DHT Holdings (NYSE:DHT) is a crude oil tanker company that operates internationally through management companies in Oslo, Norway, and Singapore. They currently have 16 operating Very Large Crude Carriers (VLCC), 1 operating Suezmax vessel, and 2 Aframax vessels. Of these 19 ships that are currently operating in their fleet, 11 operate in the spot market, while the other 8 operate on a time-charter basis. 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.
It is no secret that DHT's stock has underperformed recently. The stock is down 37% from its 12-month high and is down 28% in 2016. This selloff is due to several different reasons, but it has created a great buying opportunity for investors.
Just about every company with relation to oil has taken a hit in 2016, and crude tankers are not an exception. Just in the past month, DHT is down 12%, and its closest competitors, companies like Euronav (NYSE:EURN), Frontline (NYSE:FRO), Nordic American Tankers (NYSE:NAT), and Teekay Tankers (NYSE:TNK) are down 16%. The price and volatility of oil have caused many investors to shy away from any company with correlation to the energy sector.
Another reason for the selloff in the industry is the decline in rates in the spot market. Spot rates reached highs of $112,800/day at the end of 2015, which were the highest those rates had been since 2008. Recently, those rates have taken a dive, falling down to levels around $50,000/day. This huge difference is in large part due to a difference in the supply of oil, and the unwillingness of many oil producers to pay such high rates on the spot market.
These factors have led to a sharp selloff or tanker stocks, including DHT, but there are several ways in which the tanker industry is showing a lot of promise. Also, DHT has strategically positioned itself so that it is in a position to continue to increase year over year revenues and to outperform competitors. Overall, the severe decline in DHT's stock has created a tremendous buying opportunity for the following reasons.
As mentioned above, it would be difficult to find many companies with relation to the price of oil that have seen their stocks do well in 2016. What is quite baffling to many who closely follow oil tanker companies like DHT is that low oil prices have a positive effect on tanker companies' balance sheets, not a negative one. The tanker industry has an inverse correlation to the price of oil, much like the airline industry does, and for the same reason. The massive tankers that DHT owns and profits from are powered by bunker fuel, which is directly related to the price of crude oil. The lower price of bunker fuel means that DHT's operating costs are significantly reduced. Visible in the following graph, DHT's voyage expenses have been significantly reduced over the past year, and the main reason for that is the decline in the cost of bunker fuel.
Source: DHT Earnings Release
Additions to the Fleet
The graph shows that the vessel operating costs have risen in the past two quarters. This rise is due to the addition of new ships to DHT's fleet. DHT has already added one VLCC to its fleet in 2016, the DHT Leopard, and it plans to add four more to the fleet this year. It is expected that DHT will add one in April, July, September, and October, so that by the end of the year, DHT will have 23 operating vessels. This increase from 15 VLCCs in 2015 to 20 VLCCs in 2016 is a 33% increase. These new ships are a large reason for the increase in vessel operating expenses, but they are going to provide a huge boost to DHT's revenue. The extra revenue that these new ships will generate will help the company against the decline in prices in the spot market, if those shall continue. While its peers will be suffering declines in revenue due to these lower spot prices, DHT will be able to prosper thanks to the expansion of its fleet. If the spot prices stabilize, and it is expected that they will, the new additions to its fleet will provide DHT with even more exceptional top and bottom line growth.
While this article has focused on the effect that spot market prices will have on DHT, the company also operates in the time charter market. This allows the company to lock in prices well in advance, so that fluctuations in prices do not have the same volatile effect that those in the spot market do. The company has already locked in prices of $73,000/day for 66% of its operating days in the first quarter of 2016. The stability of the time charter market is a great generator of the revenue for the company, but it also acts as a hedge against the fluctuating prices of the spot market.
As mentioned previously, the selloff of oil tanker stocks was in large part due to the lower spot prices. This would suggest a negative effect on DHT and its competitors, but DHT has taken steps to ensure that this will not have effects on its bottom line. The addition of new ships to the fleet, as well as the balance of vessels operating on the spot and TC markets will ensure that DHT is not negatively affected by the lower spot prices like its competitors will be and like the market has anticipated that it will be. This in mind, the recent decline in DHT's stock due to these lower spot prices and the effect it has on the industry creates value for investors looking at DHT.
4th Quarter 2015 Earnings
DHT's 4Q15 earnings were released on February 3, and the company reported EPS of $0.31, in line with Street estimates. Revenue, on the other hand, beat estimates, as the company reported revenue of almost $95 million. The company has shown tremendous performance over the past year. DHT's 2015 revenue increased 142% over 2014, gross profit was up 43%, EBITDA increased by 59%, and EPS is up to $0.94 from -$0.11. These outstanding numbers, however, have not been reflected into the price of the stock. The stock is down 23% since the start of 2015, and the disconnect between the strong earnings and the stock price is unlikely to last for long.
The Balance Sheet
A large reason for this disconnect between the stock price and the outstanding numbers DHT has posted is due to concerns over its balance sheet. Debt has caused many investors to shy away from DHT. The current D/E ratio is 0.90, but the company is taking steps to improve this. As the following graph shows, the company has reduced its D/E ratio over the past year, and they plan to continue to do so.
The company plans to deleverage by doing a combination of things. First of all, the company has prepaid the $42 million loan for two of its new vessels. They have also already bought back $3 million worth of its unsecured convertible note, which CFO Eirik Ubøe claims is the company's most expensive debt. They plan to continue the convertible note buyback program, and they have mentioned buying back common shares but have yet to announce if they will officially begin a common share buyback program.
Before the company began deleveraging in anticipation of the delivery of its new vessels, the interest-bearing debt to total assets was at 56.5%. According to co-CEO Trygve P. Munthe, that number is now 51.3%. The company plans to continue this deleveraging program and is dedicated to the strengthening of their balance sheet.
One of the most attractive things about DHT is its dividend. The company is currently paying out quarterly dividends of $0.21 per share, which would pay $0.84 for 2016, good for almost a 15% yield. The company's cash flow over dividends is currently at a ratio of 8.9. This is a very strong sign that the company will continue to pay dividends, and there is even a chance that the company may raise its dividends yet again. This is on the basis of the company's claim that it wants to return 60% of net income to shareholders. Street estimates suggest that DHT's 2016 dividend could total $0.90, good for a 16% dividend.
If a 16% dividend can't get investors on board, I don't know what will.
Estimates suggest that 2016 will be DHT's greatest year since it became public in 2005. It is expected to earn $235.8 million in 2016, 10% more than the record $214.8 million it earned in 2015. EPS are expected to rise 21% in 2016, and gross profit is expected to rise 67%. The bright outlook for 2016 is mainly due to the increase in profits that will come alongside the introduction of more ships to DHT's fleet. The company is also going to benefit from low oil prices, which keeps operating costs low, thus increasing growth on the bottom line. There has been very little to suggest that the price of oil will rise significantly this year, so oil tanking companies plan to have an extended period of time with lower than average operating costs.
Earnings look to be higher in the first and fourth quarters, which is typical for oil tanker companies. They tend to earn more in the winter, the first and fourth quarters, due to higher oil demand. As shown in the graph, earnings are expected to be much higher in 2016 than 2015. Earnings are expected to be down slightly in the third quarter as the company integrates a couple of the new ships into its fleet, but the company seeks to have a strong 4Q16 and strong 2017 with these additions.
Lower spot prices and concerns around everything related to oil have attributed to a steep decline of oil tanker companies, including DHT. DHT has positioned itself very well, so that the company does not suffer from either of these things. DHT's stock has been sold off with the rest of the industry, but the company will not suffer from these factors like some others will, and DHT is poised to prosper.
The company's approach to doing business in both spot markets and TC markets allows the company to be better protected against changes in the prices of the spot market.
The low price of oil benefits oil tanker companies like DHT. The low bunker fuel costs mean lower voyage expenses which lead to higher profits, as evident by DHT's 43% increase in gross profit in 2015 while oil prices slid. Yet even with higher revenue, profits, and earnings per share, it was still sold off with the rest of companies correlated with the price of oil.
The balance sheet, and debt in particular, has been a concern for DHT and is another contributor to the decline in the past 12 months. The company is tackling this problem head on, as it has shown through its deleveraging program that it plans to continue and expand upon in the coming months.
From a valuation standpoint, DHT is relatively cheap, currently trading at a P/E multiple of 4.95. Its P/B value is currently 0.70, which is lower than that of many of its competitors (NAT's is 1.25, FRO's is 5.97, and TNK's is 0.73).
DHT has been oversold and is down 37% off its 12 month high and down 28% in 2016 alone, despite higher revenue and earnings. I believe this is due to the market's overreaction to the spot market prices and the price of crude oil, rather than weakness in DHT's business.
I believe a rise in DHT's stock is inevitable, as DHT proves that the concerns surrounding the industry do not affect its bottom lines. Also, the addition of new ships will increase 2016 revenue and earnings, perhaps giving the stock the boost it needs if somehow the industry continues to lag behind. I see the stock reaching its current 52 week high of $8.99 this year, a 61% gain. As long as the company continues to deleverage the way it has in the past several months, I see an upside of $12 on account of a strengthening balance sheet and increase in year over year earnings.
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.