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Double Hull Tankers, Inc. (NYSE:DHT)

Q3 2007 Earnings Call

November 19, 2007 9:00 am ET

Executives

Eirik Ubøe - CFO

Ole Jacob Diesen - CEO

Analysts

Jon Chappell - JP Morgan

Ken Hoexter - Merrill Lynch

Natasha Boyden - Cantor

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2007 Double Hull Tankers Incorporated Earnings Call. My name is Shaquanna and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the call over to your host for today, Mr. Eirik Ubøe, Chief Financial Officer. Please proceed, sir.

Eirik Ubøe

Thank you. Thank you and welcome to all the participants. Before we get started, I would just like to make the following introductory remarks. This conference call is also being broadcast on our website, dhtankers.com and a replay of 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 includes 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 tank demand, anticipated levels of newbuilding and scrapping and projected drydocking 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 would like to turn the call over to Ole Jacob Diesen, the CEO of Double Hull Tankers.

Ole Jacob Diesen

I shall go through the business situation of Double Hull Tankers for the third quarter of 2007, while Eirik Ubøe will focus on financial aspect for the period.

Taking that everyone has seen the press release this morning, and I will not go through that in detail. What I would say is, that in general, the third quarter of 2007 was a quarter that show the benefits of having vessel employed on time charter, with a fixed base rate and profit sharing, which together provide for stable earnings and less market exposure.

Technically, the vessels have operated well over the period all the way. A short run down on the technical side, the Overseas Rebecca successfully undertook the period's scheduled class interim survey, which overall resulted in 22 days of offhire, of which nine days relate to the third quarter.

Overseas Ania, a periodic scheduled Class interim survey was planned for the third quarter, but is now being postponed and scheduled for the second quarter of 2008. This vessel, just like the Rebecca, is in the lightering trade and restricted possibility of undertaking preparatory work, the vessel's offhire period is also expected to be above 20 days.

The demand for oil transportation by sea, I should focus on, an increase in terms of tonne-mile by an estimated were close to 5% compared to 2006. China remains the primary driver for the tanker demand growth, but also OECD countries are now having a positive effect after more than a year of declining consumption.

The freight market in the third quarter was, as I initiated, weaker than expected and below the third quarter of 2006. Overall, the period was affected by the restrained cargo availability by OPEC and low refinery utilization, primarily the latter, as a result of low refinery margins.

Additionally, we are also experiencing a backwardation of oil prices that led to counter cyclical loop drawing on the inventories over the third quarter. The average time charter earnings for the pools that our ships are employed in, were $34,500 per day for the VLCCs and $22,100 for the Aframax vessels. This compared to the third quarter of 2006, where the rates were $64,200 and $33,000 respectively.

DHT currently time chartered all its vessels to OSG at a base rate of about $37,400 to $37,500 for the VLCCs and $24,800 and $18,800 respectively for the larger and smaller Aframax tankers. This means that the company is provided with a steady minimum cash flow regardless of any negative fluctuation in markets, such as the present doldrums.

In addition to the base hire, Double Hull Tankers has an additional hire arrangement with OSG, whereby Double Hull Tankers has paid 40% of the average revenue that the vessels earn within the pools. Over and above, the base charter hire and -- the additional hire is calculated on a four quarter rolling average and also on a fleet wide basis.

During the third quarter of 2007, Double Hull Tankers has generated additional hire under a profit sharing arrangement to the extent of $2.3 million, which is about 11% of total revenue, over and above the base earnings of $17.8 million for the period.

Concerning the fourth quarter, OSG has reported that as per October 12, the Tanker International Pool for the VLCCs have booked 44% of its fourth quarter capacity at an average rate of $25,500 per day. At the same time, the Aframax International Pool has reported that they have covered 13% of its quarter capacity at $17,000 per day.

Now, about 13% of the Aframax International Pool capacity for the fourth quarter is charted on the period charter rate at $28,000 a day. Now, these rates have to be looked upon in context with what the time charter minimum earnings that always Double Hull Tankers is achieving from their charter with OSG, which I just mentioned above, namely, the time charter rate of 37,500 for the VLCCs and 24,800 for the large Aframaxes and 18,800 for the smaller Aframaxes.

Now, concerning the oil supplies, at the present level of mid 90s, this gives an incentive for increased production by the suppliers in general. And it also gives an incentive for OPEC to release more oil, or in another words, lift on their -- ease up on their restrictions.

Specifically, OPEC has announced that an increase in production of 500,000 barrels a day to take place on November. And at this time, it also say that China has announced a 10% increase in domestic prices to encourage increased refinery utilization, to meet the demand for transportation fuel, which it would lead to increased demand for importing oil through China. Despite the high oil price, the demand for oil is expected, by the analysts to continue to rise and in particularly in non-OECD countries.

While the price level is partly a result for the supply and demand balance, it's also considered by analysts to be substantially affected by the low dollar value and financial trading.

Concerning China, the consumption is about 7 million barrels a day and of this, 50% is import. And the import is, to all, practically sent by sea.

Now, if you look at this, we mean that if China is going to increase its demand by a 10% per annum, this would result in an increase in tonne-mile associated with the trade over 20%, since the growth in demand will be covered by transportation by sea.

The strong cargo and offshore market continue to attract conventional single hull and also some double hull tankers. And this, we are experiencing is mitigating or expecting to mitigate as tanker supply increases for the year 2008 to 2009.

At the moment, the full effect of the so-called winter market in the fourth quarter is still to materialize. Well, the growth in OPEC and a non-OPEC production and a need to replenish inventories, we expect the tank rates to rebound despite all the seasonal doldrums we are experiencing.

The newbuilding prices remains strong with the yards and the yards are quoting deliveries for three year's lead time. And as a result, there is not much incentive to reduce the newbuilding prices.

Now, the contracting our ships are no longer tankers as much as there are other kind of [products]. Other factors that hold up the newbuilding prices are increases in steel costs and components. And steel cost itself is representing about 20% of vessel costs have increased steadily and the cost of engines has doubled in the value over the last three years.

Now, one also has to look to the reduction in the value of US dollars versus the local currencies, to see what needs to keep the prices up for newbuildings or ships in general.

Following the announcement in July, over the acquisition of our Suezmax tankers, to be chartered for delivery to OSG on bareboat with profit sharing for seven years. Double Hull Tankers has announced in September that another Suezmaxes will be acquired. These vessels also will be charted to OSG delivery. But for a ten years charter, bareboat chartered at fixed rates and it's expected to be delivered in January or February.

These acquisitions will provide value to investors over time without undue risk and be accretive to the distributable cash flow.

As a company, we shall continue to seek selective growth opportunities, whether in the tanker sectors or even in non-tanker sectors, whether through selective acquisition of vessels or through transactions of corporate nature. In doing so, the focus continues to be on creating value for our shareholders, in terms of return on investments and accretion to distributable cash flow.

To allow for continued growth in the company, the company registered on October 29, a shelf, with SEC for raising up to $200 million in equity debt.

Now with this information, I will hand over the word to Eirik Ubøe, the company's Chief Financial Officer. Eirik?

Eirik Ubøe

Yes. You were lost there for a while. I'm still on, yes. Thank you, Ole Jacob. I'll go through a brief review of the financials for Q3 and while tanker rates in Q3 were weaker than expected, we had another strong quarter, which provided profit sharing under our charters. Total revenues of $20.1 million for the quarter consisted of $17.8 million in base charter hire and $2.3 million additional hire under the profit sharing arrangements with OSG. And we have now earned additional hire each quarter since being listed on the New York Stock Exchange in October 2005.

Net income for the period was $6.9 million or $0.23 per share and the Board of Directors has declared a dividend of $0.37 per share, which will be paid on December 12 to shareholders of record on December 3.

For the quarter, DHT's VLCCs and Aframaxes achieved average time charter equivalent revenues in the commercial pools of 34,500 per day and 22,100 per day respectively, that is according to the data from the commercial pools.

And the actual TCE earnings after profit sharing, calculated on a fourth quarter rolling average basis, that we received for the third quarter, were 41,000 per day for the VLCCs and 25,600 per day for the Aframaxes.

In the quarter, we had 267 revenue days for the VLCCs and 359 revenue days for the Aframax tankers. And while the base charter hire rates for our vessels provide for stability in revenues in weak markets, the profit sharing element gives us the benefit of sharing the strong market, that the cyclicality of the tanker market can lead to from time-to-time.

For the third quarter, DHT's vessel expenses, including insurance costs were $4.8 million, depreciation and amortization expenses were $4.3 million and G&A expenses were $1 million. G&A expenses include $300,000 in the one-time expenses related to the transactions which did not materialize.

With regards to the balance sheet, I just like to point out that DHT's balance sheet reflects that the vessels were carried over from our (inaudible) at historical book values. And we are comfortably within the covenants of our debt agreement with the vessel values well above our outstanding debt.

And with that, I will open up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And your first question comes from the line of Jon Chappell with JP Morgan. Please proceed.

Jon Chappell - JP Morgan

Thank you. Good afternoon, guys. Eirik, first question for you has to do with the VLCC fleet. The days didn't add up to [492] days per ship in the third quarter. Yet, there is no mention of any scheduled offhire in the quarter. Was there some unexpected offhire for VLCC in the third quarter, or was that just waiting time associated with the weaker market?

Eirik Ubøe

No, there were, let's see, for the Q3, there was a little bit offhire on schedule, not much though, just for some minor repairs. And I'm just scanning through here now. One was actually a few days, it was related to a missing of a slot, as we were delayed. So, I think the total offhire for the VLCCs was about nine days. Is that right? Yeah.

Jon Chappell - JP Morgan

Yes.

Eirik Ubøe

Nothing, I mean, some minor repairs and some delays.

Jon Chappell - JP Morgan

Okay.

Ole Jacob Diesen

Can I add something there, Jon, because, you said something, it was waiting for cargo. Waiting for cargo is not our cost that belongs to the charter. We have the ships on time charters and we are not suffering offhire as a result of waiting for cargo.

Jon Chappell - JP Morgan

Okay. My other question had to do with on the cost side. Obviously, we've seen a lot of inflation in costs, you have an agreement with OSG. How much longer are your costs fixed with OSG and what are you seeing in the form of insurance cost increases this year and going forward?

Eirik Ubøe

Do you want to take that, Ole Jacob?

Ole Jacob Diesen

If you take the insurance cost, I will talk about the management contract.

Eirik Ubøe

The insurance cost we had for 2007 will end up about $2.5 million and the expectations for 2008 is an increase about 7%, or 6%, 7%, 8%.

Ole Jacob Diesen

With regard to the management contract, the contract we have with OSG is for the period of the charters, first of all. Then secondly, we can terminate employment with three months notice. OSG on their hand cannot terminate the agreement until earliest in October 2008 with effect from January 2009. So, that's an option they have. We have not discussed anything more with OSG, but I think that OSG as a charter, we'll have a strong interest in maintaining the management contract.

Jon Chappell - JP Morgan

Okay. And finally, the credit agreement with the Royal Bank of Scotland, it seems that the credit market has been a little bit tighter now in the shipping world for taking a new debt. After this new credit agreement and these two new Suezmaxes, what's your capacity for assuming new debt that you'd feel comfortable with?

Eirik, you said in your prepared remarks that you still feel comfortable with your debt-to-market value. Where would you put that number and then how comfortable would you feel to increase it a little bit and how willing will the banks be, do you think, to increase it?

Eirik Ubøe

The debt-to-market value now is about a little bit north of 50%, which we were comfortable with, given our long-term contracts.

Jon Chappell - JP Morgan

After both Suezmaxes?

Eirik Ubøe

After both Suezmaxes, yes.

Jon Chappell - JP Morgan

Okay.

Eirik Ubøe

And then, the additional question was, Jon.

Jon Chappell - JP Morgan

And what level would you be comfortable bringing it up to and how comfortable do you believe the banks are as far as giving more credit in this type of broader market condition?

Ole Jacob Diesen

The last question there is, if I may say so, is really depending on the transaction you bring to the banks these days. So, I think it's little too hypothetical to discuss what the banks' appetite would be. It depends again on what kind of transactions you are providing to the bank. But as a company, we are comfortable with a leverage of 50%, there is no problem with that.

Jon Chappell - JP Morgan

Okay. Thank you, Eirik and Ole Jacob.

Operator

(Operator Instructions). Your next question comes from the line of Ken Hoexter with Merrill Lynch. Please, proceed.

Ken Hoexter - Merrill Lynch

Hi. Good morning. Eirik or Ole, can you talk about the delay of the Ania for drydocking? Is that just the timing of the slot, that the yard is available? Is there any regulatory deadline that it has to be drydocked by?

Ole Jacob Diesen

There is a window there where you can do this survey. And the beginning of the window was in the third quarter this year and the window ends in the second quarter next year and it's been decided by the technical manager to delay to take the interim survey until the second quarter next year. That’s all I really can tell you in this context.

Ken Hoexter - Merrill Lynch

Okay.

Ole Jacob Diesen

There is nothing dramatic, in other words, there is just a window that you -- within that period, you are free to do it whenever the yard is available and the schedule of the ships is suitable.

Ken Hoexter - Merrill Lynch

Perfectly understood. And then, as far as the market, obviously you've acquired these or moved to acquire these two Suezmax. Can you talk about how discussions have gone? I guess you said there was a $300,000 charge for a deal you walked away from or can you explain that a little bit more in detail?

And then, what discussions have been going lately? Have they kind of dropped off with where prices are right now? Or do you look at this as an opportunity to be more acquisitive?

Ole Jacob Diesen

I think that, first of all, the [ship values] are holding up. And there are not that many transactions at the moment, but the ship values are holding up. And as I mentioned in my talk a little earlier, it's really a matter of constant pressure on the shipyards to deliver ships, if not for tankers then for other ships. So, there hasn’t been much of a weakness in the ship values.

Concerning the OSG, we negotiated with OSG charters for these ships and we are happy with a seven-year bareboat charter for the first vessel with a profit sharing. And the second for a 10 years without profit sharing. We think it's good to have a little variety in the charter portfolio, if I can use that word, probably too big a word for a fleet with only nine ships, but limitless.

Ken Hoexter - Merrill Lynch

And then, can you explain the $300,000?

Ole Jacob Diesen

Now, the $300,000 has nothing to do with OSG and the Suezmaxes. That's an entirely different kind of transaction, but I can't say anything more about that, unfortunately.

Ken Hoexter - Merrill Lynch

Is that something that -- can you comment --

Ole Jacob Diesen

There was a one-time cost. There was a one-time cost of our transaction that were materialized. But obviously, we thought it was going to materialize otherwise we wouldn't spend so much time and cost on it.

Ken Hoexter - Merrill Lynch

Okay. And then can you talk about the kind of the activity right now. You said the ship values have hung in there, rates are bit down, are you actively looking in this kind of market? Do you view this as a market where you could be acquisitive or do you say, the divergence between rates and values is just too wide, so we kind of step to the sidelines.

Ole Jacob Diesen

We are always looking for a transaction and there are opportunities to find the right mix that can give you the right figures between the values of the charters, just like we proved what we did in August and September with regard to the Suezmaxes. So, we are looking for the right transaction. But clearly, when the market in general is falling and the values stay high, it's more difficult.

Ken Hoexter - Merrill Lynch

Okay. And again just to come back to the $300,000 for a second. You said this was not in OSG, so there is a potential where you can expand beyond your OSG relationship?

Ole Jacob Diesen

Yeah. We are definitely looking to expand beyond OSG, it's nothing wrong. We have a very good relationship with OSG and we are very pleased with it. But we think that just like we’ve said previously, that we would like to diversify the fleet. We also think it could be beneficial to diversify the charter. There is entirely freedom from OSG to do deals with us and for us to do deals with OSG. So, there is no tie-in at all in that respect.

Ken Hoexter - Merrill Lynch

And my last question is on the dividend, has any thought been discussed with you or the Board about possibly kind of shifting the payout strategy, where it would be more aligned with the base dividends, so investors could see kind of a steady income stream and then maybe use the additional cash flow for further investments in growth?

Ole Jacob Diesen

The only thing I can say to this respect is that every quarter, we review the dividend policy and we review the dividend payment. And at the moment, we will continue to review it and we continue at the moment, as Eirik said, the Board has approved to pay full dividend after this quarter.

Ken Hoexter - Merrill Lynch

Is that something that would make sense to you or do you think, as kind of one suggesting the kind of direction or do you think that the full payout makes the most sense at this time?

Ole Jacob Diesen

I think I don't want to really go into speculation on what's going to happen in the future. But at the moment, we have the cash flow to do this and we think that we gave the investors a good return by doing it and from that respect I think it is a right thing to do.

Ken Hoexter - Merrill Lynch

Thanks for the time.

Operator

Your next question comes from the line of Natasha Boyden with Cantor. Please proceed.

Natasha Boyden - Cantor

Thank you, Operator. Good morning, gentlemen. I just want to kind of look at a more macro side of things. Given where taker rates are at the moment and over the last couple of quarters they have been pretty weak, are you starting to see more scrapping of single hulls -- are owners seeing rates slow enough to consider scrapping them?

Ole Jacob Diesen

I haven’t really followed in detail the scrapping market. But my understanding, there is more activity in conversion of ships than there is in the scrapping activity. And the benefit with the conversion of ships is, of course, it will affect the balance between the newbuilding that’s coming on and the existing ship in the fleet. Having said that, we all are aware just, like you are, that come 2010, it will be mandatory to change the fleet from the double hull to the single hull tankers, unless you get special permission by the rules that can give you an extension.

Natasha Boyden - Cantor

I guess my concern with that is as far as I understand the 2010 rule, is that it's up to the individual port state, is to whether or not that will take single hull until 2015, is that correct?

Ole Jacob Diesen

That's basically correct.

Natasha Boyden - Cantor

So, essentially, we could see a bifurcation of the industry, in the sense that we might see a number of single hulls operating perhaps in the Pacific and the double hulls in the Atlantic. Would that be something you think might happen?

Ole Jacob Diesen

I think we are seeing some of that already, but I think what you really -- is one thing is what the rules tell, and the other thing is the commercial obsolete and I think that the charters are, let's say, putting their favorites on the double hull tankers. And the more and more double hull tankers that come to the market, the less -- what is the word I am looking for, a less impact the single hull tankers will have. In other words, why should the charter go for single hull tankers, if they have plenty of double hull tankers to choose from.

Natasha Boyden - Cantor

Fair enough. I am just thinking that with the excess sort of capacity, even if it's not phased out, it may keep rate slow.

Ole Jacob Diesen

I think in more double hull tankers you see, I think that there is less charter than single hull tankers that keep the market rates down.

Natasha Boyden - Cantor

Okay, great. And then in the last week or so, I suppose, it appears that the rate may be staging, finally the winter rally. Do you think this is now sustainable, given the delays in the Bosphorus and some colder temperatures or another cold start, like we saw three weeks ago? What's your feeling on that?

Ole Jacob Diesen

Well, I must say that in this particular respect, since we have all our ships in time charter, we don't really follow the market on a weekly basis. So, we look at their view a little bit to the longer-term.

Natasha Boyden - Cantor

Right.

Ole Jacob Diesen

We look at the market in relationship to when we can acquire ships and et cetera. And our ships are still on charter for several years to OSG.

Natasha Boyden - Cantor

Right. But you're going to feel some impact from the additional hire, wouldn't you?

Ole Jacob Diesen

Sure. Absolutely. But the ships are still on the time charter. And we are not following the commercial market day-to-day or week-to-week.

Natasha Boyden - Cantor

Okay. Fair enough. And then to follow up, do you have any more visibility of when in December you intend to take delivery of your Suezmax that will be acquired?

Ole Jacob Diesen

First half of December.

Natasha Boyden - Cantor

The first half. Okay, great. Thank you very much.

Ole Jacob Diesen

Thank you.

Operator

(Operator Instructions). At this time, there are no further questions. I would now like to turn the call back over to management for closing remarks.

Ole Jacob Diesen

Well, I will just take the opportunity to thank you guys who were listening, in and thank you for the questions. And we will terminate the conference call hereby. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.

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