DHT Holdings, Inc.

Good morning and good afternoon, everyone. Welcome and thank you for joining DHT Holdings' fourth quarter 2020 earnings call. I am joined by DHT's co-CEOs, Svein Moxnes Harfjell and Trygve Munster, and Vilhelm Flinder, Head of Investor Relations. As usual, we will go through financials and some highlights before we open up for your questions. The link to the slide deck can be found on our website, dhtankers.com. Before we get started with today's call, I would like to make the following remarks. A replay of this conference call will be available at our website, dhtankers.com, until February 16th. In addition, our earnings press release will be available on our website and on the SSE EDGAR system as an exhibit to our Form 6K. As a reminder, on this conference call, we will discuss matters that are forward-looking in nature. These forward-looking statements are based on our current expectations about future events, including DHT's prospects, dividends, share repurchases and debt repayments, the outlook for the tanker market in general, daily shorter highways and vessel utilization, forecasts of world economic activity, oil prices and oil trading patterns, anticipated levels of new building and scrapping, and projected dry dock schedules. Actual results may differ materially from the expectations reflected in these forward-looking statements. We urge you to read our periodic report available on our website and on the SSB EDGAR system, including the risk factors in these reports, for more information regarding risks that we face.

Good morning and good afternoon, everyone. This is Drigva. Before we take you through the highlights for the quarter, I just wanted to get you up in the helicopter, so to say, in order for you to get the right perspective. The fact of the matter is that 2020 not only set the new record for adjusted net income, it crushed the old one. The adjusted net income of $287 million last year was 2.8 times the old record from 2015. So with that as a backdrop, Laila will now focus in on the fourth quarter financials. Laila?

Thank you, Trude. Looking at the P&L highlights, DHT showed profitable results for the fourth quarter despite a very tough bank market. EBITDA for the quarter came in at $51.1 million and an net income of $7.6 million or $0.04 per share. Adjusted for non-cash gain in fair value related to interest rate derivatives of $2.4 million and a non-cash impairment charge of $7.6 million, net income would be $12.9 million or $0.08 per share for the quarter. Offex for the quarter was $22.1 million, which is above the quarterly average for the year of $20.4 million. The increase is mainly due to higher costs, for crude changes due to COVID-19 and upstoring of spares and consumables. We expect OPEX to be more in line with historical levels when things normalize. G&A for the quarter was $4.5 million. EBITDA for 2020 came in at $450.4 million and a net income of $266.3 million or $1.71 per share. Adjusted for a non-cash loss in fair value related to interest rate derivatives of $8.1 million and a non-cash impairment charge of $12.6 million, net income would be $286.9 million or $1.84 per share for 2020. Moving over to the balance sheet, the quarter ended with $68.6 million of cash. During the quarter, we prepaid $25.8 million under the Nordea credit facility. The voluntary prepayment was made for all regular installments for 2022. At quarter end, the company's availability under both the revolving credit facilities was $170 million, putting total liquidity at $239 million as of December 31st. DHT has continued to strengthen the balance sheet with the prepayment done during the quarter. Financial leverage is 29% based on market values for the ship, and estimated to 35% when including the two new assets announced in January. Net debt per vessel is 14.1 million per year end, which is well below current scrap values. Looking at the cash bridge, the quarter started with 75 million of cash, and we generated 51 million in EBITDA. Ordinary debt repayment and cash interest amounted to 23 million. 34 million was paid in dividends. 11 million was used for maintenance cash back, and 26 million was used for debt prepayments. Changes in working capital amounted to 35 million. and the quarter ended with 69 million of cash. With that, I will turn the call over to Trigva.

Thank you. Let us then talk about capital allocation. For the quarter, we will pay a dividend of 5 cents per share on February the 25th to shareholders of record on February 18th. This will be our 44th consecutive quarterly dividend payment. And for the full year 2020, dividends will amount to $176 million, or $1.08 per share. In line with our strategy, we have in the quarter continued to strengthen the balance sheet through debt prepayments. As Laila said, we prepaid the 2022 installments under the Nordea credit facility in the amount of $25.8 million. This represents roughly 40% of the total 2022 installments under our four existing credit facilities. This will, of course, have a significant positive impact on our cash break even for next year. Continuing on the theme of debt reduction, we wanted to highlight that interest bearing debt was reduced by nearly 50% through the year. We started the year with $866 million of debt, and ended with just $455 million. This has, of course, made an already sound balance sheet even stronger, and it has contributed to very robust cash break-even levels, something Svein will dig into the details of in a minute. Let us then switch to the recently announced fleet expansion. In January, we bought two VLCCs built 2016 at DSME for 136 million combined. When this opportunity surfaced, we were immediately intrigued. It is actually not that often that quality ships become available for purchase in the trough of the cycle. These are quality ships built at quality shipyard and having been owned by quality owners, just the way we like it. We're excited about this transaction for the following reasons. One, these are modern scrubber-fitted eco-ships with great fuel economics. Two, with a DHT-style debt financing of 37.5 million per ship, we only need $32,400 a day to earn a 15% return on equity. And this is significantly below the 25-year historic average of $42,460 per day. Three, to cover OPEX and full debt service, the shifts will only need to earn about $17,000 per day. And finally, four, from an ESG perspective, these shifts will improve our annual efficiency ratio and our energy efficiency operational index. So in a nutshell, this move exemplifies our counter-cyclical strategy. growth and fleet renewal at the bottom of the cycle while maintaining a strong balance sheet. As you surely have noted from our press release, we elected to advance our dry dockings in view of the soft spot freight market. During the fourth quarter, we dried out five ships and recorded a total of 180 days of scheduled off-fire, which includes 16 days related to COVID compliant crew changes. As there are still limited ports where crew changes are possible, we sometimes face deviations to get the ships to ports where the crew changes can take place. For the current quarter, we will have seven ships going through special surveys, and we estimate some 200 to 230 days of planned off-fire for the quarter. And for the full year, we have 14 dry docking schedules. and we will revert in due course with guidance for OFIRE in subsequent quarters. And with that, I'll pass it over to Slav.

Thank you, Trygve. We will now spend some time on how we have positioned the fleet. Last year, we managed to secure time charters for a meaningful part of our fleet at very rewarding rates. This strategy ensured that we stayed profitable during the fourth quarter. Further, this strategy is well reflected in our first quarter to date, as we have booked 75% of our available days at an average of $34,800 per day. This should allow DHT a good showing again. Several of our charters will gradually come off during this year, whereby we'll increasingly build more market exposure as the year advances. For the first quarter, you will note that we have a balanced time charter book, with 58% of the available fleet on time charters. With our 16 ships on time charters, seven will come off during the remainder of the quarter. Our spot exposure will then gradually increase from the second quarter, ending the year with more than 80% market exposure. We like this development, as it could well coincide with the market recovery. Those of you that have followed us for a while will know that cash break-even is a core building block in our strategy. Here we illustrate our cash break-even levels for the first and second half of 2021. As you will see, we have very limited debt repayments this year. This is by design as this was prepaid with the generous cash flows last year. Our time starter cover for the first half takes care of some 87% of our cash costs, resulting in the company only needing to earn $4,000 per day on its spot chips to go cash break even for the period. We believe this to be a very robust position that you can match. For the second half, we will, as mentioned, gradually increase our market exposure. However, We still retain our focus on staying power with an estimated cash break-even level for our spot chips during the period at $14,100 per day. For the full year, our cash break-even for the spot chips is $9,900 per day. Keep in mind that our cash break-even levels include maintenance capex of close to $50 million as well, i.e. all true cash cost is included. Staying on the same subject, on this slide we put our cash break email levels in another perspective. The bars display the annual spot market over the past 20 years. As you will see, average earnings during the year have only fallen below 20,000 per day four times. We have then put in two straight lines showing our cash break email levels for the first and second half of the year in comparison. Again, we think this illustrates that DHT has been put in a very comfortable position. Moving on. We shared this slide with you on our last earnings call. In broad terms, this illustrates DHT's strategy and how we allocate capital through the cycles. We firmly believe that this model works to the benefit of our shareholders. a belief that is supported by our performance relative to the peer group. We have deliberately positioned the company for investments at this time. As Trigve talked about earlier, we have recently made our first investments since four years, having stayed on the sidelines during the upcycle. You shall expect us to stay focused and maintain our disciplined approach in how we allocate the capital that we have been entrusted. So, to sum it up, we were profitable during a difficult tanker market. We have built a very strong balance sheet with mark-to-market leverage as of year-end below 30%. We have put in place significant staying power with very robust cash break email levels for our spot fleet, which will behoove us given our near-term market outlook. We expect to make additional investments this year as we will pursue opportunities to renew our fleet with accretive acquisitions. And with that, we open up for Q&A. Operator?

Thank you, ladies and gentlemen. We will now start the question and answer session. As a reminder, if you wish to ask a question, please post one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. If you wish to cancel your request, please press the Hush key. Once again, please press Start 1 if you wish to ask a question. And the first question comes from the line of Randy Griffins from Jefferies. Please ask your question. Your line is now open.

Howdy, Team DHT. How are you all? Great, thank you. All right. I guess first question, I know you included it in the past, but I didn't see it in this presentation. So excluding the time charters, what rates and percentage of spot days fixed have you booked for the first quarter of 21? And then maybe what rates are you currently booking this week?

So we have booked 44% of the spot fleet for the first quarter at $17,500 a day.

Okay. And are those rates kind of in line with what you're seeing this week for current fixtures?

It really depends a lot on what ship it is and what load area it is. And if it's sort of a conventional design without scrubbers and you're loading in the AG and you're missing tires, then all the TCE that you're going to generate is minuscule. But on the other hand, if you have a fully approved ship with an eco design and you're loading out of the Atlantic, chances are you're going to be in the low teens or mid teens, something like that on UTC. Got it.

All right. And then looking at slide 10, right, your spot exposure is set to increase throughout the year. Kind of a good thing, as you mentioned, with your views on a market recovery in the back half of 21. And then also looking at slide 12. showing the long-term average VOCC rate around, let's call it 40,000 a day. What are your thoughts on maybe securing some time charter ends, right, for VOCCs as the one-year rate is only 25,000 a day right now, the three- and five-year rate is only maybe 30,000 a day?

I think we have addressed this question a couple times in the past, but our strategy or our view on this remains the same, that we do not see any need to to add leverage to the position that we have. So we're not really there to charter in ships just to get more exposure to the spot the LCC market. That's not going to happen.

Well, keep in mind, you know, chartering in is a 100% levered transaction, so the cash break even level will go significantly up once you add that.

So unless there are some purchase options or something of that nature associated with it, don't expect us to do it.

Got it. Yep, that's fair. And then quickly, any other scrubber installations planned for 2022 after the ones you've kind of earmarked for this year?

No. So we have four to do this year, and that marks an end to that program.

Perfect. Well, that's it for me. Thanks so much for the time, and congrats on a great year. Thank you.

Thank you. And the next question comes from the line of Chris Tsang from Weber Research. Please ask your question. Your line is now open.

Hey, guys. Good afternoon. How are you?

Doing well, thanks.

Good, good. I wanted to kind of just ask about the decision to repay $26 million under the Nordea credit facility, which looks like it was probably made in late 2020. In light of the upcoming type X, would with the accelerated dry docking schedule and the purchase of a pair of BLCCs? Would there be additional prepayments? And how should we think about your capital allocation strategy?

I think our strategy has been to, when times are good, to invest in our balance sheet. Right now, times aren't so good, so we're not generating the type of cash flows that we saw through the past five quarters. So this may be a time when there's going to be a pause in debt prepayments. And as you also heard, we actually invested in additional chips. So the combination really suggests that you will see a pause in debt reductions or extraordinary debt reductions for a little while at least.

Great. Sorry, just to make sure I got that right. We will see a pause in further debt paydown, right?

Yeah, extraordinary paydowns. Of course, we'll do whatever is there on the regular basis, but the voluntary prepayments are probably going to take a post.

Right. No, that makes sense. And I guess just as a follow-up, just taking with capital allocation, as regards to new tonnage, is there a particular age range that you're looking at or leaning towards any, I guess, future propulsion technology? The pair of EcoDesign BLCCs were from 2016, which should bring out their useful life through to 2030. Will these vessels meet the EEX standards and are there any cap improvements you guys are looking at or might look to do to kind of get your fleet ready to trade in those times in 2023?

No, we have a focus on to buy ships in the water at this point in time. That's our priority. And they will have to be of equal designs I delivered from the second half of 2015 onwards. And these type of designs had a significant fuel efficiency improvement from prior designs. And they will certainly have a good life post-EXI 2023. So we're not in the mood to order ships at this point. When it comes to future technology, I think we don't rule anything out right now. And so far, we don't see any convincing technologies that will really carve out the future for VHCCs. It might be that we will have different types of fuels for different types of ships and trades and sizes and whatnot. But I think this landscape is yet to really be mapped out, frankly. So when it comes to new builds and investing in future technology, we are on the sidelines for now.

Yeah, no, that all makes sense. Great. That's all from me, and I'll turn it over. Thanks, guys.

Thank you. And the next question comes from the line of John Chapelle from Evicor. Please ask your question. Your line is now open.

Thank you. Good morning and good afternoon. Trigva, it's pretty noteworthy that when you spoke about the vessel acquisitions, you said it's very rare that you see ships of this quality available at the top of the market. Maybe a two-part question. One, do you see any other opportunities like this emerging? It feels like most owners and industry participants have a pretty consensus view that the first half is going to be really difficult, but the second half shows signs of optimism. Therefore, people may hold on a little bit longer and wait to get to that point, which isn't too far away. And then the second part is if other opportunities like that don't present themselves and you've done a great job managing your balance sheet, How do you think about the use of this capital if you can't find the right ships at the right price?

I think to the latter part, John, if we cannot find anything that makes sense to us, we are not going to invest. Simple as that. It needs to be sort of meeting our criteria. It's got to be at the sort of right price levels, and it's got to be quality ships and so forth. We hope and expect that there will be additional opportunities before this market takes off. But of course, this is really time will reveal whether we're right or not in that expectation. But we don't really have anything specific at this point to inform you about. But we'll keep on looking.

I think you can assume that we have an excellent deal flow. So when things develop, they certainly come across our desk. So, and we've also paused on a number of things, right?

Okay, so if we look at slide 13 then and how you've managed the cycle quite well, and we get to that point where the right side of this starts to turn up significantly and, you know, those opportunities haven't presented themselves, at what point do you maybe change your capital return policy because you've missed the opportunity to invest in the business and don't want to do it? in any other manner but in a prudent way.

I think this is an important point because, of course, if the market turns and if we haven't been able to buy more ships, we have 29 VHSCs ready to roar and generate a lot of money. And our capital allocation policy says minimum 60%. So it doesn't prevent us from then thinking differently about this as we go forward. It's a bit hypothetical. I think we should be able to invest a bit more this year, and people might be sellers for different reasons. But I think keep in mind it's minimum 60%.

Yeah, that's a good point. Thank you, Simon. Thanks, Trixa. Thank you.

Thank you. And the next question comes from the line of Omar Nocta from Carlson's Plateau. Please ask your question. Your line is now open.

Yeah, thank you. Hey, guys. Yeah, just maybe wanted to ask a bit of a general question. You've done, obviously, a fantastic job of putting DHT in a strong position, both commercially and financially. In terms of a market recovery, you're becoming more acquisitive at the moment. Obviously, the rates are very weak, but can you give us a sense of what you're looking for or what signs you're looking at to gauge market recovery for the tanker space?

We think that the main thing to watch is really COVID, that we are suffering now with reduced oil consumption on a global basis because people are in lockdowns and so forth. But we're optimistic that once the vaccines are rolled out on a sufficient scale, that we will see people returning to past consumption patterns and we expect to see a market increase in global oil consumption. And as far as the inventory overhang, that has been worked on quite significantly already. So we think the number one factor to monitor is the vaccine rollout.

Yeah, it does seem just as simple as that. I do have a follow-up. Obviously, you've only got $14 million of net debt per ship, which is clearly below scrap value, giving you a lot of flexibility there. With regards to the financing of the two VLCCs, you mentioned DHT-style financing. Can you give maybe just some further color on what that is, maybe in terms of whether it's term, duration, that type of thing?

Sure. What we typically want to do is to borrow up to or around $2.5 million per year of remaining economic life. So for a five-year-old ship, we figure there's 15 years left in them, and 15 times 2.5 is $37.5 million. And with that said, then the annual installments to repay the loan based on the mortgage financing would be $2.5 million. so a 20-year profile on the loans. And as far as the tenor of the loans themselves, five years is the industry standard. The last two big ones we did were six years, so we certainly tried to stretch it as much as we can. But the point is that we're not really looking at a percentage of value when we borrow money. We look at how much we are comfortable to commit to in terms of debt service on an annual basis in order to keep our cash break evens as sharp as they are. So that's what we mean with DHT-style financing.

Okay. Very good. That's really helpful. Thank you for that. I'll turn it over.

Thank you. And the next question comes from the line of Robert Silveira from RE Silveira Association. Please ask your question. Your line is now open.

Thank you, gentlemen, for a great job. And I'd like to say that I really love the presentation format that you did. Very clear, very easy to understand. We have gotten the two new ships. Can you give me some feeling as to our ships right now? Do you see selling any of the older ones or turning them to scrap during this coming year?

2021 or 2022 i think you know our counter cyclical strategy typically would involve a desire to try to sell older ships when the market is very strong but during this last up cycle values didn't appreciate as much as the earnings opportunities so we managed to secure time charters on several of the older ships that we have that far outstripped sort of the opportunity to sell so we elected to keep the ships and earn monies. As an example, our two 2004-built ships were on one-year time charters, earning monies in the high teens of millions each, which of course was a much greater benefit to the company as opposed to selling them. Of course, we are mindful that some of these ships are getting older. They are all quality ships. and certainly have additional opportunities to dance in the recovering market. But they will also be candidates for potential divestiture if those opportunities come. But it's not like they have a fixed policy that at a certain age they have to go. Unless we reach to 20, then they will definitely go.

Okay, good. How many do we have? That costs only two of them, right?

We have three ships that are built in 2004.

If you look at the trough we're in, you made the comment earlier that if we can't find any good deals on ships and the rates begin to rise, I would like to encourage you again to maintain the attitude that you have of strengthening the balance sheet. it is obvious to me that the wonderful way that you have done that and reduce the debt so significantly is definitely reflected in the share price, which just recently went above $6 again, a share us. And I find it kind of ironic that, um, frontline that has a totally different attitude toward debt than you guys do. Um, is not that far away price-wise any longer from the price of our shares. And the spread that was there in the days when they tried to obtain us is quite narrower now, which I think is a reflection on the wonderful job you guys have done of managing debt and managing the business. So I just want to compliment you and I want to Encourage you to, whenever possible, go after the debt again and maintain the same philosophy that you've maintained because it's a very good one. And that's basically all I have.

Thank you very much. Appreciate it.

Thank you.

I appreciate you guys. Thank you.

Sorry. Thank you. If you wish to ask a question, please press star and run on your telephone keypad. And our next question comes from George Bowman from CF Securities. Please ask your question. Your line is now open.

Good morning, gentlemen. Thanks for taking my call.

Good morning.

I've got a quick question. A couple of quarters ago, you mentioned that one of your ships had been hit in a port, an accident, and not your fault, and you were expecting an insurance settlement. Wondering if that has been settled, and if so, for how much?

It's not yet settled, so there are no negotiations, if you like, between the two insurance companies, but there's no question about fault, it's more a question about outcome, financial outcome. We feel it's not prudent to try to suggest any number at this point. But the ship is fully operational back in business. And again, there's no dispute about fault.

Okay, great. So we're expecting possibly a multimillion-dollar settlement there sometime in the future?

I think that would be overstating the result of the claim.

Okay. Alright. Then, in general, I would welcome your comments about the market in general. We've seen reports, press reports, about companies ordering as many as 10 ships, then canceling those orders. Then we've seen a report that a prominent, I think a Chinese shipper, was scrapping up to 10 vessels in their fleet. How do you see, at the moment, looking at buying opportunities, etc., You've got your ear to the market. Do you see any scrapping of older tonnage in the current market? Has that increased recently or is it still, everybody's still fixed under time charters that expire here in the first quarter?

I think for your first part of the question, there was an order that was reported for 10 ships at the Hyundai in Korea. This order was really a project broker who tried to put the deal together with financing and long-term charters. And I think most of the market participants, us included, had some doubts that that would ever go through, and it has now failed. So those 10 ships are sort of out of the way, if you like. When it comes to scrapping or demolition, in a weak market like now, and also with the strong scrapping prices, one would expect scrapping to sort of start to get traction. But there are a number of sort of the old ships that are involved in trades that would not sort of pass a KYC test for a company like DHT. And until sort of this maybe normalizes or changes, I think there will be some opportunities for these ships to continue to trade a little longer. Of course, they will have the sort of CAPEX decisions to make the dry docks, ballast, water treatment systems and typically those sort of investments turn to develop or be a fork in the road for these guys. Are they going to spend millions of dollars or not? So I think we're hopeful that you will start to see retirement during the year, but so far it's been very limited.

Okay. Thank you very much, and I look forward to hopefully stronger quarters to come. Maybe we've seen the bottom here in the fourth quarter.

We shall see. Thank you.

Thank you.

Thank you. There are no further questions. Please continue.

Okay. Thank you very much to all for following DHT, and we're wishing you a continued good day.