DHT Holdings Management Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: DHT Holdings, Inc. (DHT)
by: SA Transcripts

DHT Holdings (NYSE:DHT)

Q4 2013 Earnings Call

January 23, 2014 8:00 am ET

Executives

Eirik Uboe - Chief Financial Officer and Principal Accounting Officer

Svein Moxnes Harfjeld - Chief Executive Officer

Analysts

Herman Hildan - RS Platou Markets AS, Research Division

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Omar M. Nokta - Global Hunter Securities, LLC, Research Division

Anders Wennberg

Operator

Good day, ladies and gentlemen, and welcome to the DHT Holdings Q4 Earnings Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Mr. Eirik Uboe, Chief Financial Officer. Please go ahead, sir.

Eirik Uboe

Thank you, and good morning. I'm joined on today's call by Svein Moxnes Harfjeld, CEO; and Trygve Munthe, the President of DHT Holdings.

And before we get started with today's call, I'd like to make the following remarks. This conference call is also being broadcast on our website, dhtankers.com, and a replay on this conference call will be available on the website. In addition, our Form 6-K, evidencing this news release, will be filed with the SEC.

As a reminder, this conference call contains forward-looking statements that are governed by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which include statements regarding DHT's prospects, the outlook for tanker markets in general, expectations regarding daily charter hire rates and vessel utilization, forecast of world economic activity, oil prices and oil trading patterns, expectations regarding seasonal fluctuations in tanker demand, anticipated levels of new building and scrapping and projected dry dock schedules involve risks and uncertainties that are more fully described in our filings made with the SEC. Actual results may differ materially from the expectations reflected in these forward-looking statements.

And with that, I'll turn the call over to Svein Moxnes Harfjeld.

Svein Moxnes Harfjeld

Thank you, Eirik, and good morning to all, and thank you for attending our conference call. Our EBITDA for the quarter came in at $18.9 million, with a net income for the quarter of $11.5 million. This equals to $0.48 per share. This also includes $15.4 million in revenue related to the final settlement of the sale of the OSG claim to Citi.

Cash at the quarter end was $126.1 million. We will pay a dividend of $0.02 per common share for the quarter, and this is payable on February 13 for shareholders of record as of February 6.

In line with our communicated strategy, we have agreed to acquire 2 VLCCs built in 2006 and 2007 for a combined price of $99 million. Both vessels will be delivered during February. We will fund the acquisition through a combination of conventional mortgage financing and an acquisition facility, and this has enabled us to act quickly on what we perceive to be a great opportunity, add 2 ships at a very attractive price. We consider this -- them an attractive addition to the fleet, and we will continue to pursue investment opportunities and grow the company as clearly communicated to the markets.

In the end of November last year, we completed a private placement of shares generating net proceeds of $106.7 million. During the fourth quarter, we also have entered into agreements with Hyundai to construct 2 VLCCs with a contract price of $92.7 million each, and this includes certain additions and upgrades to the standard specification.

In January, we agreed to enter into an agreement for a third VLCC at Hyundai at identical contractual terms. Subsequently, our order book consists of 3 VLCCs scheduled for delivery in April, July and September 2016. In December, we paid the 20% predelivery installment on the 2 first vessels totaling $37.1 million. And in January, we paid the installment for the third vessel, equal to $18.6 million.

In November, we agreed a final claim amount of $46 million with OSG related to the claim of $51.8 million filed with the Bankruptcy Court in March 2013. The amount was approved by the court in December. In February 2013, we sold the claim to Citigroup for a purchase price equal to 33.25% of the amount of the claim ultimately allowed, and DHT received an initial payment of approximately $6.9 million in the first quarter of 2013. The final payment of $8.5 million was received in January 2014. The full amount of $15.4 million received related to the sale of the claim has been recorded as shipping revenue in the fourth quarter of 2013.

Further, in November, we agreed a final claim of about $1.5 million with OSG related to 6 smaller claims in the amount of $3.4 million filed with the court in May 2013. These claims have not been assigned to a third party and as the amount, timing and form of any recovery is unknown at this point, we have not reflected this amount in our financial statements.

And with that, I hand over to the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Herman Hildan of RS Platou Markets.

Herman Hildan - RS Platou Markets AS, Research Division

My first question, I mean, the sentiment in the industry has changed quite dramatically, and it as is -- so with the Maersk fleet, there was a fair slide to kind of get control on it. My question relates to further fleet expansions, obviously, the OSG did this, kind of focused on this space. But do you see other alternatives in the market? And also, how do you see competition in terms of being able to buy a larger fleet in the tanker [ph] market at the moment?

Svein Moxnes Harfjeld

I think the first response is that the acquisition of these 2 VLCCs built in '06 and '07 is a proof that demonstrates our ability to act on good opportunities. We think that the average broker assessments will put these ships somewhere between $110 million and $116 million worth, combined. And the price that we bought them for, we think is certainly attractive and demonstrates our ability to conduct these. We are looking at a broad set of opportunities and being single-ship opportunities, potential fleet acquisitions, we stay in very close dialogue with the yards to follow on, on opportunities that will arise there. And we're also considering potential M&A opportunities for the company. So there's a gambit, a wide gambit of business opportunities for us ahead of us. And we've seen also that we have strong support from the capital markets. The shareholders who have taken up their private placement in November have all been very vocal to us that they would like to see the company grow and get bigger. And so with that, it also gives support from the lending banks. We certainly think that the company is in good position to continue to expand.

Herman Hildan - RS Platou Markets AS, Research Division

Okay. And in terms of new building capacity, how much more do you think is available in 2016? Or are you able to get any additional deliveries to the 3 you already have in '16?

Svein Moxnes Harfjeld

We, as I said, we will stay in touch with the various yards and we think there are potential for maybe a handful more 2016 deliveries. There were some rumors out last week that there was some private entities that had secured 2 ships for '16 with a price tag of 99. So prices are clearly up, and we really think there's a limit to how many more 2016 deliveries you can see from the call it recognized yards, which again bodes quite well for the whole outlook. We think that this is one of the attractive aspects to the sector at this point. But the supply side on the large tankers is pretty much capped for the next 3 years. And when you couple that with the expectations for continued demand, we think that really is the foundation for the recovery we're seeing coming.

Operator

Our next question comes from Jon Chappell of Evercore.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Svein, I was hoping for a little bit more detail about the financing for the 2 secondhand ships. Has the conventional mortgage or the bank financing already been secured? And if so, what percentage? And then also, can you just give a little bit more explanation about the terms of the acquisition facility?

Svein Moxnes Harfjeld

I think in line with what we have communicated in general, we are considering leverage over time for 50% of acquisitions. So the conventional mortgage financing on those 2 ships will be in line with that. And certainly, we expect general pricing of this type of financing to be in the range of 300 to 350 basis points overall. We secured an acquisition facility, which has a tenure of less than 1 year. And I think just to speed up things here, as this opportunity came about, this enabled us to react very quickly and secure these ships at what we perceive to be a very attractive price. So the cost of such a facility is higher than the general conventional mortgage financing, but still, from our perspective, viewed to be very attractive. I think, in general, we have very clearly stated to the market that we intend to continue to grow the company, and this involves identifying additional investment opportunities and also coming to the market to raise additional capital. And then we'll look closely at opportunities to do so as we move forward. You can view this acquisition as something more of a bridge financing, if you like, so.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Yes, that's what I figured. So if we assume that you're going to use either cash on hand or equity at some point to repay the acquisition facility and we compare that to the cash on hand at the end of the year and your capital commitments to the newbuilds, what would you estimate your current liquidity situation is, as we try to think about how many other assets you could potentially buy without an equity raise?

Svein Moxnes Harfjeld

I think based on the cash you see at the end of the year, of course, we have the first payment on the third newbuild that has already taken place subsequently. And then the next installments on the newbuilds are coming in the second quarter, with 10% of the contract price for each of the 3 ships. And then there is really nothing on CapEx commitments until the third quarter of next year. So I think you will see -- we feel that we have a quite comfortable cash position. But we still think that this market, you ought to have a prudent capital structure. As we have said numerous times, not too much leverage and also to keep a solid cash balance at all times.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Got it. And if we think about the 2 moves that you've made in the last 2 months or so, let's call it newbuilds versus the secondhand, and I know you're probably looking at all opportunities. But over the last year, it seems like you've kind of come around a little bit to the eco arguments. But with what Trygve has said earlier about very few slots available for '16, how do you kind of balance the desire to have ships on the water today versus the fuel efficiencies that you're starting to see or hope to see, but potentially not getting a vessel on the water now for 3 years?

Svein Moxnes Harfjeld

I think that the 2 moves you refereed to demonstrate that we are committed to both, both newbuilds and secondhand, and we think that they're both attractive. And as you say, with the secondhand, of course, you get ships in the water immediately and you get to participate in the spikes. But in the long run, we think that the fuel efficiency is going to be an important factor. As we've said, we're happy doing both.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Last one for me. The spot exposure in the fourth quarter, about 42%. As we are kind of coming out of the depths of the downturn, and I'm not sure how sustainable current rates are, but how do you kind of feel about your chartering strategy? Would you want to be far more spot exposed relative to your historical bent towards being more charter covered in the near future?

Svein Moxnes Harfjeld

It always tough to be [ph] -- coming into 2013 that we felt it prudent to -- as the most relevant certainty about the earning potential for last year, we thought it prudent to secure some shorter-term employment on some of our fleets. But we've been very conscious of keeping kind of that -- all those charters in the kind of 6 to 12 months' length in order to retain the flexibility to increase boat exposure when we see that the fundamentals are changing. So I think the current spike that we're in demonstrates to us that the underlying balance in the market is better than what people said coming into -- in '13. We certainly expect 2014 to be better than '13. But you also expect '14 to still be a bit choppy and lumpy. So -- but we will increase the spot exposure through 2014 and increase market exposure in general. And these 2 ships that we just have agreed to buy, they will trade in the spot market, and through that, increase our spot exposure immediately.

Operator

Our next question comes from Omar Nokta of Global Hunter Securities.

Omar M. Nokta - Global Hunter Securities, LLC, Research Division

I just wanted to follow up on the last commentary about the spot exposure. Could you just give a sense as to, say, starting at the beginning of this year, where you are with the 4 VLCCs, 2 Suez and 2 Afras, that are on the water currently? Which -- what number are on the spot and what are on charter?

Svein Moxnes Harfjeld

Currently, the 2 Suezmaxes and 2 Afras are all on short-term fixed-rate charters. Of the VLCCs, we have 1, the DHT Chris, she is on a fixed-rate charter that expires in the second quarter this year. We obviously are exposed to the spot market. The DHT Eagle, we are fixing ourselves. She was just recently fixed on a long voyage from Venezuela to the Far East at sort of the current healthy rate levels. And then the DHT Phoenix is participating in the TI pool. As you know, there would be a little bit of a time delay from what you see in the bunker reports on ongoing rates until it shows up on the P&L statements, simply because we're fixing somewhat out, and they need to complete the current voyages before they commence. And lastly, the DHT Ann, she is on a time charter to coke, but that's a freely floating rate tied to the DD3 index. And that gets more of an immediate participation in the upswings than the other 2.

Omar M. Nokta - Global Hunter Securities, LLC, Research Division

Okay. And I'm not sure if you'll be able to disclose for the Eagle and the Phoenix, do you have a sense of what percentage of days for Q1 have been fixed and at what rate?

Svein Moxnes Harfjeld

The TI is -- and also, that is reflective of what youarall [ph] reported, approximately 40% of TI's first quarter capacity is fixed at approximately $36,000 a day. So that's certainly healthy levels.

Eirik Uboe

The Eagle is fixed for close to 2/3 of the first quarter at rates north of that, north of 50.

Omar M. Nokta - Global Hunter Securities, LLC, Research Division

Did you say north of 50?

Svein Moxnes Harfjeld

Yes.

Eirik Uboe

Yes.

Omar M. Nokta - Global Hunter Securities, LLC, Research Division

Okay. All right. And then just also, I wanted to just change the topic and not get too deep into it, but wanted to get a sense of the dividend. You declared another $0.02 dividend. Obviously, the annualized $0.08 payout seems to be very well protected and has substantial upside, whether the market continues to improve or just stays maybe at lower levels from here. How do you guys see the dividend? And is that something that the board or you guys would look to actively grow from here? Is this something that we can expect a boost this year? Is it more of a 2015 or beyond story?

Svein Moxnes Harfjeld

We think that the current market environment, and certainly through '14, is a time that we would focus on investing and growing the company. And as such, the potential cash that we will generate through the year will be applied accordingly. We think, 1 year, 18 months ahead of us, you should expect us to slow down investments and start a kind of a harvesting period, and you build up in what we expect to be the upturn in the market for more sustainable rates. And in that phase, there will be opportunities for us also to increase the dividends and return more monies to shareholders. But in this market, we are certainly focusing on investing and growing the company. And as we've said, we are looking to acquire both new and -- or newbuildings and the secondhand tonnage. We have a strong focus on robust cash-taking levels that again will enable us down the road to increase dividends significantly. The current cash breakeven on our VLCCs is $13,000 a day, and that is a fixed interest for debt service and G&A. And these 2 new ships we have acquired will have marginally higher cash breakeven levels. But again, I think these will be all very good investments that will return a lot of capital to shareholders over time, and this is really how we focus on our investments.

Operator

[Operator Instructions] Our next question comes from Anders Wennberg of Brummer.

Anders Wennberg

Just another question on the spot versus time charters. I understand that the -- I think you said that the Suezmax and Aframax time charters are coming off in June to spring, February to April time frame. But I also understand they have some kind of extension options. So have the customers declared that or are you actually getting them available for the spot markets? I didn't get that.

Svein Moxnes Harfjeld

It was with the 6, in particular, the DHT Trader, the client, BP, have an option to extend, which they did. So that the new period of 6 months will commence in February, and they have no further options to extend than beyond that 6 months' period. So that charter, we expect them to expire in August on the DHT targets. That charter is due to expire in March. But then, the client has an option to extend also for another 6 months and that option is -- we will have to see whether that is declared or not. On the DHT Sophie, that charter has broader flexibilities. It trades on the West Coast of the U.S., so that charter has a min-to-max range, if you like, from between the second quarter to the fourth quarter. The DHT Cathy is extended with the current Phillips 66 through the year. From the VLCC side, the DHT Chris, that charter is expiring in the second quarter. And we have 3 VLCCs in the spot market as we speak, and the 2 ships that we just have acquired, which, with immediate delivery, will also be in the spot market. So essentially, we'll have -- an immediate effect, we'll have 5 VLCCs in the spot market, which is soon to be 6.

Anders Wennberg

Okay, good. And then on -- back to the overall question of growth. I know we all appreciate you growing in this market that has much better supply-demand balance than before, only a couple of months ago. However, how much has pricing gone up for 5-year old vessels? How much -- how is it that you can actually get a hold of those of kind of -- those fleets? And then also, given that prices actually have gone up, have you any idea about how far do you want to grow, how much further capacity you want to add? Do you have any kind of target for that?

Svein Moxnes Harfjeld

I think, certainly, if you look at the broker evaluations over a 5-year old site, it has some VLCC move from, say, maybe the mid-50s to now the high-60s. So percentage-wise, that is a meaningful move. But you need to be aware that there are a few transactions in general, so these are very much broker assessments. So the actual data points of a transaction may be different. So maybe the low wasn't quite as low as the brokers estimated. And then certainly, there is now more buying interest, so there's more support for those evaluations that we see. But with that said, if you look at the 2 -- the secondhand we just acquired, if you run the math on them and you assume a 20-year lifespan, you'll need about $30,000 a day to get a 10% unlimited return thereabout. And this compares to historic average earnings over the past 20 years with VLCCs in the mid-40s. We think there's definitely still attractive investment opportunities out there, both on new -- brand-new ships to somewhat more seasoned ships. So we think we're still in the investment window of the cycle. Keep in mind that the acquisition price of these 2 ships is somewhere kind of 10%, maybe 15% below what the broker assessments have been. So again, it demonstrates that we have the ability to capture a very attractive opportunity on a pretty short notice. Not to say that we can always do things like this, but demonstrates, at least our ability to respond, when the opportunities are right.

Operator

[Operator Instructions] As we have no further questions at this time, I would like to hand back to our speakers for any additional or closing remarks. Thank you.

Svein Moxnes Harfjeld

Well, it remains to say thank you very much for attending our conference call and being interested in DHT, and we will continue to work hard and deliver on our strategy. Thank you very much, and have a good day.

Operator

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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