DHT Holdings, Inc.

Good day and thank you for standing by. Welcome to the Q1 2023 DHT Holdings Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, you can press star 1 and 1 again. Please be advised, today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Leila Halvorsen, CFO. Please go ahead.

Thank you. Good morning and good afternoon, everyone. Welcome and thank you for joining DHT Holdings' first quarter 2023 earnings call. I'm joined by DHT's President and CEO, Svein Moxnes-Halfjell. 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 May 11th. 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 as detailed in our financial report. Actual results may differ materially from the expectations reflected in these forward-looking statements. We urge you to read our periodic reports available on our website and on the SSE Edgar system, including the risk factors in these reports, for more information regarding risks that we face. We have a rock-solid balance sheet represented by love leverage and significant liquidity. Financial leverage is about 18% based on market values for the shapes, and net debt per vessel was 12 million. The quarter ended with total liquidity of 346 million, consisting of 117 in cash and 229 available under our revolving credit facilities. You should also note that we have no new building CapEx commitments. We achieved revenues on TCE basis of 93.9 million during the quarter and EBITDA of 71.9 million. Net income was 38 million equal to 23 cents per share. We continue our good cost control with APEX for the quarter at 18.4 million and G&A at 4.6 million. The vessels in the spot market earned $54,600 per day, and the vessels on time charters made $35,000 per day. The weighted average TCE achieved for the quarter was $49,100 per day. Earnings were impacted by 112 scheduled offer days in connection with the installation of exhaust gas cleaning systems. and unscheduled off-hire mainly related to one of our vessels which encountered bad weather damage. IFRS adjustment for the quarter amounted to $5.4 million, equal to $3,900 per day. Hence, adjusted TCE for the vessels in the spot market was $58,500 per day. The IFRS 15 adjustment is simply due to the timing of when revenue is recognized and is impacted by low dates. These earnings will be transferred into the second quarter. We started the quarter with 125.9 million of cash, and we generated 71.9 million in EBITDA. Ordinary debt repayment and cash interest amounted to 5.4 million, and 61.9 million was allocated to shareholders through the cash dividend pertaining to the fourth quarter of 2022. We invested $14.8 million in our fleet with $2 million in maintenance capex and $12.8 million for installation of exhaust gas cleaning systems. In January, we terminated seven interest rate swaps and received $3.3 million in connection with the termination. In addition, we refinanced one of our large credit facilities with a net zero effect. and the quarter ended with $117.5 million of cash. In January, we entered into a $405 million secured credit facility, including $100 million accordion. This refinanced the outstanding amount on the ABN AMRO facility, and is secured by 10 of the company's vessels. It is repayable in quarterly installments of $6.25 million, equal to $625,000 per vessel, with maturity in January 2029. The new loan bear interest at a rate equal to sulfur plus 1.9%, which is equivalent to LIBOR plus 1.64%. The mentioned refinancing is in line with DHT-style financing, which includes a 20-year repayment profile and a six-year tenor. In connection with the refinancing, and as mentioned on the previous slide, we terminated seven interest rate swaps that would have matured in the second and third quarter of 2023. We received $3.3 million in cash in connection with the termination. Switching now to capital allocation. Our dividend policy was updated last year. Our key thought behind this was the combination of our strong balance sheet and no new building capex makes distributing 100% of net income good business. According to the new dividend policy, we will pay 23 cents per share for the quarter, returning $37.5 million as a quarterly cash dividend. The dividend will be payable on May 25th to shareholders of record as of May 18th, and this marks the 53rd consecutive quarterly cash dividend. The shares will trade X dividend from May 17th. In March, our board of directors approved a renewed share repurchase program of 200 million of the company's securities. The repurchase program has a 12-month duration and replaced the prior 50 million program. We have no immediate plan to deploy this program, but like to have our toolbox equipped should the capital market present the right opportunity. With that, I will turn the call over to Svein.

Thanks, Laila. Our Time Charter book currently consists of seven contracts. Three of them are coming off during the third quarter, and it is our intention and ambition to rebuild the Time Charter portfolio through the right opportunities with the right customers. We have recently secured a three-year Time Charter for the DHT Puma. The contract has a profit-sharing structure that includes a fixed base rate of $33,500 per day. The profit-sharing structure is based on certain indexes with the ship's actual economics, as such including the benefits of being an eco-vessel fitted with a scrubber. The first tier of earnings from the base rate to $40,000 per day will be allocated 100% to us. Earnings above this level will be equally shared between the customer and us. We have good experience with these structures from past time charters. As an example I reference, this time charter earned about $62,800 per day during March. We are here updating you on our bookings to date for the second quarter of 2023. We expect 620 days to be covered by our term contracts at an average rate of $34,800 per day. We further expect to have 1,390 spot days for the quarter, of which about 65% has been booked at an average rate of $70,300 per day. Combined, and as of today, this indicates bookings of 75% of the total days at weighted average earnings of 55,800 per day. In the last line, we are estimating the spot P&L breakeven rate of 24,900 per day for the second quarter, allowing you to model a net income contribution based on your own assumptions for the unfixed spot days. The bookings for the second quarter to date is a healthy start to the quarter with good prospects for the quarterly cash dividend. We have, however, seen a drop in freight rates since the beginning of the quarter. Current rates for an eco-scrubber fitted vessel starts with a four-handle, though the current sentiment suggests softening in rates. We discussed this on our prior call, and in order to avoid any misunderstanding, we take the liberty to show this slide again. The estimated P&L breakeven for the fleet as a whole is about 27,500 per day for the remaining three quarters of the year. When adjusted for the fixed income that we have, the P&L breakeven for the spot fleet is about 24,600 per day. For the remaining three quarters of the year, we estimate the cash breakeven for the fleet as a whole to be 18,500 per day, with the spot ships requiring to make 12,800 per day for the company to be cash neutral. Keep in mind that our cash breakeven numbers include all true cash costs. OPEX, G&A, maintenance capex, cash interest and debt amortization. This illustrates a headroom of about $9,000 per day between cash breakeven and net income breakeven for the fleet, with a potential annualized cash flow of some $70 million that will be allocated to general corporate purposes. This cash flow, combined with the capacity in our balance sheet, will enable us to invest when the time is right and the opportunities offer rewarding prospects. Here we provide you with an update on our project to retrofit the remainder of our fleet with exhaust gas cleaning systems. We have to date completed six of eight of the retrofits and thus have two remaining. We have not fixed the time for these two, but intend to use air pockets in the freight market to execute them. The project execution thus far has been according to plan, both from a cost perspective and in terms of planned off-fire days for the ships. The fuel spreads have alongside weakening refining margins come off, but are still offering premium earnings for the ships with systems installed. We now have 21 or 23 ships operational with systems and plan to be 100% fitted within this year. As we have mentioned earlier, these ships are the focal point of clients wanting to pursue term charters. On this slide, we illustrate developments in seaborne crew transportation over the past two years or so, and ton-mile development over the same time period. As you are all aware, the conflict between Russia and Ukraine disrupted trade patterns, which drove premium earnings for our smaller siblings. With a slightly longer retrospect, following the COVID setback, it has been a fairly steady and positive development. Importantly for DHT in particular, the graph on the left shows VLCCs handling close to 50% of seaborne crude oil on a nominal basis. Unsurprisingly, and due to its size and competitive cost of transportation, it represents about 70% when measured on a ton-mile basis. The VLCC is a true workhorse of the crude oil transportation market, and we think it's reasonable to expect this to prevail going forward. These are extraordinary times from a geopolitical perspective and our business is, as one would expect, impacted. We shall not offer you any geopolitical analysis or act as an oil market expert. That would be beyond our capacity. However, lifting the beams a bit, the three basic pillars for our business are positive. We have a growing demand for oil. We've got increasing transportation distances. and basically no new supply coming on. We think we are in the early innings of experiencing the benefits of these pillars, and it would likely continue to be volatile and seasonal. OPEC Plus surprised the market with its announcement a month ago. War, sticky inflation and increased interest rates, falling refining margins, raising concerns about demand and certain financial turmoil, are all tempering near-term expectations. Maybe OPEC Plus was ahead of the curve by trying to reduce the impact on oil price now and targeting a higher price for the forecasted recovery later this year. Our two cents only. China is, however, opening up and increasing consumption. And we do have a sense that non-OPEC supply will step up to compensate at least for part of this impact. and that will mean longer transportation distances. The tanking market has historically been prone for disruptions. As we speak, there are tankers involved in seizures in the Middle East Gulf. A certain significant flag state issued a security alert to its members, and we understand some owners failing under this flag have concerns about entering the area. If this plays out, it can abruptly decrease supply of ships in this highly important loading area. This certainly has risked the upside in the freight markets. Unrelated, there was recently an explosion followed by significant fire and fatalities in an older tanker anchored in Southeast Asia. We are seeing incidents and now accidents related to ships in the Shadow Fleet. If this trend evolves, it could make users of these ships, authorities controlling territorial waters in which they transit, and terminals accepting these ships, think twice about accepting and using them. If this price plays out, it could remove capacity, and again, it certainly has risked the upside. There are some near-term headwinds in the market. But we think one should not let this blur the long-term tailwinds supported by the key market pillars. Going forward, our plan is consistent and we will stick to our knitting. You should expect continued strong discipline in executing our business model and strategy. We have a great team of people in a no-nonsense company culture, all focused on delivering safe, reliable services to our customers and strong results for our shareholders. We are tuned to operate in the tanker market with a quality fleet of ships, all in the water, able to generate premium revenues. A rock-solid balance sheet, a low-cost structure with robust break-even levels. We think returning 100% of net income to shareholders to be fair and square, and with that, we open up for questions. Operator.

Thank you. If you would like to ask a question, please press star 1 and 1 on your telephone and wait for your name to be announced. If you want to withdraw your question, please press star 1 and 1 again. And we'll now take our first question. Please stand by. This is from the line of Chris Sung from Weber Research. Please go ahead.

Hey, good afternoon. Good morning. It's fine. How are you? Doing very well. Thank you, Chris. Good. On that time chart for the Puma, just to confirm, if rates are 50,000, THC gets 40 plus another 5, the 50% on the upside over 40. Is that right?

Yes, Craig. So above $40,000 a day on the calculator is the 50-50 share of income. But I think what's important to recognize there is that there is a pre-agreed calculator using this ship's specific economics. It's not a standard index ship. So the equal benefits of this ship and the scrubber benefits of this ship is in that calculation.

I see. And then for the increase, there's the option at the year end. Will that increase for the base alone or is that for both the base and the profit share?

The base.

and the threshold for the profit share will increase. All right, great. That was one question. And just on the second one, on your cash flow statement, I noticed that investments in vessels are a little bit higher than expected. Is that just for one scrubber? And how should I think about what future investments could look like?

Laila, you want to reply to that?

Yes, that's not just one scrubber, no. So that relates to the scrubbers installed during the quarter. But it's also worth mentioning that the cash flow effect is not timed exactly at the time of the installation. So I hope that clarifies.

Okay, all right. Sure, and maybe just one final one before I pass it on. Just hearing about that vessel that was damaged by bad weather, how long will that vessel be out for?

The vessel is back in service, but she was out of service for a while in the first quarter. So, you know, we had some, you know, rough weather damage and that's been repaired and that took a little while. So, and the ship is back fully classified and servicing its customers.

Perfect. Thank you guys for the call. I'll turn it over.

Thank you. We'll now take our next question. Please stand by. And this is from Jonathan Chappell from Evercore. Please go ahead.

Thank you. Good afternoon. Fine. Going back to the PUMA contract, that's a term that we haven't seen really in some time across the industry, maybe from the last boom cycle pre-global financial crisis. Are those the types of contracts now that are becoming more prevalent given some of the volatility in the market and some of the long-term tailwinds that you mentioned in the presentation?

I'd say no. This is a customer, some people we know well. It's not sort of a typical structure that is on offer, I think, in any way, but it has been developed between both the customer and ourselves, and it sort of worked well for both parties. I'd say liquidity in sort of term business is thinner now than it was, you know, say, in the fall and maybe in the winter, but very few things got executed, and the bid-ask spread was quite significant during the first quarter, and basically nothing got done. But we try to have close discussions with all our customers and we do have a sense that there is a genuine concern about supply of ships over the longer term, as the order book is a good example of. And also because a significant portion of the fleet has migrated into the shadow trades, the compliance fleet has shrunk quite meaningfully. So it also means that there are less operators or closed service providers that they would like to engage in term business with. So we expect there to be more opportunities to develop good cash flows with longer terms. And we've had some brief discussions on both three-, four-, and five-year opportunities, one even longer. But, you know, it takes a bit of time to develop and there's always a little bit of spread in what the two parties want. But we have a sort of clear focus on an ambition in developing these. So I think over the next, say, call it six to 12 months, you should expect the DHT to present more opportunities in different shapes and forms, but to get better visibility on earnings and becoming, hopefully in the long run, a more investable business, not just a trading business.

Okay, that's really helpful. Thank you. My second question, you mentioned the China demand reopening, hopefully, tail. I was hoping maybe you can explain a little bit on how you've seen that transpire so far. As you noted, the market is weakened of late. OPEC cuts really haven't kicked in yet. I mean, we're just in the early part of it, maybe a couple of weeks of V booking. So the V is being a good proxy for kind of long haul Chinese demand. and maybe some other industries raising some yellow flags about the China reopening. Has it been what you expected it to be? And what gives you the confidence that the country will still go back strong on its crude imports?

I think as we said in the press release, right, we have to sort of really see the details of how this cut will play out. I think one sort of reasonable, there's also a lot of sentimental psychology in this market, right? So So just a few weeks back, the AG East market, or Middle East to the Far East market, traded at a premium to the Atlantic market. And now, if not reversed, it's probably leveled out. So that's a reflection on the sentiment of expected oil coming out of the Middle East. China is for sure reopening and we've seen the latest numbers that refinery runs are higher than what they were on prior months and prior quarters. But we do think that these runs are primarily tuned to increase in domestic consumption. So we see now in the golden week now the mobility in China is a huge increase in flights and driving and whatnot. We're not suggesting this is a proxy for everything going forward, but it is an example that the society is moving in a more normal fashion. Golden Week is an annual event, right? And it tends to move people in the same way as maybe Thanksgiving in your country. So that is happening. And again, it's a bit too early to say how it plays out. Will all the cuts be implemented by the meter or... You know, I don't know, frankly, but some level of impact we think it will have, but oil price has not really been able to hold up, right? So, you know, I think we need to see it really happening in practice, at least for the oil price to respond. So let's see what happens on that. I think that might be a good indication on how this will develop.

All right. Thank you for the thought, Simon.

Thank you. We'll now take our next question. Please stand by. This is from Omar Nocta from Jefferies. Please go ahead.

Thank you. Hey, guys. Good afternoon. Definitely some good color you gave in your opening comments and then just now talking with John about the way the market is set up. I wanted to ask, obviously, the OPEC cuts, they just started. We've seen the impact on VLCC rates, and you had the headwinds in the near term off of that. How do you think over the next several, maybe call it three to six months, how the potential to replace those barrels are shaping up? Do you think there's an opportunity for cargoes out of the Atlantic Basin to potentially replace what we're not seeing from OPEC?

I think Brazil has increased their consumption steadily over quite a while now, and they're up to 3.1, 3.2 million barrels a day. And they are supplying the Far East market in particular. And we still have one ship on a term contract to the biggest producer in Brazil, and they do a lot of spot business, and there's still a lot of inquiries on that. So that's sort of, I think, the most obvious area. West Africa in general is lagging a little bit behind and they haven't been able to step up production-wise for a variety of reasons. But they have the opportunity to sort of step aside for these voluntary cuts because they have other operational issues. To what extent the US will be able to continue to grow, you might sit closer to the action than what we are, The latest sort of forecast we saw that people expect increased production of maybe half a million barrels a day this year. And Europe has been an increasing, you know, important market for US barrels. And we've done a number of shipments on the LCCs to Europe, which is sort of a new business. But there's still sort of steady exports going to China, in particular from the US. So there might be some there. North Sea is now basically all Europe, so we don't really expect that to go to the Far East to the extent it used to do, unless you get sort of willingness to pay for it, i.e. sort of the higher freight cost in particular, right? So it's predominantly Brazil, and secondary, maybe the U.S. has something to deliver.

Got it. Thanks for that, Kalle. And then maybe just sort of, you know, there's been a lot of discussion here over the past few weeks about refining margins having come off from their very high levels earlier this year. How do you see that translating into the market? Are we seeing an effect of that? You know, lower crack spreads, is that impacting vessel demand? And how do you see that going forward if crack spreads were to remain at these sort of levels? Does that impact the VLCC trade or is it somewhat insulated from that?

I think it's worth noting that the refining spreads are still positive, so the refiners are making money. As long as they're profitable, they tend to keep the runs going. It's more in the event that they turn neutral or even if it's a theoretical negative, then of course, then runs will tear back and that will impact the crude heat stock immediately. So I think for now it's still okay, but of course this is an indication of maybe, you know, maybe supply for refined products was too tight at some point, lifting this margin, and maybe now it's sort of getting into a more balanced market. But so whether it's sort of fallback in demand or whether it was just lack of supply that created those elevated spreads, I'm not an expert on that, but of course it's something we have to follow because if they get too close to zero, that will impact the transportation of feedstock.

Yeah, it makes sense. Thanks for that. And maybe just one final one, just to follow up to your answer to John about the time charters. And you mentioned for us to expect the HG to do a few things later this year, customer-wise. Is that just specific to time charters? Or do you see an opportunity to take maybe advantage of this potential soft patch that's ahead and acquire assets?

So far, there's no signal of at least estimated asset values to be softening. If they do, in our book, for us to make these sort of attractive opportunities, there has to be a quite meaningful correction in values. But there are different ways for us to invest. And as Laila commented on, we have extended the shared buyback program, but not only extended it, but also increased it in size. And the reflection or reason for this is that, number one, of course, the equity value of the company has increased as we have delevered. So we wanted to have more muscle. But also this is a period that if for some other reason, not just specifically in the tanking market, but if for capital market or economic reasons things reprice negatively, buying our own ships through buying back stocks is maybe the most interesting investment as opposed to buying hard assets. So we wanted to have our toolbox ready and if these opportunities come along, not that we necessarily wish for it to happen, But if it happens, we want to be ready.

Great.

Oh, very good. And just as an example, right? So between the summer of 21 and summer of 22, we bought back approximately 6% of the company. And at that time, you know, very attractive share prices, but from an investor perspective. So we have been able to do this in the past. And, you know, it could well happen in the future as well.

Awesome. Thank you.

Thank you. We'll now take our next question. And this is from the line of Frodo Morkadal from Clarkson Securities. Please go ahead. Hi, Swain.

Hello, Frodo. I have a question on the VLCC order book, which is now approaching record lows. And as you have seen, I guess, there's been some new orders for LR2 product anchors recently. So first, could you just talk about what you think is holding back new orders for the VLCCs? And secondly, what needs to change for people to start ordering vessels again?