DHT Holdings: Afloat After Its Q3 Earnings Release, But For How Long?

| About: DHT Holdings, (DHT)

DHT Holdings, Inc. (NYSE:DHT) just released its third quarter earnings, with EBITDA for the quarter at $7.3 million and net loss for the quarter at $4.2 million ($0.27 per share) after adjusting for a non-cash impairment charge of $92.5 million. The company will pay a dividend of $0.02 per common share and $0.28 per preferred share. Rather disappointing, but understandable considering the current market conditions.

The first portion of this article is related to DHT's third quarter earnings release, while the end portion constitutes my takeaway from the third quarter earnings call. Further down in the article, you can find a discussion on impairment charges. Click here for the full results.

Earnings per share was calculated assuming that all preferred shares issued 3 May 2012 have been exchanged for common stock - which has not happened because the mandatory conversion to common shares is not required until June 2013. Each shareholder was to receive 17 shares for each preferred share. Under the second quarter preferred dividend (div. $3.40/17=$0.20) to common stock (div. $0.24)) you would have come out ahead by converting.

It is also true now that each preferred share is at 28 cents or (div. $0.28/17= $0.016) vs. common share at $0.02 cents. I may have digressed from the earning statement, but it is important to note you are better off not continuing to hold the preferred shares as an average investor who bought the backstopped-equity offering.

The decline in revenues in 2012 is attributed due to two vessels being sold during the second quarter and increased spot exposure as vessels have come off charters. One vessel was redelivered from Overseas Shipholding Group, Inc. (NYSE:OSG) during the quarter and two more vessels are expected to be redelivered during the next six months.

The remaining charters to OSG will be determined in the future based on current events. However, two Suezmax vessels are on long-term bareboat charters to OSG until December 2014 and January 2018, respectively. It will be interesting to see what happens with OSG and these Charters. As of September, five of the companies' nine vessels, where on charter and the long-term boat charters are to OSG, which is a key part of DHT's revenues.

Concerning vessels on charter from OSG and Frontline, DHT Holdings reported in its earnings statement that the charter hires is paid monthly in advance. There was an amendment to the original charter hire to be paid in arrears. This resulted in an accounts receivable from Frontline in the amount of $1.7 million still due as of 30 September 2012. The overall increase in accounts receivable is credited with more vessels being in the spot-market. Therefore, this assumes that OSG does not have any outstanding debts owed to DHT. However, the future of the charters OSG holds is still in question.

DHT is in compliance with its loans and says it has a balance of $72.2 million as of September 30, 2012. It has no scheduled principal installments under its three credit facilities in 2013 and 2014. Currently, it has scheduled principal installments totaling $12.0 million in 2015. However, a further decline in vessel values may result in additional prepayments in order to remain in compliance with minimum value covenants. With a weak tanker market, this will probably come to fruition.

Following fleet appraisal for the third quarter, DHT repaid $3.1 million under the RBS credit facility. Following the fleet appraisal for the fourth quarter conducted in early October, DHT repaid $4.0 million. The next scheduled principal installment under the RBS facility is in Q4 2015.

DHT Holdings has changed the way it depreciates its vessels from 25 years to 20 years. I am not an accountant, but I would assume this gets it a much larger depreciation rate, and thus a tax advantage to offset losses. DHT's depreciation and the estimated future earning are used to assess the "value in use" of its fleet. This is a way of assessing future earning to see if it needs to adjust on the carrying or current value of the vessels against what may really be the fair market value, since the tanker industry is so cyclical and subject to market conditions.

At times, DHT takes charges against the above adjustment - called "impairment charge" - which it took this quarter for $92.5 million. You can look at the third quarter earnings release notes page for more detail on how they figure this. Again, the recent announcement by OSG regarding its solvency, and the continued weak tanker markets, led the company to adjust the carrying value of its fleet through the non-cash impairment charge.

While DHT has $72 million on its books and no scheduled principle installments until 2015, it has had to continue prepayments as it experiences a decline in vessel values. DHT even stated it expects to have to continue to make these payments. I personally do not consider $72.2 million as a lot of "unencumbered cash", especially with the outlook for future earnings.

During its earning call, DHT went over the earning release with no additional statements. It then took questions from the callers. My most significant takeaway is that OSG is current on all charter payments and DHT has not discussed any new terms with OSG with regards to its future contracts. While the dividend cut was larger than expected, it was done in order to preserve capital and allow for future growth. I do not see any larger dividends in the future until the market conditions change.

No target dates have been set for expansion, but DHT wants to keep its options open and look towards a more modern vessel to acquire. DHT admits it does not have much clarity on future cash flows and nothing will happen with the current capital until the OSG issues are resolved. DHT feels it has enough cushion in its cash on hand if the contract on New Capital and London vessels with OSG ends due to Chapter 11 filings.

DHT went from 25 years for depreciation of its vessels to 20 years as an accounting measure and economical life expectancy of its vessels in the current market as stated in the earning release. If the markets recover and the vessels remain significant to the fleet, DHT may return to the 25-year depreciation accounting measures. The tanker market has not seen much scrapping of vessels, which translates to an excess amount of tankers on the current market. DHT does not expect an early rebound this year and expects a continued tough market and cyclical summer drops to impact conditions as well as economic issues in China.

There were not a lot of calls during the earning conference and DHT did not go into specifics; it has not been in negotiations with OSG and stated it has not discussed any current contracts for revision with OSG. I believe DHT is waiting to see what is going to happen before it can react both in terms of fiscal measures and in terms of arrangements with its vessels.

An audio replay of the conference call will be available through October 31, 2012 (to access the replay, dial 1 347 366 9565 within the United States or +44 203 427 0598 for international callers and enter 8144064# as the passcode). You may also access the call from the DHT Holdings website here.

Currently, I am still holding onto my shares of DHT, but I would not recommend purchasing shares at this time. If you are holding for the dividend yield then you must figure DHT will keep its payout ratio low until conditions change. Currently, if you had a quarterly dividend of $0.02 then the yield for the year would be (div $0.02 x 4 quarters /price) or 1.6%. A big difference for the risk involved compared with the dividend prior to this quarter. The OSG issue needs to be resolved and the market conditions must change for the tanker industry. Investors need to do their own homework and determine if it is best to continue to hold, sell or even take the risk and buy.

Disclosure: I am long DHT. 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.