DHT Holdings, Inc. (NYSE:DHT)
Q4 2015 Earnings Conference Call
February 04, 2016 08:00 AM ET
Eirik Ubøe - CFO
Svein Moxnes Harfjeld - Co-CEO
Trygve Munthe - Co-CEO
Herman Hildan - Clarksons
Fotis Giannakoulis - Morgan Stanley
Amit Mehrotra - Deutsche Bank
Chintan Desai – UBS
Charles Rupinski - Seaport Global
Erik Stavseth - Arctic Securities
Good day, and welcome to the Q4 2015 DHT Holdings Inc. Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Eirik Ubøe, Chief Financial Officer. Please go ahead, sir.
Thank you. 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 through February 11, 2016. In addition, our earnings press release will be available on our website and on the SEC's 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 including DHT’s prospects, dividends, share repurchases, and debt repayment, the outlook for tanker market in general, daily charter hire rates and vessel utilization, forecast of world economic activity, oil prices and oil trading patterns, anticipated levels of new building and scrapping and projected dry-dock schedules. Actual results may differ materially from the expectations reflected in these forward-looking statements.
We like you to read our periodic reports available on our website and on the SEC’s Edgar system including the risk factors in these reports for more information regarding risks that we face. I’m today joined by DHT's Co-CEOs Svein Moxnes Harfjeld and Trygve Munthe.
With that, I will turn the call over to Trygve.
Thank you Eirik, and good morning and good afternoon to everyone and thank you for participating in DHT's fourth quarter 2015 earnings call. This earnings call will follow a slightly different format than what we have done in that past. First, we'll go through a slide presentation and you can find the link to the webcast on the homepage of our website dhtankers.com. Through the presentation, we will discuss highlights from the quarter. We will bring you the status and the deleveraging program. We will explain our updated capital allocation policy and we will discuss how DHT is currently positioned. And finally we will try to illustrate how DHT will perform financially in some different tanker market scenarios. And then after the presentation we will be happy to take your questions.
We have had a strong and busy fourth quarter as well as the start in the current quarter. On the charting front, we have extended three existing time charters and entered into one new one at rates we consider attractive. They provide good returns on the investments and they offer increased visibility on future earnings and cash flow. On the investment side, we have grown the fleet with the deliveries of two newbuilding VLCCs both of which have been delivered ahead of schedule. We have also sold one of our old Suezmaxes at what we consider an attractive price.
When it comes to capital location, we have paid dividends in accordance with our policy. And we have also delivered our balance sheet further by prepaying about $38 million in the fourth quarter and another $47 million of mortgage debt since the beginning of this quarter. Additionally, we have purchased $3 million worth of our convertible note. Combined, these prepayments represent some 13% of our interest-bearing debt as per quarter end. And as a result, we now have four debt-free VLCCs.
Svein Moxnes Harfjeld
Then on to the spot earnings. The fourth quarter’s spot earnings was the best quarter of the year with TC coming in at $62,200 per day. The large tanker market is regarded as seasonally volatile, but looking back, our average spot earnings in 2015 have been remarkably stable over the quarters. Our average spot earnings for the year were $58,700 per day and represent an excellent performance and compares well to the competition.
The achieved TC is a result of our high quality fleet and ships combined with an experienced and dedicated team running them. You should note that our reported TC does not include profit sharing from time charter. If we had added profit sharing from time charter to our spot earnings, the average for 2015 would be $60,000 per today. We are off to a great start to 2016 with two-thirds booked at solid rates. We are so far booked 66% of the first quarter at $73,300 per day.
And then on to our P&L. We are certainly pleased with our fourth quarter numbers. The TC revenues at $80 million and EBITDA at $60 million, it was a solid quarter. Earnings per share came in at $0.35 per share. As such, we will pay a cash dividend of $0.21 per share on February 24 to shareholders of record as of February 16.
Looking at the year as a whole with EBITDA of $215 million and net income of 105 million, it was certainly a strong year for DHT. Earnings per share for the year were $1.13. Quarterly cash dividends for the financial year of 2015 will reach $0.69 once the fourth quarter cash dividend is paid later this month.
Then on to our balance sheet. It is a robust balance sheet with net debt to book value of vessels at 41%. It should be noted that the yearend cash balance includes $50 million drawn down on December 29 to finance the VLCC newbuilding DHT Leopard that we took delivery of on January 4.
As Svein mentioned, there has been some important subsequent event since quarter, so we would therefore like to take you through the balance sheet effects of them and also percent of pro forma balance sheet based on delivery of the four remaining newbuilds. As part of the focus, we will be on interesting bearing debt to total assets. We have combined the current and long-term portion of interest-bearing debt into loan line, and simply calling it interest bearing debt.
So first, as Svein said, we took delivery of the DHT Leopard on the 4th of January and we have drawn down the debt of the same ship – for the same ship on the 29th of December and the balance sheet effect of the delivery is simply [indiscernible] cash and royalty into vessels.
Secondly, we have since the beginning of the year prepaid the loan of the DHT Hawk and Falcon in its entirety, $42 million, we prepaid RBS with $4.9 million and we have purchased $3 million of our senior and secured convertible notes. So based on these adjustments, you see that an adjusted balance sheet shows an interest bearing debt to total assets of 44.5% and net debt to vessels book values at 39.7%.
We would now like to show you the pro forma balance sheet based on an assumed immediate delivery of the four remaining newbuildings. These newbuildings will grow our VLCC fleet by 25% over the next five months. The remaining CapEx of some $260 million of these four ships, and note we have already paid some $166 million, including the delivery installments for these ships, will be funded by $25 million from cash at hand and about $191 million of mortgage debt. The debt financing, which represents 50% of purchase price is secured and fully committed.
So as you can see on a pro forma basis with all newbuilds delivered, interest bearing debt to total assets now stands at 51.3%. This is a significant improvement over the 56.5%, we had before we started the deleveraging campaign. And as a remainder, this is all based on the fourth quarter balance sheet.
We announced the capital allocation policy in July last year. It’s stated that we would return at least 60% of ordinary net income to shareholders. We further stated that we intended to use a significant amount of surplus cash flow off the dividends to delever our balance sheet.
As you will see in this table, our quarterly cash dividends were growing through the year. You will also see in this table that we made ordinary debt prepayments of $32.9 million during last year. Delevering since the second quarter last year totaled $107.9 million, and this number includes $49.9 million prepaid during the first quarter of this year.
As illustrated on the previous slide, the strong freight market has allowed us to make meaningful efforts in delevering our balance sheet. Since early January, the capital markets have been rocky and that is the case with most comparable stocks. The market validation of our company has also dislocated from cash generation, earnings and underlying values. As such, we thought timely to update our capital allocation policy to include a securities repurchase program. It is important to note that our quarterly cash dividend remains unchanged at 60% on net income. What’s new is that we opened up borrowing back our securities. We envisage that this will continue – that we will continue to delever the balance sheet, although not necessarily at the same pace.
Our new capital allocation policy reads as follows: DHT intends to return at least 60% of its ordinary net income, adjusted for extraordinary items, to shareholders as quarterly cash dividends. Further, DHT intends to allocate surplus cash flow, after paying such quarterly cash dividends, to delever its balance sheet, to repurchase its own securities, or for general corporate purposes. The extent and allocation will depend on market conditions and other corporate considerations. DHT will apply its updated capital allocation policy starting with the first quarter of 2016.
Let’s now focus on our time charter book. For 2016, we have in total 37% of our available tanker days, and expect to generate about $102 million of revenue from these time charters. That means that 62% of our estimated cash costs for the year is covered. But still we have 69% of our VLCC capacity open in what we expect to be another rewarding year. For 2017, we have 16% of capacity and covered approximately 29% of expected cash cost.
Switching then to cash breakeven, as most of you know, this is a key metric for us and with this slide, we like to illustrate where this lies for 2016. Starting on the left side, in the first bar, we have stacked expected cash costs for the year. This is all cash costs. Operating expenses, debt service, G&A and maintenance CapEx. However, it should be noted that a market related debt repayment structure in the RBS loan is not included as it will not apply at rate levels around cash breakeven levels.
So this cash cost for the year is totaling about 163 million. And in order to generate that type of revenue, we need the VLCCs to earn $22,600 a day to Suezmax's 18,600 and the Afra’s 11,200. However, 37% of capacity has been fixed, generating 102 million in revenue, which means that the VLCCs in the spot market will only need to earn about $13,600 a day, indeed, a very comfortable cash breakeven.
The last stacked bar illustrates the cash generating capacity of the company, if the spot VLCCs earn $42,500 a day, which is the historic average and $60,000 a day respectively. And as you can see, if we get 2016 in line with 2015, we should generate over $200 million of cash flow, beyond what cash cost for the year is estimated to be. And if we drop down to 20-year historic average, we will generate over 130 million, both cases quite rewarding for DHT in our opinion.
And to be clear, this slide does not represent our market view. Following up on the two previous slides and previous commentary, it illustrates the downside protection built into our company in combination with a significant upside potential. The low case illustrates that our fixed income allows us to be profitable even in a $30,000 per day sport market. The historical average case and the high case simply illustrates the very attractive operational leverage in the company.
And on that note, we open up for questions.
Thank you. [Operator Instructions] We will now take our first question from Herman Hildan from Clarksons. Please go ahead.
Good afternoon, guys. Can you hear me?
Yes. Good afternoon.
So, first, on how you think about your portfolio purchase, is the strategy to, I know and the years going forward always have two-thirds of your cash breakeven covered at one year forward or so, how should we think about that?
No, it's not really a target number for that, Herman. We just think that in the current time charter environment, these rates make sense to us and we're happy to secure it and as a side effect, it was just meant as an illustration how much -- a third of the capacity is covering in terms of the cash cost.
Okay. And kind of also obviously, in Q4, I think you had some 50 plus million dollars of operating cash flow and you spent about 20 of it paying dividends and kind of the $50 million buyback, is that call it for a year or is there an idea that, I mean, obviously, it depends on the prices and everything, but are you keen on having a lower leverage on 50% or are you -- do you think 50 is a very conservative number or a right number?
As you will see Herman, the program extends through February 2017. So it's over a year. The nominal amount is close to 10% of our market cap. But I think importantly as we have stated is that we will use this to look at both securities and also then some additional de-leveraging. So I think it's fair to say we will be a bit optimistic and look at where we can create most value for our shareholders.
We will now take our next question from Fotis Giannakoulis from Morgan Stanley. Please go ahead.
Hi guys, and congratulations for the good quarter. What I want to ask is about your capital allocation policy and you mentioned about being open in share buybacks. Can you share with us how do you view the value of your stock, is it the NAV that you are considering is it the earnings multiples, how do you think what is the right price to buy back your stock?
I think what is intriguing to us is, as we just illustrated, if you get rates in 2016 similar to what we saw last year, we should generate over $200 million of cash flow. And with the market cap of 550, we think that’s quite attractive. And even if you drop down to 42,000 a day, you’re still getting only four times cash and we think that's attractive.
Does the NAV play any role and also there is a lot of discussion about asset values, we have a very strong freight market for crude tankers, but at the same time asset values the last 12 months instead of going up they have actually come off a little bit. Where do you see asset values moving in the next year and given your outlook what would maybe more attractive at the current market given your current stock price, share buyback or further asset acquisitions?
I think referring to our earlier statements that we are typically not communicating house view on NAV. We think that Street average is high $7s or around $8. And as we stated also on this call, we do think that our current pricing in the capital market is dislocated from as we've alluded to the cash generation potential of the business, but also as we’re reporting our earnings as well as underlying values. You are right, we are not really seen over the past 6 to 12 months any big moves in asset values.
And we think some of this is reflection on limited capital being available in the industry. But investors should look at this on a positive note that they are able to buy into companies such as DHT in a way that enjoying these earnings without asset values having been appreciated. But given where we trade today we of course trade at a significant discount to the Street average NAV. As we all know NAV is also somewhat of a moving target. So we are not specifying publicly a price that we will act on this program. We will report this quarterly what we eventually will execute on.
Can I ask about the current state of the market right now and if you can describe some of the trends in crude flows in particular how the Iranian oil is moving, if you have seen any movement either from the Iranian fleet or from your market vessels that they are loading to the region. And also if you can comment about the US - the lift of the US export ban, if it has - if it makes any changes in oil flows and the way that your vessels are trading?
Well that was a quite a few questions for this. But in general on the market, I think it's important that we find ourselves and we are in the midst of a very healthy tanker market as Svein said we we’ll book two-thirds of our capacity for the current quarter at $73,000 a day levels. Yes, on a weekly basis, the rates have come off the peak around $100,000 a day down to today may be mid-40s. But mid-40s is still very healthy rate. So we don't think there is any reason to get very panicky about this short-term volatility. As a matter of fact we saw it a few times last year when rates in the short-term tank and then it recovered quite quickly again. And if you look at our quarterly earnings on bulk ships through last year, they were remarkably stable, so despite that short-term volatility.
Then to your crude flow question, we’re certainly getting incoming phone calls from Western or European oil companies that want to be able to go to our van and pickup cargo. So there is definitely buying interest out there. There are some wrinkles to be ironed out for the ship owners to be able to do those barrels quite yet, but we think that will be sorted in relatively short time. And as such we do expect it to add to demand.
Can you describe if you see right now any changes in relation to the Iranian barrels or in relations to the US export ban lift, cargoes moving out of the US or Iran?
Svein Moxnes Harfjeld
On the Iranian side, we had incoming requests about lifting cargo out of Iran. But to Trygve’s point there are still some issues to be sorted out, in particular it relates to P&I insurance where the international group has their reinsurance -- part of their reinsurance program placed in the United States. So settlement of potential claims under that insurance coverage could be a challenge. One could not transact in US dollars for one. And now, as of late, we’ve seen also Saudi and Bahrain adding some trade restrictions on ships that are traded at Iran.
So, there are still issues to be sorted out following some political decisions and to see if you can make this operational. On the US side, I think there is limited flows for now, there has been some smaller cargoes going out but they are opening up and we think that they should export their large fleet products and this should eventually also be good for large tankers that they would need to still import some of the more heavier rates for the refineries. So, one could expect continued or potentially even increased import of crude from the Middle East into the United States.
Thank you that's very thorough. And one last question about the oil contango, we see that the two months Brent spread is between $1.5 and $2 is that seems to make floating store as profitable at levels close to $40,000. Have you seen any activity, any new activity for floating storage and given the fact that the floating storage becomes economical at so close levels to the current spot market. Have you seen any increase in enquiries for period contracts 6 to 12 months contracts that will help time charter market?
Svein Moxnes Harfjeld
I think there are number of traders asking for short-term time charters but with large degree of optionality in their favor and we are not typically entertaining that. But this contango play is very much micro play, and one day it’s in the money, the next day it’s out of the money. So people need to act very quickly to make this work unless you have people that make a longer positional, say they book a ship for year or two. And they get options in that charter to use it for storage for either part of the period or the whole period. Typically, I think, owners are not too keen on providing storage options for really long periods as it typically hampers the whole over time and you would need to scrub at least or in some of the worst cases, then drydock shipped to get a hold back in good trading condition.
Thank you. We will now take our next question from Amit Mehrotra from Deutsche Bank. Please go ahead.
Thank you. I think there is about half a question left to be asked but I will try anyways. A quick question on asset values and just following up on your comments. Conventional wisdom would obviously suggest that asset value should be higher or improving in the current rate environment, but I guess counter intuitively, I think also it’s encouraging that they have not in terms of what it means to the sustainability of the strong cash flows. So I’m just trying to understand based on obviously your experience, how you observe the relationships between rates and asset values at different points in the cycle, really the early point in the cycle and also the latter point in the cycle and if the lack of recovery in ship values is actually bullish sign for the sustainability of the market. Thanks.
I think the levels of the second-hand values has been discussed on prior calls and in general and I think it comes back to what we have said before that there is quite a few people in the private side of this business, that is a bit down and out because they typically own dry bulk and even offshore assets in addition to tankers. So quite frankly they are not in a position to develop and buy anything. And I think that is a very real factor behind the lack of asset value appreciation.
In a normal tanker market, with the kind of rate levels that we have today, you are absolutely right, second-hand values would normally be higher, but the good news and the fact that it hasn’t really rallied this time around is that is no incentive to go up and contract for newbuilds when you can buy second hands in the VLCCs in the high $70 million or $80,000 apiece. So we agree with what you allude to that the sort of lack of asset value appreciation gives hope that this healthy market can last a little bit longer.
Okay, great. And just one quick one if I may regarding you comment on using the significant amount of surplus cash flow to delever the balance sheet. I know you are not going to precisely talk about capital allocation, that’s fine. But you obviously have a pretty good LTV right now and it’s only most likely going to get better over the next 12 months. So how do you sort of balance deleveraging while at the same time, I guess the way to put it is optimizing the balance sheet to really create more equity value and so how do you balance the two because it’s going to get to a point now when you use that excess free cash flow, so to speak, you are going to get to sort of levels that are well below sort of the peers over time and so just trying to understand how you balance those two items. Thanks.
I think it’s hard to give you detail still on this. We need to consider market conditions at any given time really, but in the bigger picture, we do think it serves tanker companies well to have a very robust balance sheet that we get all times. So as we all know, this industry presents opportunities both in the down-cycle and the up-cycles for a variety of reasons. And we think it’s only prudent to build the long legs in our company and hence there is a continued focus on delevering. We also at the same time returning a meaningful amount of capital to the shareholders firstly through this cash dividend, but then also as we now said, opening up for buying back our own securities.
Okay, that’s helpful. Thanks a lot. Appreciate it.
Thank you. We will now take our next question from Spiro Dounis from UBS. Please go ahead.
Hey, guys, this is Chintan filling in for Spiro. Thank you for taking my call. I just had a couple of quick questions. The first one, can you walk us through the decision to buyback the convertible bonds before the equity and how you are viewing the relative value of each as you provide – as you pursue your new capital allocation strategy?
I think in our book, buying back the convertible note is first and foremost deleveraging. It’s the most expensive debt that we have out there. It carries a coupon of 4.5%. And of course in addition there is a conversion rate and from that perspective it serves both purposes. It delevers and it also reduces the full share count. Going forward, I think it’s difficult to sort of speculate on that whether we are going to do more stocks than converts or so forth. I think that really depends on where things are when we start the program.
Okay, great. That makes sense. Your actions so far had been pretty consistent prior to what you’ve guided, but to some degree some view it as defensive given the vessel sales, deleveraging and chartering. How would you respond to those that say you are preparing for a turn in cycle?
Svein Moxnes Harfjeld
Could you repeat that question, please?
Yeah, I mean, just with the vessel sales, deleveraging and chartering, there is some out there who may say you’re preparing for turning the cycle, I am just wondering to get your view as to how you would respond those who say that?
Svein Moxnes Harfjeld
I think we have a well-defined strategy of how we want to play different parts of the cycle and in a way, it’s not like just [indiscernible] where you can do everything at one go, you need to do it when there is liquidity at the different times in the cycle. We were vulnerable at sales between the second half of 2013 and into first half of 2014 and buying essentially 16 VLCCs at very good prices and positioning the company well for this upcycle and strong earnings. And now, at the same time, we also placed orders for newbuilds, so the sale of the Suezmax is the oldest Suezmax we have, so you can view that as part of fleet renewal. Assets like this on average have a healthier life, they need to be replaced at some point.
When it comes to charters, these charters are now that we can secure in excess of the 20-year average rates. We think that the return on investment compared to what we have paid for these assets will be very handsome. And it provides the company with lot of flexibility as we also bring down secure -- a good portion of the cost brings the down the cash breakeven of the company and gives us excellent maneuverability at really any point in the cycle.
I think it’s important to stress that chartering health is more a reflection of how we think that mid-40s is very attractive to get them on old ships and new ships alike. It is not to flatten down actions and get ready for a very tough storm. But we continue to delever, and we just think it’s good business. And I think in this industry, there are some curve balls being drawn every once in a while and we would like to have a DHT that is well-positioned to handle whatever is coming at us. But we do not have a high probability on such a scenario, but we cannot put it down to zero either. So that’s why we are doing what we are doing. And finally, by delevering, we are also extending the time when you can actually payout dividends and return capital to shareholders.
Okay, great. Thank you and congrats on the quarter.
Thank you. We will now take our next question from Charles Rupinski from Seaport Global. Please go ahead.
Thank you and good afternoon. Congratulations on the strong performance for the quarter. Most of my questions have been answered, but just I was curious what you’re hearing in terms of longer term charters, three to five years. Is this something that oil majors or major customers are becoming more accepted too and is this something that you think could be part of the mix going forward, some of the longer length charters?
I guess, we have stated on number of earlier occasions, the liquidity and the long-term market is rather shallow. But then we are open to long-term charters for sure, three, five, seven, ten years as long as numbers make sense. But again, liquidity is limited. So there are somebody – some clients [indiscernible] every now and then checking prices and in discussions, some might be a bit more optimistic, some might just want to have a certain percentage of their requirements covered long-term with good ships and good operators, such as ourselves, but don’t think the markets would expect that there will be a flurry of say five year charters coming into anybody’s book at any time really.
I see, so no flurry, but I mean, just in terms of over the last few months or quarters has it gone directionally one way or the other, are people more interested a little bit or less interested or is it exactly the same?
I guess, you have seen from our news, certainly we have been more interested as the pricing has gone up and making more sense to us. And in the current environment, at the moment, you don’t really have to give options to the customers in any meaningful form. So that to us is attractive. I think there will always be clients there to talk about time charter, but you look back in 2013 or even in early parts of 2014, the rates were rather miserable we think, so we were not really that excited by its own business. So [Technical Difficulty] long-term charter, but that’s not the business we are in.
I understand that. Thank you.
[Operator Instructions] We will now move on to our next question from Erik Stavseth from Arctic Securities. Please go ahead.
Hi, guys. You seemed to me to sound like the most conservative, crude tanker, the list of entities out there and I mean, you've kind of moved into harvest mode in terms of deleveraging and then chartering out to take some covered and make sure you have a solid balance sheet, but what could make you change your view? I mean, I realized that you're sort of painting a picture of being optimistic here, but it does sound to me that you're kind of positioning for the bad times.
I think the result -- the two things that you allude to is building up some more fixed income and de-levering and really to Trygve’s earlier point, you're creating a better visibility on earnings and you are then also potentially extending your ability to pay dividends and we gather from multiple capital markets. If there is some uncertainty amongst investors, it's really how long this market is going to last. So to build some better more clarity and certainty on this, we just think it's a good business. And we've been around there for a while and in running shipping businesses for quite a while. So we think to be a little bit prudent really any time is just wise.
We have no further questions in the queue.
Svein Moxnes Harfjeld
Okay. So then, we just thank everybody for your interest in DHT and wish you a good day. Thank you.
That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.
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