DHT Maritime (DHT) Q2 2019 Earnings Call Transcript

DHT earnings call for the period ending June 30, 2019.

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Motley Fool Transcribing
Aug 8, 2019 at 10:23AM
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DHT Maritime (NYSE:DHT)
Q2 2019 Earnings Call
Aug 07, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's second-quarter 2019 DHT Holdings Inc. earnings conference call. [Operator instructions] I must advise you that this conference is being recorded today on the 7th of August 2019.

I would now like to hand the conference over to your first speaker today, Laila Halvorsen. Please go ahead, Madam.

Laila Halvorsen -- Chief Financial Officer

Thank you. Good morning and good afternoon, everyone. Welcome, and thank you for joining DHT Holdings second-quarter 2019 earnings call. I'm joined by DHT's Co-CEO, Svein Moxnes Harfjeld and Trygve Munthe.

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 through August 8, 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; outlook for the tanker market in general; daily charter hire rates and vessel utilization; forecast on world economic activity, oil prices and oil trading patterns; anticipated levels of newbuilding 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 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. Looking at the income statement, our EBITDA came in at $38 million and a net loss of $10.5 million or $0.07 per share. Adjusted for a noncash change in fair value related interest rate derivatives of $7 million, the net loss would be $3.5 million or $0.02 per share. The average earnings for VLCCs came in at $26,400 per day in the second quarter with a shift sometimes shorter earnings $27,500 per day, and the spot fleet earnings, $26,200 per day.

Opex for the quarter was $19.1 million or $7,800 per day average for the fleet, and G&A for the quarter was $4 million equal to $1,600 per shift per day. For the first half of 2019, the fleet generated $31,100 per day in revenues on TCE basis. Opex per day for the first half of 2019 was $7,600 per day average for the fleet, and G&A for the first half of 2019 was equal to $1,600 per shift per day. As of today, we have booked 65% of our third quarter at $21,100 per day.

The company has elected to pay a cash dividend for the 38th consecutive quarter. A dividend of $0.02 per share for the quarter is payable on August 29 to shareholders of record as of August 22. Moving over to the balance sheet. The quarter ended with $71 million of cash.

This does not include $83.9 million currency available under our revolving credit facilities. As previously disclosed, we have also secured scrubber financing of $50 million, where only $5 million is drawn as of quarter-end. Financial leverage is moderate with interest-bearing debt to total assets just below 50% based on market values for this year. Looking at the cash bridge, we generated $38 million in EBITDA and positive cash flow from operations.

Following dividend and capex, the quarter was essentially cash neutral, ending with $71 million of cash. With that, I will turn the call over to Trygve.

Trygve Munthe -- Co-Chief Executive Officer

Thank you, Laila. Allow us now to just say a few words about our convertible bond coming to maturity on the 1st of October. The total outstanding is $33 million. The conversion price is currently $6.04.

We currently have no plan to extend or exchange this bond. So depending on the share price development, this will either convert or be deemed in cash on maturity. We will now give you a status report on our scrubber retrofitting project. As you will recall, we will have scrubbers 18 of our ships, equivalent to two-thirds of our fleet.

Two ships were delivered from yard with scrubbers, and the retrofitting program includes 16 ships. To date, we have completed six ships. We currently have two ships in the yard, and we'll have two more coming in later this quarter. That leaves six ships that will commence the retrofits in the final quarter of the year.

We are generally pleased with the work done on the first six retrofits. Cost and time spent have been in accordance with budget and expectations. With that said, we do recognize that the yards and manufacturers are increasingly busy, which may have an impact on the efficiency of future retrofits. Total capex for the retrofitting project is budgeted to be $70 million.

To date, capex paid is $21.4 million. And as previously announced, we have a scrubber finance facility of $50 million in place. To date, only $5 million has been drawn. With that, I pass it over to Svein.

Svein Harfjeld -- Co-Chief Executive Officer

Thank you, Trygve. We will then, from where we are sitting, give you some color on recent events and market. One, refinery margins stayed weak for longer, potentially extending an already deep refinery maintenance period. I retain the view that the current quarter should offer a significant increase in throughputs and hence, demand for transportation.

Refining margins are on the rise. And this last week has already seen an increase in cargo inquiries that might be the early innings of their predictions. Two, trade tensions affected the macro picture and demand. This is, of course, an aspect hard to predict and offer any credible guidance on.

We do note, however, with interest that despite the noise, the two leading economies state ambitions to engage in negotiations and possibly getting a deal done. Of particular note is China not putting any tariffs on oil imports from the U.S. Three, incidents in Middle East spurred short-term increases in the oil price. But as the owners were apprehensive and entering the area during these periods, an overhang on ships build up in the area, negatively impacting the freight markets.

Four, following a busy first quarter with 20 VLCCs delivered, the second quarter followed in similar fashion with 19 deliveries. As such, two-thirds of the planned order book for 2019 was delivered during the first half. We believe that only a handful of ships have left the fleet so far this year. Five, there are very few ships undertaking scrubber retrofitting during the first half.

We are, however, seeing a meaningful increase in this activity, and we expect a large number of ships going out of service to undergo these projects over the coming six to nine months. From what we are picking up through the grapevine, the yards are very, very busy and some potentially chaotic, and delays in manufacturing and project execution should be expected. We retain our view that from a shipping market perspective, things look very promising with several factors set to play into the hands of the ship owners. Key factors worth mentioning are a fleet getting older as retirements have slowed down, new regulations imposing capex related to ballast water treatment, a declining order book now at 11% and expanding transportation distances.

Stating the obvious, we are, however, as with most industries, reliant on a positive macro environment, offering growing economies and demand growth. And with that, we open up for Q&A. Operator, please?


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Questions & Answers:


Operator

Thank you. [Operator instructions] The first question comes from the line of Randy Giveans from Jefferies. Please ask your question.

Randy Giveans -- Jefferies -- Analyst

Howdy, gentlemen? How's it going?

Svein Harfjeld -- Co-Chief Executive Officer

Good. Thanks.

Randy Giveans -- Jefferies -- Analyst

So first looking at the time charter market, we're seeing one-year time charter rates of $35,000, maybe even $37,000 a day for ECO VLCCs without scrubbers. So have you seen that kind of market similar to those numbers? And also what are you hearing for one to maybe three-year time charter for a scrubber-feeded VLCC?

Svein Harfjeld -- Co-Chief Executive Officer

Yeah, there are for ECO ships with scrubbers, there has been done -- there has been time charters done in excess of $40,000, in the low $40,000s. And there is demand for those ships at probably similar numbers. I think for non-ECO with scrubber, there is also demand and the numbers would be marginally below that. So there is interest in time charter in general.

But I think over this past few weeks, now summer holidays maybe have impacted this, it's been a little bit more quiet than what we saw ahead of the summer. But through sort of general engagement with customers, we sense there is interesting -- there is interest still to cover. But I guess if -- from DHT perspective, we would like to see the expected freight market sort of rise through the fall before we engage in further discussions.

Randy Giveans -- Jefferies -- Analyst

Perfect, all right. That answers my follow-up there. So I'll go over with a different follow-up. So recently, [Inaudible] President's been out there saying -- questioning, maybe the development of bunker fuel cost and maybe availability of some different either HSFO, VLSFO, what have you.

So have you kind of seen that HSFO, VLSFO spread developing now that we're getting four, four and a half months from January? And then also will you look to purchase some of your fuel, either your HSFO for your scrubbers-fitted vessels or your VLSFO for your non-scrubber-fitted vessels early? Or are you just kind of, kind of wait and see how prices react in the next four to six months?

Svein Harfjeld -- Co-Chief Executive Officer

It's really the latter, that we have no plans to take a position in the fuel market, be it for compliant fuel for high sulfur before we really need a product. But as we have talked about before in these calls that, of course, for the nine ships that it will not be scrubbers fitted, it's a transition from the high sulfur to the new compliance, and that will probably start in earnest toward the end of the current quarter.

Randy Giveans -- Jefferies -- Analyst

OK. And then as far as the kind of spread development, how have you seen that in terms of kind of forward curve prices for the HSFO versus VLSFO come, call it January?

Svein Harfjeld -- Co-Chief Executive Officer

We frankly don't see anything else than what you can see yourself. So we don't really have any comments on that.

Randy Giveans -- Jefferies -- Analyst

All right. Well, that's it for me. I'll turn it over. Thanks.

Svein Harfjeld -- Co-Chief Executive Officer

Thank you.

Operator

Thank you. Our next questions come from the line of Jon Chappell from Evercore. Please ask your question.

Jon Chappell -- Evercore ISI -- Analyst

Thank you. Good afternoon, guys. I wanted to follow up on kind of Randy's first line of questioning. You have some of the first VLCCs that are out of the yard with the scrubber fits.

And when you announced the strategy, I guess around 13 months ago, you had mentioned the phrase, super profit. A lot has changed in the meantime, I think there's a lot more uncertainty on the market, although we're still as optimistic as you are. And you only have four time charters right now across your entire fleet, which is kind of light from a historical perspective. So how do you think of balancing the coverage of your fleet and using that within the scrubber strategy, maybe even if you do think there's a super profit for the scrubbers, using some of the non-scrubber-fitted vessels to lock in more coverage on the operating days?

Svein Harfjeld -- Co-Chief Executive Officer

Well, we'll, of course, look to maximize earnings on whatever we have on our hands. And you can read from the previous upturn in '15, '16, we did take advantage of the market and secure the numerous time charters at what we deemed at the time to be very attractive rates. And that's certainly something we would look to do again if we -- if that presents itself. So -- but you really need to see sort of a market with healthy spot market earnings for this really to develop, we think at levels that are attractive.

So we remain sort of waiting for now. So -- but I think you should certainly expect us to be active in the term market and then build more fixed income in due course.

Jon Chappell -- Evercore ISI -- Analyst

OK. And then thanks for the update on the remaining capex for the scrubber fitting program. Your comments about the yards becoming a bit more busy, what are you modeling out for off-hire time associated with the retrofits on the final 12 ships, both those that are in the yard today and those that will be in sort of the rest of this year?

Trygve Munthe -- Co-Chief Executive Officer

I think our sort of plan has been for about 30 days on every one of them. And for the first six, our average is right in that neighborhood. So what we wanted to convey in our general commentary was that there is, of course, an increasing danger that you are going to run into some snafus and incur more time. But we haven't really changed our planning on it.

We're just being aware that there could be unforeseen factors that are going to play into this. But we're not aware of anything at this point.

Svein Harfjeld -- Co-Chief Executive Officer

I think also just to add to that that our comment here is also general, it is not specific from the yard that we are doing the workup. So we are at our sort of go-to yard with all our ships, with our own people. We think we are well prepared for this. Of course, barring any unforeseen circumstances, I think we're well prepared.

But we are picking up things happening at other areas that are sort of challenging for people and yards in general. And this is only going to get busier through the fall.

Jon Chappell -- Evercore ISI -- Analyst

So kind of the read between the lines theme there is that other ships may be off-hire for significantly longer, which could tighten the market even further going into the end of the year.

Trygve Munthe -- Co-Chief Executive Officer

Yeah. Chances are that the average is going to go up for sure. There's a few times more ships are going to be retrofitted in the second half than what was done in the first half. So congestion there.

Svein Harfjeld -- Co-Chief Executive Officer

I think we expect maybe a total of 140 Vs to be retrofitted. And it's hard to take out the exact number, how many have done the work so far, but probably not more than 20-plus. So yeah, we have a good chunk of ships now that's going to be heading to yards over the next six to nine months.

Jon Chappell -- Evercore ISI -- Analyst

All right. OK. That's all I had. Thanks, Svein.

Thanks, Trygve.

Trygve Munthe -- Co-Chief Executive Officer

Thank you.

Operator

Thank you. The next questions come from the line of Frode Morkedal from Clarksons Securities. Please ask your question.

Frode Morkedal -- Clarksons Securities -- Analyst

Yeah. Hi, guys. Following up from the IMO 2020 theme there. What do you see in terms of the tank cleaning and off-hire days associated with that?

Trygve Munthe -- Co-Chief Executive Officer

We foresee that it's going to be maybe four days or something like that that if you elect to do this in port with the sort of specialist cleaning out your tanks, then something in the neighborhood of four days. But there is also a possibility that some of this can be done on the way, and of course, then less off-hire.

Frode Morkedal -- Clarksons Securities -- Analyst

I think there was -- last week, there was a Bloomberg article arguing that it's one minute to midnight and ship owners are totally unprepared for if it will switch. Do you agree with that or do you -- yeah, what's your view on the preparedness?

Trygve Munthe -- Co-Chief Executive Officer

We can, obviously, only speak for ourselves, and DHT certainly is well prepared for this. So of course, the scrubber program is only one aspect of this, but operationally also, we have planned out well with everybody involved, both onshore and onboard the ships now to how to get tracking on this. So we'll certainly try to minimize downtime and be as efficient as we possibly can.

Frode Morkedal -- Clarksons Securities -- Analyst

Final question is on the rates. Again, you think the leasing, I mean benchmark rates both for Q2 and also as far as we can see, the Q3 today, and that was also the story last quarter. And ask you then why are you doing so much better or relatively better than the market? Any further color on that?

Trygve Munthe -- Co-Chief Executive Officer

I think we'll answer in the same tone as last time, that we have an excellent fleet, and we have excellent people. And combined, it gives good results.

Frode Morkedal -- Clarksons Securities -- Analyst

OK. So it's not like you have any additional trade routes? Or are you more exposed to, let's say, U.S. boat exports or --

Svein Harfjeld -- Co-Chief Executive Officer

That is sort of the detail of what Trygve was saying is that we have equipment and people and procedures and a way of operating that certain customers certainly like and a lot of repeat business. And so in that, it's -- all this is sort of connected, right?

Trygve Munthe -- Co-Chief Executive Officer

And it's not like we have sort of a secret client that is paying front haul for backhaul or anything like that. We're in competitive markets wherever we go.

Svein Harfjeld -- Co-Chief Executive Officer

Yeah.

Frode Morkedal -- Clarksons Securities -- Analyst

Great. That's it. Thank you.

Svein Harfjeld -- Co-Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from the line of Robert Silvera from R.E. Silvera. Please ask your question.

Ronald Silvera -- R.E. Silvera & Associates, Inc. -- Analyst

Yes. In -- I'm sorry I missed a little bit of the early presentation. But as you view the third quarter right now, would you say that the third quarter will be kind of a carbon copy of what your second quarter has been, and there's no real improvement overall until we get to the fourth quarter?

Trygve Munthe -- Co-Chief Executive Officer

It's sort of potentially a reverse because going into the second quarter, we were somewhat benefiting from the rates that was booked in the end of the first quarter and then the quarter got weaker. And then the third quarter start, of course, with the bookings made in the second quarter at those numbers. And now we see a rise in freight, and it's a bit early to say whether it's going to sort of hit similar levels or potentially beat or not. So but I think what is important for us now is to continue to have very good control of our cost structure, delivering superior opex and adding cost numbers.

And our trading guys sit very much -- sort of sitting at the edge of their seats and doing whatever they can to maximize things and so it's hard to predict a particular result.

Ronald Silvera -- R.E. Silvera & Associates, Inc. -- Analyst

OK. But you don't see it falling off sharply, do you?

Trygve Munthe -- Co-Chief Executive Officer

I think as we alluded to, that the market has been lackluster at the get go this quarter, and we've seen over the last week or so an increase in -- increase for business, and rates are certainly up. So but whether this is the beginning of higher throughput in the refining industry as predicted by IA or not, it's hard to -- it's a bit early to say, but things looks promising, we think so.

Ronald Silvera -- R.E. Silvera & Associates, Inc. -- Analyst

All right. Are you having any problems with particular routes even though you have scrubbers, and those routes will not allow ships with scrubbers that you'll just have to have reduced sulfur fuels to be acceptable on those particular routes?

Trygve Munthe -- Co-Chief Executive Officer

No. And I think the news flow on areas where scrubbers are not committed is related to coastal areas and ports. And in DHT's plans for scrubbers, we never anticipated to use scrubbers in ports or in these coastal areas. So our game plan has always been to use scrubbers in open sea, and that remains very much the case.

The scrubbers are not in operation yet. This is something that will take place by the switch of the year into 2020.

Ronald Silvera -- R.E. Silvera & Associates, Inc. -- Analyst

I see. OK. That's all for me. And congratulations on doing, as well as you've done in a market that's a stressful market especially with all these tariff talks.

Thank you.

Trygve Munthe -- Co-Chief Executive Officer

Thank you. Appreciate the kind words.

Operator

Thank you. [Operator instructions] The next question comes from the line of J Mintzmyer from Value Investors. Please ask your question.

J Mintzmyer -- Value Investors -- Analyst

Hi. Good morning, everyone.

Svein Harfjeld -- Co-Chief Executive Officer

Good morning.

J Mintzmyer -- Value Investors -- Analyst

Yeah, good results, as the previous questioner was mentioning, for such a difficult market. I noticed you mentioned 65% of the VLCC spot days were fixed at a little bit over $21,000. Just to clarify, that's just the spot days, right? Is there any sort of guidance including the fixtures for your time charters?

Trygve Munthe -- Co-Chief Executive Officer

You're correct, that's just for the spot days, and that's the way we've been communicating in the past, and we don't really have any update on the variable elements on the time charter fleet.

J Mintzmyer -- Value Investors -- Analyst

Understandable, understandable. Of course, those time charters are a little bit higher than the spot rate, so that'll be a decent help going forward, hopefully. There has been some notes in the market about some time charters being done in the mid-$30,000s to lower $40,000s, especially those with scrubbers. Has there been any specific interest toward your company or anything that you've seen available?

Trygve Munthe -- Co-Chief Executive Officer

As I said earlier, I think it's fair to say that it's a bit of summer doldrums at the moment, that there is not that much activity in the period market. We did see some more activity and interest in the second quarter. Some of that didn't come to fruition, and we wouldn't be surprised if the activity picks up again after Labor Day.

J Mintzmyer -- Value Investors -- Analyst

OK, excellent. And the rates have been pulling back a little bit seasonally, right, that Q3 is always the weakest quarter. So it's not a huge surprise or anything there. But when the rates do start picking up, I noticed you were repurchasing stock earlier this year at a healthy discount to NAV.

As those rates do pick back up hopefully this winter, how do you think about your primary uses of cash going forward with the stock where it's at? Is -- are repurchases still on the table? Are we looking at those converts at all? I know the converts have recently pulled up above par, I think they're sitting around like 107 right now. Is there a certain way you think about that trade-off?

Trygve Munthe -- Co-Chief Executive Officer

I think our capital allocation policy is robust and stays in place, a minimum 60% of net income to be returned. Over the years, we have been certainly paying back more in the form of dividends than in buybacks. However, in the fourth quarter last year, in particular, we did see a big dislocation between the fundamentals of our business when rates were going up, ship values were being marked up. Yet, it's -- the stock was trading down dramatically, and we saw some good value-creation opportunities in buying back.

So I think it's too early to say, but we definitely will stick with our 60% minimum. Whether it comes in the forms of buybacks or dividends, it's really too early to say. First thing now is to get back with the black bottom line, and then we can start to paying out a little bit more, returning a little bit more than $0.02.

J Mintzmyer -- Value Investors -- Analyst

Yeah, definitely understandable. And I know investors aren't jumping for joy for $0.02, but it is nice to have at least a little bit of stability when the markets do have their seasonal weaknesses. So yeah, definitely a good job this quarter, about as good, I think as you could do considering the market rates, and we're looking forward to an increased winter season. Thank you.

Svein Harfjeld -- Co-Chief Executive Officer

Thank you.

Operator

[Operator instructions] The next question comes from the line of Nick Linnane from Sefton. Please ask your question.

Nick Linnane -- Sefton Place Advisor -- Analyst

Hi. Thanks for taking my question. Could you talk a bit about how testing of the 0.5% sulfur fuel is going, and how much of that testing you've done? And also to the extent that you notice how the refineries are making the compliant product, whether it's mostly through kind of running very, very low sulfur crude through their refinery system or whether it's through particular blending techniques? And whether you see a kind of a consistent pattern of -- in the product that's being offered for testing or whether there's kind of a lot of different product?

Svein Harfjeld -- Co-Chief Executive Officer

I think to the first part of the question, our technical department has tested the compliant fuels, and we have not experienced any instability or a problem with those. But there's just been limited testing so far. But we don't really have any worries so to speak, if you have a proper quality assurance program in place that as we have. So I think the latter part is more a question for a refining analyst of the refining industry, frankly.

But from talking to our customers, I think the compliance fuel will come in different shapes and form, whether it's to cracking or vacuum or blending or whatnot. So and they will be different, and they might not be compatible. So that's the sort of fuel management challenge that might come up, that fuel from one supplier produced in a certain way might not be compatible with another -- from another supplier producing it in a different way. So that's in the area where we will have a strong focus to ensure good operations of all our ships.

Nick Linnane -- Sefton Place Advisor -- Analyst

OK. And if I can ask one follow-up. For anyone placing -- looking to place new orders from the yards of VLCCs, when do you think now that they could get those ships?

Svein Harfjeld -- Co-Chief Executive Officer

Really early 2021, so --

Nick Linnane -- Sefton Place Advisor -- Analyst

Yeah. OK. Thanks. Thank you.

Operator

[Operator instructions] Dear speakers, there are no further questions at this time. Please continue.

Svein Harfjeld -- Co-Chief Executive Officer

Then it remains for us to just say thank you to everyone for your continued interest and support of DHT. Thank you.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

Laila Halvorsen -- Chief Financial Officer

Trygve Munthe -- Co-Chief Executive Officer

Svein Harfjeld -- Co-Chief Executive Officer

Randy Giveans -- Jefferies -- Analyst

Jon Chappell -- Evercore ISI -- Analyst

Frode Morkedal -- Clarksons Securities -- Analyst

Ronald Silvera -- R.E. Silvera & Associates, Inc. -- Analyst

J Mintzmyer -- Value Investors -- Analyst

Nick Linnane -- Sefton Place Advisor -- Analyst

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