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DHT Holdings Inc  (NYSE:DHT)
Q4 2018 Earnings Conference Call
Feb. 07, 2019, 8:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to today's DHT Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in the listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise everyone that the call is recorded today Thursday, the 7th of February 2019.

I would like now to hand over the conference to your speaker, Ms. Laila Halvorsen, CFO. Thank you, go ahead please.

Laila C. Halvorsen -- Chief Financial Officer

Thank you. Good morning and good afternoon, everyone. Welcome and thank you for joining DHT Holdings fourth quarter 2018 earnings call. I'm joined by DHT's Co-CEO, Svein Moxnes Harfjeld and Trygve Munthe. As usual, we will go through the 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, through February 13, 2019. In addition, our earnings press release will be available on our website and on SEC EDGAR system as an exhibit to our Form 6-K.

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 repayment, the outlook for the tanker market in general, daily charter hire rates and vessel utilization, forecast of world's economic activity, oil prices and oil trading patterns, anticipated levels of newbuilding and scrapping and projected drydock schedules.

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 SEC EDGAR system, including the risk factors in these reports for more information regarding risks that we face.

Agenda for today's call is Q4 financials, business update and market update. Looking at the income statement, our EBITDA came in at $61 million and a net income of $12 million or $0.08 per share. Adjusted for non-cash change in fair value related to interest rate derivatives of $6.2 million, the result would be $18.2 million or $0.13 per share.

OpEx for the quarter was $8,100 per day for the VLCC and $7,700 per day for the whole year. Our Board has elected to pay a dividend of $0.05 per share. This marks the 36th consecutive quarterly dividend, and will be paid on 26th of February to shareholders of record as of February 19th.

In December 2018, the Company also purchased 1.2 million of its own shares for an aggregate consideration of $5 million. Combined with the cash dividend, the Company will return $12.1 million to shareholders, equal to 67% of net income adjusted for the non-cash change in fair value related to interest rate derivatives. The average earnings for our VLCC came in at $34,900 per day in the fourth quarter with a shift time-charter earning $35,000 per day and the spot fleets earning $34,800 per day. As of today, we have booked 67% of our first quarter at $37,200 per day.

Moving over to the balance sheet. The quarter ended with $95 million net of cash. This does not include our undrawn revolving credit facility with $52 million currently available. As previously disclosed, we have also secured scrubber financing of $50 million, where only $5 million is drawn. Financial leverage is modest with interest-bearing debt to total assets just above 52% based on mark-to-market.

Finally, looking at the cash bridge, we would like to highlight that we generated $61 million in EBITDA, and after debt service and maintenance CapEx, we're left with $29 million in cash from operations. Investments in newbuildings saw a strong term debt consumed $7 million and net proceeds from the sale of the two Aframaxes generated $17 million. Finally, net working capital increased by $20 million as the reflection of a stronger freight market.

With that I will turn the call over to Svein.

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Thank you, Laila. Our current program for repurchases of our own securities was installed in March 2018 with a limit of $50 million. The program is authorized through March 2019 and may be suspended or discontinued at any time. As announced earlier this year, we bought close to 1.25 million of our own shares in December, for a total amount of about $5 million.

The price on average was $4.07 per share, and the transactions were accretive on both metrics of earnings per share and net asset value. Both shares have since been canceled. You should look at the share repurchase in connection with announced cash dividend of $0.05. As such, we are returning 67% of adjusted net income to our shareholders.

We will now provide you with an update of our scrubber project. We will by 2020 have 18 out of our 27 VLCCs fitted with scrubbers i.e., two-thirds of our fleets. This comprise of two newbuildings and 16 retrofits. They will all be fitted with open-loop systems. The systems can be converted into hybrid systems. However, we do not expect this to be a likely scenario. 15 of the scrubbers will be able to clean the sulphur down to 0.1%. This capability enables the ships to operate with scrubbers within emission control areas and ports, where permitted.

Importantly, we commenced the project several years ago in anticipation of IMO 2020, whereby we configured our ships fuel tank lay-out allowing all our ships to carry various grades of fuels in segregation. Our operating mode then facilitates flexibility consume -- to consume compliant fuels with 0.5% or less sulphur content, when in emission control areas or ports that do not permit operations of scrubbers. Our assumptions and our configuration was in anticipation of countries implementing stricter rules related to the use of scrubbers when ships operate in their respective near seas and ports. As such, recent announcements by various states do not permit the use of scrubbers in their port or coastal areas do not change our expected economics for these investments.

Our two newbuildings delivered from Hyundai during the second half of last year where both were fitted with scrubbers. We are following these commenced our retrofit project with the first two retrofits completed during the fourth quarter of last year. The ships were DHT Lake and DHT Raven, both built 2004. The project was conducted in connection with the respective third special survey and dry-dock. Both projects completed below budget and on-time. We have concluded on the depreciation profile that we will use for our scrubbers; each individual system will commence depreciation upon actual installation and carry through 2022. We believe this to reflect a realistic yet conservative expectation of economic benefits.

And with that I hand over to Trygve to discuss the markets.

Trygve P. Munthe -- Co-Chief Executive Officer

Thank you, Svein. Before we open up for Q&A, allow me to give you the highlights of our market outlook. After two quarters with healthy rates, we are now heading into the typical seasonal weakness in the large tanker market. In addition to the usual seasonal factors, we are at this point also suffering from the OPEC plus cuts, and a heavy delivery schedule of newbuildings.

Fuel cargoes in the market, coupled with 10 new VLCCs delivered in January alone is not a very constructive combination. And as we have addressed before, newbuildings are weighing on the freight market, not only because they increase supply, but also because not all customers are willing to take ships on their maiden voyage, which means that these new shiny ships need to discount their rates in order to get going. We could certainly say it's a tough business we're in, most customers don't want older ships, but they don't want new ones either.

So if we try to look beyond the next few months, we are much more bullish. We expect the preparations for IMO 2020 to start in earnest in the second half of this year. This should be constructive to the freight market as, one, fleet efficiency will go down, the ships are taken out to service to clean tanks or install scrubbers; and two, as refinery runs we'll probably have to increase in order to deliver sufficient compliant fuel. But even without disperse of IMO 2020, we believe we would be heading into better markets.

Our reasons for saying so is four-fold. First, the world continues to consume more oil every day, every year. Secondly, the majority of the increase in consumption happened in the Far East, while the incremental oil production now is in the Atlantic Basin. That spells long-haul transportation and that's the business we're in. Thirdly, all inventories have come down over the past couple of years, so we don't expect much -- much consumption to be sourced from inventory in the next several quarters. Lastly, while scheduled newbuilding deliveries are heavy this year, it will drop off dramatically over the next year.

At the same time, we expect scrapping to continue at reasonable levels simply because they are now big classes of VLCCs that have reached the end of their economic lives, and because of the required CapEx associated with the ballast water treatment requirements kicking in the third quarter this year. So in summary, oil demand is growing, fleet growth is slowing, inventories are down and IMO 2020 is coming to town.

With that, ladies and gentlemen, we are ready to take your questions. Operator?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question-answer session. (Operator Instructions) Thank you, we will now begin our Q&A and we'll now take our first question. Please go ahead, your line is open.

Jonathan B. Chappell -- Evercore ISI Institutional Equities -- Analyst

Good afternoon, guys. It's Jon Chappell from Evercore ISI. First question, just big picture strategy, I think you've done a great job over the last 12 months or so even '18, kind of, creating a company with pure play focused on VLCCs, early mover on addressing the IMO 2020. But as you think about the next two years to three years, do you think you have the fleet in place to take advantage of the cycle that you see or do you think that there is still opportunity for expansion vis-a-vis still keeping a relatively strong balance sheet and executing the 60% capital return to shareholders?

Trygve P. Munthe -- Co-Chief Executive Officer

Interesting question, Jon. As you've seen from past performance, we are focused on trying to get the timing right when we expand the fleet. If you look at our tenure with DHT, it's really been two phases that when -- when we have been aggressive on growth. And in hindsight it turns -- it seems to be good timing. We think that the 50% fleet expansion that we did in 2017 behold (ph) as well, we feel that we have an excellent fleet going into this upcycle. And we do -- also do believe that the best acquisitions are now really behind us. So further growth in and of itself at this point is not really a top priority for us.

Jonathan B. Chappell -- Evercore ISI Institutional Equities -- Analyst

Okay, great.

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

I think should if I may add to that I think there's sort of two key aspect that we should expect from us during the next upcycle -- for this upcoming upcycle; one is to return money to shareholders and two, to further strengthen the balance sheet coming into the next down cycle whenever that will show up.

Jonathan B. Chappell -- Evercore ISI Institutional Equities -- Analyst

That make sense. Thank you. Just a quick update, thanks for the, kind of, qualitative update on the scrubber program. Just quantitatively, can you just remind us the CapEx schedule for this year as those retrofits are completed? And is the debt -- the financing lined up completely with the CapEx or we shouldn't expect any kind of huge equity dings from quarter-to-quarter?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Well, the sort of program is a bit packed in the second half, if you like. But we already done two, as we mentioned, we have some starting in end of second quarter. The total CapEx is roughly sort of in the $70 million -- around the $70 million mark, and as you know, we had a $50 million financing on this. So for now, it's intent is to use the resources we have at hand to finance the remainder. So we will not issue any equity of any sort or we were not planning to raise any additional financing.

Jonathan B. Chappell -- Evercore ISI Institutional Equities -- Analyst

Okay, back-end loaded though, so maybe 60%, 70% of the off-hire time should be -- will be in the second half?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Yes, I think that's a reasonable assumption.

Jonathan B. Chappell -- Evercore ISI Institutional Equities -- Analyst

Okay. Final question, pretty noteworthy that G&A dropped significantly in the fourth quarter, both sequentially and year-over-year if you strip out one-time items. Is that an appropriate run rate to use going forward or is there kind of one-time events there that made that lower and maybe think about full-year 2018 as a more appropriate run rate?

Trygve P. Munthe -- Co-Chief Executive Officer

We think it's the latter, John, that you should really look at the full year 2018 as more of a run-rate. Towards the end of the year, there's always some extraordinary items and this year it was some reversals of accrual. So that's why we ended up that, but if you take the full year and divide that in four that's a reasonable estimate on future run rate.

Jonathan B. Chappell -- Evercore ISI Institutional Equities -- Analyst

Okay.

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

I think if you, if you just look at our G&A expense over the year, I think you will find that DHT is -- has a very, very competitive cost structure, and looking at this asset per ship per day basis, I think you'll be hard-pressed to find anybody sort of matching this number in our space.

Jonathan B. Chappell -- Evercore ISI Institutional Equities -- Analyst

Is the move to Singapore are going to help that or is it going to maybe increase it a little bit?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

This move is into an existing infrastructure and we are not providing any more people. So for now, there is no sort of change, but if this structure will remain over time, we have to see. So of course, we cannot rule out sort of minor changes in G&A, it's the infrastructure losses will change.

Trygve P. Munthe -- Co-Chief Executive Officer

But it shouldn't really be anything material.

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

No, certainly not.

Jonathan B. Chappell -- Evercore ISI Institutional Equities -- Analyst

Okay. Got it. Thanks, Svein, and thanks, Trygve.

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Thank you.

Operator

Thank you. We'll now take our next question. Please go ahead. Your line is open.

Randy Giveans -- Jefferies -- Analyst

Hey, it's Randy Giveans from Jefferies. Good morning.

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Good morning.

Randy Giveans -- Jefferies -- Analyst

Hey. Two quick questions from me for the return of capital to shareholders. Let me first say, it's good to see you paid it on the adjusted amount netting back the interest rate derivatives, also good to see kind of a combination of dividend and share repurchases. That said, how did you determine that split and kind of the 67% of net income, higher than you're kind of policy floor of 60%?

Trygve P. Munthe -- Co-Chief Executive Officer

We -- given the share price where it was toward the end of last quarter, we certainly saw some opportunities of returning capital to shareholders in a very good way or that is what -- accretion both on EPS and on NAV, but we also think that cash dividends has a role to play, so we wanted to strike a reasonable balance and we think we did so by doing $0.05 and 1.25 million shares.

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

But importantly also the buyback is at a time where we're generating positive cash flows. So it would not be that we will use sort of reserves to buyback stock. It will be at the time, when the business is sort of thriving, so--.

Randy Giveans -- Jefferies -- Analyst

Sure. Now makes sense for sure and then for the scrubber retrofits, how many days did that take per vessel in 4Q 2018, and is there, kind of, on-time and on-budget? But can you give some clarity around days and was it any additional time in addition to the normal special survey kind of dry-docking?

Trygve P. Munthe -- Co-Chief Executive Officer

We have planned for 30 days of five per (ph) project, and this project was delivered on-time or maybe -- even marginally below and cost-wise, it was below budget. So this were the two first retrofits, of course, we've built some contingency into our entire project, and you don't really know in advance how this -- all these projects will sort of be run. So it was a good experience to go through these two first, and we'll continue to do our best and stay sharp on doing this at the lowest cost possible. But I think when we've done with all this, we will provide an update on, sort of, what we ended up with -- so there's still moving parts in this. I don't think we should -- we will share any further details in that regard at this point.

Randy Giveans -- Jefferies -- Analyst

You know, that's fair. And I guess one quick industry question. Looking at everything going on in Venezuela, have you seen any either additional congestion down there or any new routes emerging from that chaos?

Trygve P. Munthe -- Co-Chief Executive Officer

Not really, we haven't traded in Venezuela for a very long time, so we don't really have direct insights by having ships, sort of, in the water or in their waters. But typically all these sort of disruptions tends to be good for shipping in one way or another, but we are of course, now in a market with some other speed bumps. So there might be hard to see right now as we speak, but then, it maybe a bit too early.

Randy Giveans -- Jefferies -- Analyst

Okay. Understandable. Okay, thanks again. Solid quarter.

Operator

Thank you. We will now take our next question. Please go ahead, your line is open.

Noah Parquette -- JPMorgan -- Analyst

Thanks, it's Noah Parquette of JPMorgan. I just wanted to ask, you know, I'm sure you guys saw that the report from the European Commission's IMO talking about, I don't know, clarifying rules on scrubbers, you know, kind of, talking about the environmental risk. Can you give your thoughts on -- does this change the landscape at all? Do you see risks that there is -- moving scrubber bands, the open-loop scrubber bands and more ports states banning within the waters, what are your thoughts on kind of how that plays out?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

I think, as we explained earlier on this call is that our base case has always been to consume compliant fuel, when in ports and then in coastal areas. So for the DHT business case, this does not change anything. And in a way we think this was sort of expected, and I think for many of these states, it consequences, sort of, politically correct the sort of follow through without necessarily having a scientific base to back up that position. So it doesn't really change anything for us. But I guess it will more have an impact for operators, smaller ships that operate more in their seas and the coastal transportation and other types of ships. The VLCCs are sort of the low-hanging fruit from an economic perspective in installing scrubbers, big ships, they are mostly out in open sea and they consume a lot of fuel.

Noah Parquette -- JPMorgan -- Analyst

I mean, do you see this being a scientific debate ultimately? I mean, obviously it's -- lot of it's good tackle is coming out the scrubbers. But from the crowd that is putting scrubbers on -- in place, are they preparing defense, is this going to be like a scientific debate or will it be just sort of a fear mongering, where the -- how the policy gets done, I mean, it's just, it's accelerating pretty quickly and I just, as you're major scrubber -- the operator, so I just wanted to see what the strategy is from your side?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Yes, people have different reasons for doing what they're doing or meaning or thinking what they're thinking, but I think from a ship owners perspective, there's sort of two camps that are against scrubbers; either ones who haven't got the money to do it or the other tier camp that sort of came way too late for the party to do this in a credible and realistic fashion well ahead of the 2020 timeline.

Noah Parquette -- JPMorgan -- Analyst

Okay. All right. That's helpful. That's all. Thank you.

Operator

Thank you. We will now take our next question. Please go ahead, your line is open.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Yes. Hello and thank you. This is Fotis Giannakoulis from Morgan Stanley. I would like to ask you about your decision to depreciate the scrubbers in -- within three years. Does this implies your view about the period that the scrubber will be economical or you are just trying to be conservative here? And in your view, what kind of, the spread you expect to develop over the next five years?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Fotis, we made this investment decision based on certain assumptions on spreads obviously, and we found this to be a very robust and a compelling investment opportunity. What are the payback is going to be inside of one year or inside of two years, who knows. This is certainly quite a fluid situation, but we do expect that it will be a temporary phenomenon, and with three years, we think we are on the conservative side and that's where you want to be on establishing depreciation result.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Thank you. Regarding the trade flows both for crude then fuel oil after IMO 2020. I understand that there are some vessels that they are trading long-haul for fuel oil, how many vessels these are every year. And do you have any view of how many vessels they will have to be used next year to move the fuel oil to the cokers and also where -- this excess fuel oil is going to go, Middle East seems to be one example. Any idea of how much of the success fuel oil can be absorbed by Middle East, and if it's going to be the release of any crude, that is right now burned for power generation to the supermarket?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

These are tough questions, and very hard to give, sort of, meaningful answer to. We've heard oil experts with all kinds of different opinions, but we did take note of one guy suggesting that it's going to be flooded with heavy fuel oil that cannot be used by the shipping industry and it -- he was arguing that there would be a fair amount of floating storage. And so perhaps that's Suezmax business with heating coils and so forth. But, I think it's too early to have a firm opinion on how many ships are going to be absorbed into this trade and storage.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

And one last question regarding the quality of the fuel, I assume you've run several test right now or for the vessels that they do not have, they are not going to use scrubbers. How confident you feel that there is any industry will be -- will have available compliant fuel and the industry will avoid problems that we experienced last year with contaminated cargoes. Is this a concern for the sector and I'm not talking about the 18 ships that you are going to put scrubbers, I'm talking about the remaining ships?

Trygve P. Munthe -- Co-Chief Executive Officer

We certainly take fuel management very seriously and 2020 is going to present some new challenges to the industry. So we believe that what people would label as compliant fuel to be available, but there will be certainly different types and quality. Are they straight one, are they blended, are you buying from, you know, a proper counterparty, who also can control the logistics and the quality assurance, what terms are you buying on et cetera, et cetera. So this is a big project that I think many people are taking very seriously and certainly us included. So, you know, this in itself will likely also create disruption we think to the industry and thereby taking out some productivity of the tanker fleet and, you know, in some that is certainly positive for the tanker market, we think.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Thank you for your answers.

Trygve P. Munthe -- Co-Chief Executive Officer

Thank you.

Operator

Thank you. We'll now take our next question. Please go ahead, your line is open.

Robert Silvera -- R.E. Silvera & Associates, Marine Surveyors -- Analyst

Hello. My name is Robert Silvera, R.E. Silvera & Associates, Marine Surveyors. My first question has to do with as you sit and look forward for 2019 and 2020, do you have a feeling or an estimate as you work through, you know, what the order book is for new ones? Do you have an estimate of how many ships might be scrapped?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Yeah, there's some different forces of play to estimate that. Last year, we're sort of lucky with our estimate, but we take note that there are some 20 ships that are exposed to their port special survey i.e., at the age 20 and there are fifth intermediate survey at the age 22.5 this year. So some of these ships are in storage business and they might stay in that business not really be exposed to sort of leaving the transportation scene. But I think it's not a bad depth to expect at least the 20 ships to retire from the fleet this year. Of course, it depends on the price of scrapping and the freight market and all that, so --

Robert Silvera -- R.E. Silvera & Associates, Marine Surveyors -- Analyst

Sure. How about 2020, have you looked at 2020?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Yes, and there is a bigger class of ships, sort of, hitting these, sort of, CapEx anniversary since 2020. So again, you will have ships that not only will be older, but they will have to install ballast water treatment systems. So we would expect certainly the fleet to have a steady flow of retirement over the next few years.

Robert Silvera -- R.E. Silvera & Associates, Marine Surveyors -- Analyst

So, you come up with a balance between the new book and the scrap? Or do you come up with overall net less ships, because of the increased scraps during 2020?

Trygve P. Munthe -- Co-Chief Executive Officer

I think in 2019, you certainly have a large order book and you're not going to see 60 ships being scrapped this year. Next year, I think the order book is in the 30s somewhere so you -- whether it's going to be a marginal plus or flat, who knows. But we don't think that this market is really threatened by the supply side for 2020.

Robert Silvera -- R.E. Silvera & Associates, Marine Surveyors -- Analyst

Okay. My next question has to do with your buyback of stock. I love what you're doing, I'm very pleased with the way you are blending between dividend cash flow to us, as well as removing stock. And the removing stock methodology, may I suggest that you examine selling put options for instance, on the July 19th currently the last trade was for a $4 option was $0.45. So if you were optioning for 1 million shares that would put $450,000 into our treasury, and if the stock of course, does not go below $4 by July 19th, then we will pocket that $450,000. If in fact the stock goes below the $4, then of course, we will bought back another million shares and they will have cost us $4, less the $450,000 that we got for the options. So would you entertain doing stock buybacks through that methodology?

Trygve P. Munthe -- Co-Chief Executive Officer

We haven't considered that, and we'll put some thought to it and maybe we can continue that conversation offline.

Robert Silvera -- R.E. Silvera & Associates, Marine Surveyors -- Analyst

Yeah, well you have my phone number and love to talk to you about it, don't hesitate to call me, and it would be a very predictable way -- predictable cost way for you et cetera, and I'd love to see you incorporate that, because it could give us a nice steady cash flow over three month to four month periods of time, and retire stock if the price of the stock goes down, because the general market has been knocked down. In my opinion, you've done a wonderful job, I love the conservative approach, you guys seem to really understand your market and you approach it in a very wise way and we're very pleased. That's all my questions.

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Thank you. Thank you for the kind words. Operator?

Operator

Thank you. We'll now take our next question. Please go ahead, your line is open.

Magnus Fyhr -- Seaport Global Securities -- Analyst

Yeah. Hi guys, this is Magnus Fyhr, Seaport Global. Just had one question on uranium floating storage and see if you had any thoughts there. I guess the US has indicated that it will not grant new waivers and just interested to see if you have any thoughts there? What the current storage is and also what your thoughts are going forward?

Trygve P. Munthe -- Co-Chief Executive Officer

There is some storage, but it's a bit hard to pinpoint the ships, they are switching off their IF (ph) gear, and I think you, sort of, almost need to be on the ground -- on the water to have a look for yourself. But, certainly, some ships taken out given the reduced production level. So whether it's 10, 15 or 20, I would expect to be closer to 20 than 10. And there is some talks of people want to buy directly from Iran, but there seems to be concerned about what potential ramifications to other businesses. So it doesn't feel that the Iranians are getting much traction on selling directly by using their own ships either. So that oil is sort of seems to be out of the market, as well as the ships for now.

Magnus Fyhr -- Seaport Global Securities -- Analyst

Do you have, I mean, is floating storage the main option, or I'm not sure what on-shore storage capacity is in Iran. Do you have any ideas there?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Well, we have limited knowledge for that, but of course, they can also simply just reduce production rights, their output.

Magnus Fyhr -- Seaport Global Securities -- Analyst

Right. Okay. Great, thank you.

Operator

Thank you. That's our last question for now. (Operator Instructions) And thank you, we'll will now take our next question. Please go ahead, your line is open.

Nick Linnane -- Sefton Place -- Analyst

Hi, this is Nick Linnane here from Sefton Place. I have two questions. First one, for the ships where you don't have scrubbers, you plan to burn compliant fuel. When would you expect to start loading that fuel, and in particular, would you basically keep loading high sulfur fuel oil right until the end of this year and so sailing in Q1 of next year, still burning high sulfur fuel oil? Or would you stop loading the compliant fuel in Q4, so that you would then be burning that fuel from January 1, that was my first question.

And second question on scrubbers -- your scrubbers. Do you have any equipment that seeks to remove pollutants other than sulphur, so kind of heavy metals polycyclic aromatic hydrocarbons people talk about or any other form of large or do you just take the sulfur out and just directly discharge the water? Those are my questions. Thanks.

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

To your first question. The rules are such that you cannot consume heavy fuel oil unless you have a scrubber, after 1st of January 2020. So this of course, means that given also the long voyages of these big ships, we will start to clean out systems and supply the ships with compliant fuel during the second half of this year. And you also need to ensure that you'll have no contamination between the different fuel types. This will be a progress that will also happen depending on the positions of the ship when and how we'll do it, but it's a project that will probably take, sort of, during the second half of the year.

As to your second question, there are no sludge from the scrubbers that we will install. So there is no sludge handling required and the scrubbers are meeting the IMO requirements and that is what we are focusing on.

Nick Linnane -- Sefton Place -- Analyst

Okay. Thanks for taking my questions.

Operator

Thank you. That's our last question. (Operator Instructions)

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Well, thank you to all for following DHT and stay interested.

Trygve P. Munthe -- Co-Chief Executive Officer

Have a good day.

Operator

Thank you. That does conclude our conference for today. You may all disconnect. Thank you all for participating.

Duration: 39 minutes

Call participants:

Laila C. Halvorsen -- Chief Financial Officer

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Trygve P. Munthe -- Co-Chief Executive Officer

Jonathan B. Chappell -- Evercore ISI Institutional Equities -- Analyst

Randy Giveans -- Jefferies -- Analyst

Noah Parquette -- JPMorgan -- Analyst

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Robert Silvera -- R.E. Silvera & Associates, Marine Surveyors -- Analyst

Magnus Fyhr -- Seaport Global Securities -- Analyst

Nick Linnane -- Sefton Place -- Analyst

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