drawn RCFs, and then generate cash flow and back and forth on that. So, that’s why this happened during this past quarter.

Jon Chappell: Have you had any interest at this point with delivery now within the next 24 months on time charters, or do you just assume that those would be implemented in the spot market upon delivery?

Svein Moxnes Harfjeld: There is some initial interest, but I would say it’s not at the level that sort of provides for negotiations. So, and we have the intention and interest in seeing if we can develop this. I think it will take a bit of time, and it’s probably a next year event, if we decide to pursue that. So, it is our ambition to build more long-term, and fixed income for the company in general. And these ships will offer some very interesting opportunities for a couple of three clients, in particular that have showed interest.

Jon Chappell: Okay. And then finally trying, the seasonality makes sense. I’ve seen it several years, third quarter’s weakest. Maybe this time, though, there’s some concerns about China as being the biggest end market for crude long-haul deliveries, and some potential weakness there. Have you seen any signs that maybe China, is weakening and it’s a bit more beyond seasonality? There’s some cyclical component to it, or do you truly just think it’s a function of refinery shutdowns at this time of year?

Svein Moxnes Harfjeld: I think there’s a bit of both. We’ve seen some development in that heavy trucking is starting to implement LNG as fuel, and LNG or heavy transportation in general in Asia, has been a meaningful contributor to globe demand growth in general. So, this is something to watch. On the positive side, there is meaningful growth in the pet-chem industry, which is, I guess, a reflection of policy in China that they want to focus more, on a consuming industry. And the new refining capacity coming on in China, has around upwards to 80% of pet-chem output, of which the predominant part is crude oil-based. But this is not happening right now. This is something you will see developing now over the next, I would say, 12 to 24 months.

So, there is some change in where the oil is going or what’s good the oil is being used for, if you like. And I guess the negative components have come earlier than when the positive components will come into the market. So, that’s probably amplified a bit the seasonality this summer.

Jon Chappell: Okay. Thanks for the time.

Operator: Thank you. We’ll now move on to our next question. Our next question comes from the line of Frode Mørkedal from Clarkson Securities. Please go ahead. Your line is open.

Frode Mørkedal: Thank you.

Svein Moxnes Harfjeld: Hi, Frode.

Frode Mørkedal: Regarding the new deductions, is the decision to not exercise them, due to the fact that it could impact the ability to pay 100% of earnings in dividends? Or is it a view on the new build prices themselves?

Svein Moxnes Harfjeld: Well, if we had declared Frode, it would be a meaningful increase in CapEx, of course. And that would also change the structure of our balance sheet considerably. And we had no desire to do that. So, the core plan was all along to do the four ships, and with a caveat that if we had had some early interest, to develop true long-term charters, say, seven, eight years or longer. If that had happened earlier, we could develop some particular financing for that. That’s something we might have considered for one, two, or all four ships, but that did not materialize. So, we felt it and prudent to do the four ships and we were happy with that. So, yes, that’s the short story, I guess.

Frode Mørkedal: My next question is about the market. I guess there’s been some talk about the VLCC cleaning up to do CPP cargoes. What’s the magnitude of that activity? And is that something you’ve also considered?

Svein Moxnes Harfjeld: It’s mostly Suezmaxes. We think maybe around 20 that have done that. There’s been some VLCC cargoes. We think about a handful. And ideally, it should coincide – that you have a relatively modern ship that is then going through drydock. And so, when that happens, that you also clean up the ship – so beyond the conventional drydock work, it will take quite a few extra days, probably 20, I would say. And it will have some cost, a few hundred thousand dollars, depending on the ship and that ship’s prior cargo history, and things like that. So, and there was an opportunity now with the sort of arbitrage pricing on products as well as the lower cost of ships. So, we have done this in the past. And we did not have any ships that were sort of suited at this point for this business opportunity, but it’s not an unknown territory for DHT. So, we guess probably five ships, maybe six and that’s about it.

Frode Mørkedal: Okay. That’s interesting. Thank you.

Operator: Thank you. We’ll now move on to our next question. Our next question comes from the line of Omar Nokta from Jefferies. Please go ahead. Your line is open.

Omar Nokta: Thank you. It’s fine. I just want to follow-up really quickly, on the last question from Frode about the VLCC and the potential, carrying the clean cargoes. You mentioned that it’s typically done before the vessel is going into drydock. Is that basically, would this be just one cargo that they’re able to do, and then go to drydock or can it do a series of cargoes?

Svein Moxnes Harfjeld: It’s done in connection with the drydock so that you clean up. And then, when you load the refined product, and these cargoes are typically going to the Atlantic basin and quite a lot of them have gone to Africa. And you tend to be lying or storing the cargo for a while before you’re able to unload. So, that’s sort of, you could say, not a positive, because you are a freshly painted vessel and you tend to get some hull growth after this. But of course, the charter rates are at the premium to the general market. So, that I guess, compensates for some of that. Then there’s some detailed nuances on risk with contamination and decolorization and things like that, to what extent you can transfer some of that risk to the counterparty, and whatnot.

But it is really for one cargo unless you, after discharge, say in the Atlantic basin. You decide to balance back to try to do a second cargo. But that is normally not done and ships view this as a sort of repositioning of the drydock into the Atlantic basin, and to then trade the cargoes loaded in USGO or Brazil, West Africa.

Omar Nokta: Okay. Got it. Thanks for that. And then just wanted to ask, maybe you were discussing earlier the seasonality aspect, and it comes every year and you have the chart that shows that the pickup. I guess I wanted to ask maybe a bigger picture. It feels like we’re in this pattern of OPEC constantly we need to revisit its production levels. And maybe we’re looking at a situation where flat production from OPEC is best case. And they’re constantly, perhaps having to cut. And that’s not necessarily because of demand, but it’s the fact that you have so much non-OPEC production growth. I guess, how do you think the VLCCs will continue to fare in this type of market? If we were to think about the dynamic here over the next, say six to say 18 months where OPEC is flat to down, but then you’ve got the Atlantic that’s growing. How do you think VLCCs fare in this type of market?

Svein Moxnes Harfjeld: I think that would be a positive. So, the Atlantic barrels out to Asia is truly a VLCC business. And it’s impossible really for Suezmax to compete in freight terms on that. So, I would say that’s a positive. I think if OPEC at some point now decides to release barrels to the market, it’s because there is true evidence of demand growth also. So, that those barrels can come to the market without necessarily rocking the oil price, to the sort of zip code. So, I think I always thought that OPEC or Saudi in particular, clear objective of managing price more than anything. And that is precious to them.

Omar Nokta: Okay. Yes. And then just the final ones, Svein. The TMX has been ramping up and it looks like we’re almost at a – not necessarily a run rate, but it looks like a good number of Aframaxes are loading, perhaps somewhat consistently out of the Vancouver region. Has there been any settling of how these cargos are being directed? Obviously, it’s the Afros that are loading at the port, but – is reverse lightening onto VLCCs becoming a standard thing? And is that also something that maybe will move the needle on VLCCs? Just perhaps not visible now, because of summer?

Svein Moxnes Harfjeld: Yes. There’s already a number of cargoes where the Aframaxes have been heading South, California or even further South, now. And there’s been then reverse lightening onto these for those ships that go predominantly to China. There’s also been, I think, one cargo to India. And the sort of freight cost of that, is meaningfully cheaper than sending an Aframax directly from the Vancouver area over to China, because also those Afros will not be fully loaded due to drought restrictions. So we think that this – is a new trade that will evolve for these, on top of what else is going on.

Omar Nokta: Okay. All right. Thank you. That’s it from me.

Svein Moxnes Harfjeld: Thank you.

Operator: There are no further audio questions at this time, so I’ll hand the call back to Svein Moxnes Harfjeld for any closing remarks.

Svein Moxnes Harfjeld: Thank you to all for staying interested and tuned in for DHT. And we wish you all a good day ahead. Have a good one.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.