DHT Holdings, Inc. (NYSE:DHT) Q4 2022 Earnings Call Transcript

DHT Holdings, Inc. (NYSE:DHT) Q4 2022 Earnings Call Transcript February 14, 2023

Laila Halvorsen: Thank you. Good morning and good afternoon, everyone. Welcome, and thank you for joining DHT Holdings fourth 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 February 16. 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. Our balance sheet is in excellent shape. The quarter ended with $126 million of cash. And in addition, the company’s availability under our revolving credit facilities was $234 million, putting total liquidity at $360 million as of December 31. Financial leverage is about 19.4% based on market values for the ships. And net debt per vessel was $11.8 million at quarter end, which is significantly below current scrap values.

Reflecting on the strong freight market and our competitive cost structure, EBITDA for the fourth quarter was $95.4 million with net income at $61.8 million, equal to $0.38 per share. OpEx for the quarter was $19.9 million and included some periodical variations, mainly related to stores and spares. G&A for the quarter came in at $2.8 million. In the fourth quarter, the vessels in the spot market earned $63,800 per day and the vessels on time charter made $36,100 per day. On average, the achieved TCE for the quarter was $56,900 per day. The first 3 months of 2022 was more or less breakeven. Our net income for the full year came in at $62 million, equal to $0.37 per share. DHT continues to show a very stable and competitive cost structure, and OpEx for the year was $73.8 million, equal to an average of $8,250 per day for the fleet.

On the next slide, we present the cash bridge for the quarter. We started the quarter with $65.7 million of cash and we generated $95.4 million in EBITDA. Ordinary debt repayment and cash interest amounted to $9.5 million, $4 million of new debt was issued in connection with the refinancing and $7.5 million was allocated to shareholders through the dividend payment. In December, we prepaid $23.7 million of long-term debt and the quarter ended with $125.9 million of cash. In the fourth quarter, we entered into a $37.5 million refinancing of DHT Taiga with Credit Agricole. The facility is repayable in quarterly installments of $625,000 per quarter with a final payment of $22.5 million in addition to the last installment in December 2028. The new loan bear interest at a rate equal to SOFR plus 205 bps, which is equal to LIBOR plus 179 bps.

Photo by Natalya Letunova on Unsplash

As mentioned on the previous slide, in December, we prepaid $23.7 million under the Nordea credit facility. The voluntary prepayment was made for all regular installments for 2023 and reduces the company’s cash breakeven levels for the year. In January, we entered into a $405 million secured credit facility, including $100 million uncommitted incremental facility. The new facility will refinance the outstanding amount on the ABN AMRO credit facility and is secured by 10 of the company’s vessels. The facility is repayable in quarterly installments of $6.25 million, equal to $625,000 per vessel with maturity in January 2029. The new loans bear interest at a rate equal to SOFR plus 190 bps, which is equivalent to LIBOR plus 164 bps. As I mentioned refinancing of the Credit Agricole and the ABN AMRO credit facilities are in line with DHT-style financing, which includes a 20-year repayment profile and a 6-year tenor.

Subsequent to these refinancings, DHT’s weighted average cost of outstanding debt and revolving credit facilities is equal to LIBOR plus 177 bps. With that, I will turn the call over to Svein.

Svein Moxnes Harfjeld: Thank you, Laila. We announced our new dividend policy last year. With our strong balance sheet and low newbuilding CapEx, we simply think our new dividend policy could distribute 100% of net income to be a good business. And as promised in our last earnings call, we are showing you the money. Based on the ’22 fourth quarter financial results, we will pay $0.38 per share as a quarterly cash dividend on February 24 to shareholders of record as of February 17. In connection with our new dividend policy, we will on a regular basis, inform the market on how much our ships have made on a time charter equivalent basis. This advice will be released shortly after every quarterly close, so well ahead of our quarterly financial results.

Additionally, we will at the same time advice of bookings made to date for the subsequent quarter. The purpose is to be transparent and to guide on our ships’ earnings, thereby assisting you all in setting out our expectations for our financial results. We are here updating you on our bookings to date for the first quarter of ’23. As you will see, we expect 510 days to be covered by our term contracts at an average rate of $33,900. We expect to have 1,390 spot days for the quarter, of which about 66% has been booked at an average rate of $56,400 per day. Combined, and as of today, this indicates bookings of 75% of the total days at weighted average earnings of $48,400 per day. In the last line, we are estimating the spot P&L breakeven for the first quarter, allowing you to model a net income contribution based on their own assumptions for the unfixed spot days.

You saw a dip in the freight rates towards the end of last year and there were decent resistant levels reflecting on the underlying market balance. And based on what we see now, we expect rates to improve for the balance of the quarter. We think our plan for guiding will make good sense in relation to our new dividend policy. On this slide, we are sharing our estimated breakeven levels for the year of ’23. The estimated P&L breakeven for the fleet as a whole is about $27,200 per day. This includes the increased annual depreciation of $7.2 million related to our retrofit program for exhaust gas cleaning systems. When adjusted for the fixed income that we have, the P&L breakeven for the spot fleet is about $25,400 per day. The estimated cash breakeven for the fleet as a whole to be $18,100 per day with the spot ships requiring to make $14,200 per day for the company to be cash neutral.

Keep in mind that our cash breakeven numbers include all true cash costs, i.e., OpEx, G&A, maintenance CapEx, cash interest and debt amortization. This illustrates a headroom of about $9,000 per day between cash breakeven and net income breakeven levels for the fleet with these potential cash flows being allocated to general corporate purposes. Here, we provide you with an update on our project to retrofit the remainder of our fleet with exhaust gas cleaning systems. We have to date completed 2 of the retrofits and have 2 currently at the yard. Another 2 will enter the yard later this quarter and the final 2 early in the second quarter. The project is developing according to plan, both from a cost perspective and in terms of planned of our days for the ships.

The fuel spreads are holding up well, resulting in premium earnings for ships with systems installed. We are not facing any operational issues and are pleased with our decision to fit the last decks of our ships with these systems. Following this, our entire fleet will be fitted with exhaust gas cleaning systems. Additionally, these ships are attracting increased interest from customers for long-term charters. There are very favorable fundamentals in our markets, and we expect this to have legs resulting in good earnings from the tanker sector. We see the early innings on the impact of China’s reopening. The size of the announced second batch of crude oil import quotas for refiners in China suggests expansive domestic demand requiring increasing refinery runs.

Non-OPEC supply is growing, supporting longer haul transportation. Additionally, geopolitical events are disrupting certain trades, reducing the productivity of the larger fleets. This disruption is not expected to disappear anytime soon. And as we all know, there’s hardly any new supply of ships coming in. The VLCC order book now stands at 2.2% of the sailing fleets. The older part of the fleet is growing quickly with about 14% of the fleet being older than 20 years of age and 30% being older than 15 years. These numbers will expand rapidly over the coming years and at the time when regulatory requirements are expected to result in reduced speed for a good part of the fleet. An increasing number of ships are engaged in trades either partly or fully sanctioned.

This fleet is also referred to as the shadow fleets. Although these ships currently serve a purpose in the greater market, we find it hard to believe that they will stay in business over time or ever return to the compliant markets. We believe this could be viewed as the new scrapping in due course and our expectation is that the fleet will start shrinking over the next couple of years. So going forward, our plan is clean and simple. You should expect continued strong discipline in executing our business model and strategy. We have a great team of people in a no-nonsense company culture, all focused on delivering safe, reliable services to our customers and strong results for our shareholders. We are tuned for rewarding times with the quality of fleet and ships all in the water, a rock solid balance sheet, premium revenue generation and a low cost structure.

We think returning 100% of net income to shareholders to be fair and square and good business. And with that, we open up for questions.

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Q&A Session

Operator: We will take our first question and the question comes from the line of from Clarksons Securities.

Unidentified Analyst: So I noticed you had a debt capacity this quarter by $100 million. So could you talk about a bit your — talk about — a bit about your leverage position? And in general, would you be willing to increase debt on your existing ships to pay for the extra portion on potential new investments?

Svein Moxnes Harfjeld: So our investment strategy is very much countercyclical. And by building the balance sheet that we have done and likely we’ll continue to do, this of course, forced the company to have investment capacity when we find the time to be right. And the sort of core of this is that we should hope and want to expand at the right time organically, i.e., without having to rely on new or external capital to do it. So if we can have a balance sheet that has the capacity to invest, those investments will be highly accretive to our owners. So that is the simple plan.

Unidentified Analyst: And a small follow-up. You still have a few older vessels in your fleet which has seen quite a significant increase in volume. So how do you look at these assets today and how is your decision process in making divestment decision now?

Svein Moxnes Harfjeld: I think it’s unlikely that we will divest additional ships at this juncture. These ships are really high quality ships. They are used to service our customers. They make good earnings. And we expect them to continue to make good earnings in this time tanker market going forward. So they are not sales candidate anytime soon.

Operator: We will take our next question, and the question comes from the line of Jon Chappell from Evercore ISI.

Jon Chappell: Two quick ones for you, Svein; one on DHT-specific and one on the broader market. Just to DHT, to be clear, I think the payout ratio is perfectly clear and makes a ton of sense given your balance sheet and where we are in the cycle right now. But does that make fleet expansion and/or modernization kind of a mutually exclusive decision or do you still have the capabilities whether it’s through adding finance or the part of the cash flow and not the net income that you’re not paying out to consider that?

Svein Moxnes Harfjeld: Well, 2 things to that. I mean, this is a very relevant question. So of course, our balance sheet with the current leverage ratio has capacity to increase the debt level, if you like, to make investments. But we do find that the current asset prices are sort of too high to our liking to invest. So there is no sort of immediate urge to do that. But in due course, that is the way we are building investment capacity. As we also tried to illustrate on the deck, there is meaningful difference between net income and breakeven and cash flow breakeven. So we will be able to continue to build some level of funding that can be used for either investments or even further deleverage if we have to. So let’s see how all that plays out. But the size of our balance sheet is quite meaningful. And I think you should expect us to have the capacity to make a splash, if you like, when the time is right and then there’s more also clarity on ship designs.