- DHT Holdings reported earnings after the close on May 5th.
- The company disclosed EPS of $0.49 on revenue of $211.9MM.
- Spot Time Charter Equivalent for Q1 was $66,400 when average VLCC rates averaged over $77,000 per day.
DHT Holdings (NYSE:DHT) operates an independent fleet of very large crude carriers (VLCC) in both the spot market and on fixed time charter. Management claims; "A counter cyclical philosophy with respects to investments, employment of our fleet and capital allocation." So, it is not surprising that the company announced six 12-month time charters on April 1st of this year.
However, those fixtures would not have affected first quarter results, which were released after the market close on Tuesday, May 5th.
Image: DHT Stallion from DHTankers.com corporate website
This article is intended to follow up DHT Holdings And Crude Oil Storage, by taking a closer look at the earnings report just released. In it, we will look at gross revenues, expenses such as voyages, operations, and administrative, and reconcile net income by looking at component values of interest, taxes, gains and losses, and depreciation/amortization. Finally, we will discuss fleet availability and calculate Time Charter Equivalent rates.
Backstory And Last Quarter
DHT last reported quarterly earnings February 5th, 2020 for Q4 2019. The company had reported EPS of $0.52 on revenue of $191MM, and had just declared a $0.32 dividend. It was a nice surprise for shareholders compared to the minimal dividend the company had been paying since the beginning of 2017.
As 2020 began, VLCC rates were in a slow decline from elevated levels relative to the volatile swings seen at the end of 2019. After reporting, those rates seemed to settle out in the high $20K to low $30K range before skyrocketing as we transitioned from Q1 to Q2. As a result, average rates across routes was higher than the spot time charter equivalent the company reported in Q4.
Although investors had the prospect of similar high rates in Q1 and the possibility of another high dividend, the per share price of DHT dropped from $8 at the beginning of the year to a low under $5. During the first two months, the stock price exhibited a direct but weak correlation to spot rates.
First Quarter Numbers
That weak correlation has continued, but we now have data summarizing the period. Interested readers can view the release on the company website and download the PDF of results.
Image: Reconciliation of non-GAAP financial measures table from DHT Q1 earnings
For the quarter ended March 31st, 2020, DHT holding reported $0.49 EPS on revenues of $211.9MM. This is a decrease over last quarter's earnings of $0.03 on an increase of $19.9MM of revenue.
Voyage expenses for the first quarter were reported to be $59.4MM as compared to $50.1MM prior quarter. Meanwhile, operating expenses increased to $19.8 from $21.9MM. Administrative expenses grew from $3.5MM in Q4 to $4.3MM last quarter.
Each of those numbers is significant because by subtracting voyage expenses, operational expenses, and administrative expenses from gross revenues, we can determine Earnings Before Interest Taxes Depreciation and Amortization (EBITDA). For the first quarter, it was reported $128.4MM, an increase from $116.3MM in the fourth quarter. What this tells us is that the company is bringing in more money than last quarter with the same asset base.
For those readers not familiar with accounting terminology and adjustments, probably the most looked at indicators are gross revenue and net income. To determine net income, we simply need to adjust EBITDA for net interest, gains and losses, taxes, other expenses, and depreciation and amortization. However, comparing these individual adjustments quarter to quarter can be daunting but it explains why net income varies considerably relative to gross revenues from quarter to quarter.
Last quarter of 2019, DHT paid $20,000 in taxes as compared to $426,000 this quarter. Last quarter the company disclosed a gain of $2.99MM on derivatives, while this quarter reported a loss of $12.6MM. Interest expense decreased from $13.016MM to $12.226MM, while other expenses went from $350,000 to $925,000. Finally, last quarter the company earned $357,000 in interest and $267,000 in profit from associated companies. This past quarter, DHT reported $99,000 in earned interest and $206,000 profits from associated companies.
As a result, net income for this quarter was $72.2MM as compared to $75.9MM in Q4. Taking a look at these values quarter over quarter we have:
To comment on these individual components: Voyage expenses are directly related to operating the ships, and is dependent on routes and number of voyages made. Operational expenses are pretty much fixed and vary little quarter over quarter. Along the same lines, administrative expenses, net interest, and depreciation also vary little quarter over quarter.
By digging through all the past quarterly releases, you will find that the largest variable over time has been the Gain/Loss associated with derivatives the company uses to hedge interest rate adjustments. This single component; a loss of $12.644MM reduced EPS by over $0.08 for the quarter. In short, if you want to know why the company missed earnings, here it is - interest rates dropped.
Time Charter Equivalent
The next metric that we want to look at is the effective rates the company is receiving. Since different ships are chartered for different routes at different times, and not all ships are chartered at the same time, the easiest way to look at this metric is by calculating an average; the effective Time Charter Equivalent.
Ships that are on time charter earn the same rate over the time period. But, ships that operate in the spot market will earn a different amount each voyage. And, costs associated with a voyage will depend on a number of factors, so each one is different. However, all ships have fixed costs associated with operations. This is why voyage costs (variable costs) are separated from operational costs (fixed). To determine the effective Time Charter Equivalent rate, only the voyage costs are considered because the operational costs will be incurred even if the ship is not on a voyage.
To calculate the effective Time Charter Equivalent, we take the revenue earned by ships and subtract the voyage costs to determine the adjusted revenue. We then divide that amount by the number of revenue days. Ships that are not fixed for a reason (such as refit or maintenance) are not included in revenue days.
For the first quarter, DHT reported revenue of $211.9MM and voyage costs of $59.385MM. This gives us adjusted revenue of $152.524MM. Although there were 2457 vessel days in the quarter (total number of ships * total days in the quarter), the company reported 2369 revenue days. Therefore, effective Time Charter Equivalent reported was $64,383 per day. This compares to an effective Time Charter Equivalent of $58,467 from Q4.
Because total revenue comes from both spot and time charters, the company reports not only effective Time Charter Equivalent, but also discloses spot Time Charter Equivalent; for Q4 it was $59,200, but increased to $66,400 in Q1.
Summary And Looking Forward
Overall, the company saw an increase in both spot and effective Time Charter Equivalent rates quarter over quarter. DHT realized greater revenue in the first quarter, but due to higher expenses, taxes and a loss on derivatives, the company realized lower net income, thus missing earnings expectations. Finally, the board of directors declared another impressive dividend of $0.35 per share payable May 26th to shareholders of record as of May 19th.
Other than the pending dividend, everything up to this point is past news. The big questions lay in the future. Fortunately, the company did provide some forward-looking guidance: "Thus far in the second quarter of 2020, 66% of the available VLCC spot days have been booked at an average rate of $110,400 per day on a discharge to discharge basis." and provided the following table:
Image: Table I from DHT first quarter earnings
This can give us a bit of a head start on projecting what Q2 is going to look like, even though we are only just over one month into it. For starters, even though the company chartered 2/3 of spot days, projected revenue is already above where it was in Q2 of 2019. At this rate, Q2 2020 revenue could meet or exceed this quarter's revenue.
The company also disclosed additional financing of one ship with the existing lender at a rate of LIBOR+2%, and drew down one credit line for the completion of scrubber refitting. Together, these will add more than $2.25MM in interest expense each quarter. This will impact earning by about $0.015 per share each quarter.
Reading through the quarterly report did not bring to light any glaring concerns. True to form, management has tried to maintain a capital structure to benefit shareholders and has positioned the fleet through additional time charters with the long-term outlook in mind. Finally, the board of directors has declared another generous dividend to further prove the company is looking out for the interest of shareholders.
While there are some serious systemic risks to consider with the global economy, energy sector, and crude oil shipping segment, for the short term, DHT is well-positioned. Overall, my outlook is fundamentally bullish for the next quarter. However, time will tell if the market agrees or not.
This article was written by
Analyst’s Disclosure: I am/we are 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.
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