DHT Holdings (NYSE:DHT) is a crude oil tanker company that operates internationally through management companies in Oslo, Norway, and Singapore. They currently have operating Very Large Crude Carriers (VLCC), Suezmax vessels, and Aframax vessels. Some of their vessels operate on the time-charter market, and some of their vessels operate in the spot market. In the first quarter of 2016, their spot market exposure was roughly 60%. The integration of both markets into their core business gives the company the stability of the time-charter market, which allows them to lock in prices in advance, while also providing the company the flexibility that the spot markets offer.
Recent Stock Movement
In February, I wrote an article encouraging a long play on DHT. At the time, the stock was trading at $5.73. Since that time, the stock has traded as high as $6.44, but closed Wednesday at $5.33. The turmoil surrounding the oil market has contributed a great deal to the volatility in DHT's stock price. That is likely to continue, but with the oil market showing hints of stability, the stock should cease to see the same amounts of volatility that it has in recent months.
Another reason for the stock's recent decline is a disappointing first quarter earnings report. On May 2, the company reported earnings per share of $0.30. This value was down $0.01 from the previous quarter, but it missed consensus analyst estimates of $0.37. However, the company beat Street estimates of revenue by posting revenue of $90.2 million. The stock is down roughly 10% since that earnings report, presenting a nice buying opportunity for many investors.
The future looks bright for both DHT and the oil tanker industry, which will be addressed later in the article. Dating back to 2015 and continuing in 2016, DHT has been in the process of adding six new vessels to its fleet. With the addition of these new vessels, DHT will have one of the largest fleets among its competitors. By expanding its fleet, DHT expects to grow revenues and, consequently, its bottom line.
Another way that the company is looking to grow revenues is through an increased exposure to the spot market. The spot market looks to be a good opportunity for oil tanker companies in the coming months and years, and DHT plans to take advantage of that. They currently have a 60% exposure to spot market, but over the next two years they plan to gradually increase their exposure. By Q2-18, they plan to have a 96% exposure to the spot market, as seen below. Click to enlarge
Source: DHT Company Presentation April 2016
The oil tanker industry is without a doubt a cyclical one. The ups and downs of the tanker industry can usually be tied to the price and demand for oil. The weakness in oil during the past twelve months has been the main reason that the stocks of oil tanker companies have struggled during the same time period. The United States Oil ETF (NYSEARCA: USO), which closely tracks the price of oil, is down nearly 39% over the past twelve months. The Guggenheim Shipping ETF (NYSEARCA: SEA), which tracks the global shipping industry, has incurred almost identical losses, down 40% over the same period. While the price of oil and the state of the shipping industry are not this coorelated, they tend to move in tandem.
The price of oil has increased over 10% in the past month, and the many weaknesses surrounding oil at the beginning of the year have begun to subside. I do not expect oil to return to its low levels we saw earlier in the year, and this is good news for the oil tanker industry. While the price of oil has seen a rebound in the past month, many companies in the tanker industry have not. I believe that this is due to concerns many investors still have about the sector and the oil market, rather than the individual companies, specifically DHT. As the market surrounding oil and the industry continues to stabilize, I believe that investors will once again warm up to tanker industry, allowing it to follow the gains that oil has seen recently.
The rebound and stability in the price of oil should prove to be beneficial, especially since demand for oil is still strong. Many analysts are bullish on the oil tanker industry as a whole and on some of DHT's competitors, such as Euronav, (NYSE: EURN), Frontline (NYSE: FRO), and Teekay Tankers (NYSE: TNK). While sometimes it can be harmful for a company's competitors to succeed, this is not the case for DHT. The company is in no position to lose any market share, and success of their competitors means the industry is moving in the right direction, a positive for DHT. The rebound in the oil tanker industry will be a key to DHT's success in the long term.
While there are several reasons that make DHT an attractive buy, none is more so than its dividend. The company recently increased its dividend, the third time it has done so in the last four quarters, to $0.25. This provides an 18% yield on a company with a strong balance sheet. While this yield is already outstanding, the company has shown that it is dedicated to rewarding its shareholders through a large dividend and increasing that dividend, as previously mentioned. The company's goal is to redistribute 60% of net income back to shareholders through its quarterly dividend, and it has a history of doing so. This is a large part of the reason that the yield is so high. Instead of only distributing a small percentage of net income back to shareholders like many companies, DHT feels the best way to reward shareholders is to distribute the profits back to them.
DHT is not a growth company, and it does not identify as such. This is why they can afford to redistribute so much cash back to shareholders. In a recent company presentation they stated, "We do not aim to be the biggest, but we endeavor to be one of the most respected tanker companies in the world." While they have added vessels to their fleet and plan to continue to do so, they are content with their size, which can put away fears of the company growing too quickly.
The company looks likely to continue increasing profits, thanks to some of the reasons mentioned above, and consequently, increasing its dividend. This alone is evidence of the investment opportunity that this company provides. In a year where the S&P 500 is relatively in the same place it was to start the year, and the average yield in the market is less than 3%, a yield of 18% is enough to excite any investor. Also, unlike many other high yields of this nature, DHT's yield is a consistent one that is here to stay.
DHT's outstanding dividend, as well as the upside of the company, should provide generous returns and income to investors in a market where both are hard to find. I am encouraging a buy of DHT for the long term, to allow the tanker industry to rebound, while collecting an 18% yield.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.