DHT Maritime (DHT) Q2 2020 Earnings Call Transcript

DHT Maritime (DHT 2.55%)
Q2 2020 Earnings Call
Aug 11, 2020, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 DHT Holdings, Incorporated earnings conference call. [Operator instructions] I must advise you that this conference is being recorded today, Tuesday, 11th of August 2020. And I would now like to hand the conference over to your first speaker today, Laila Halvorsen. Thank you.

Please go ahead.

Laila Halvorsen -- Chief Financial Officer

Thank you. Good morning and good afternoon, everyone. Welcome, and thank you for joining DHT Holdings second-quarter 2020 earnings call. I'm joined by DHT's co-CEOs, Svein Moxnes Harfjeld and Trygve Munthe; and Wilhelm Flinder, the 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 August 18th.

In addition, our earnings press release will be available on our website and on the 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 repayments; the outlook for the tanker markets in general; daily charter hire rates and vessel utilization; forecast of 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 P&L highlights, EBITDA for the quarter came in at $178 million and a net income of $135.8 million or $0.92 per share. Adjusted for a noncash change in fair value related to interest rate derivatives of $0.4 million, net income was $136.3 million or $0.93 per share for the quarter. This sets another new record in the company's 15-year history.

Opex for the quarter was $19.7 million or $8,000 per day average for the fleet. And G&A for the quarter was $5 million. Moving over to the balance sheet, the quarter ended with $138 million of cash. During the quarter, we prepaid $59 million under the ABN Amro and Nordea credit facility.

The voluntary prepayments under the two facilities were made for all regular installments scheduled for 2021. Current availability under all our revolving credit facilities is $135 million, putting total liquidity at $273 million at quarter end. Financial leverage is 39.4% based on book value and 38.6% based on market values for the ships. Net debt is $582 million, which equals an average net debt of $21.5 million per vessel.

Looking at the cash bridge. The quarter started with $76 million of cash, and we generated $178 million in EBITDA. Ordinary debt repayments and cash interest amounted to $26 million, $52 million was paid in dividend, $10 million was used in scrubber and maintenance capex, $13.5 million was provided by scrubber financing, about $59 million was used for debt prepayment. Changes in working capital amounted to $60 million, and the quarter ended with $138 million of cash.

With that, I will turn the call over to Trygve.

Trygve Munthe -- Co-Chief Executive Officer

Thank you, Laila. Let me then walk you through the operational highlights for the quarter. As you've seen from the press release, our spot VLCCs earned $92,100 per day in the second quarter. The time charter ships earned an average of $62,700 per day.

Fleetwide, the average then becomes $83,300 per day. As of today, we have covered 61% of the available spot days at an average rate of $51,400 per day. More importantly, if you are an investor, on a fleetwide basis, i.e., with the time charter ships included, three quarters of the tanker days are covered at an average rate of $51,200 per day. That is with no profit sharing on the four ships with such arrangements.

Our aggressive pursuit of time charter opportunities earlier in the year was clearly the right strategy. With it, we have been able to extend the good times well into next year. On the cost side, the company continues to deliver stable and competitive numbers. Vessel operating expenses came in at $8,000 per day per ship for the quarter.

Cash G&A amounted to $3.1 million for the quarter. Let us then turn to capital allocation. For the 42nd consecutive time, we'll pay a quarterly dividend. $0.48 per share will be paid to -- on September 2nd to shareholders on record of August 26.

The amount equals 60% of net income divided by the fully diluted share count. In the quarter, we continued to strengthen our balance sheet by prepaying almost $60 million of bank debt. Specifically, we prepaid the 2021 regular installments on our two large loan facilities. In addition to the overall deleveraging effect, this move has a significant positive impact on next year's cash breakeven levels, something Svein will then discuss in more detail in a minute.

As you have noted, on the 17th of July, we exercised our call option on the $125 million convertible bond due August next year. The conversion price is $5.347 per share. Thursday next week is the last chance for bondholders to convert their notes into common shares. If they do not, they will be redeemed in cash at par on Friday, the 21st.

The potential cash redemption will be covered by cash at hand and a partial draw on our revolving credit facilities. And on a general note, we would like to add that we look forward to having this instrument retired from the capital structure. On previous occasions, we've been able to buy back convertible bonds in the open market at a discount. However, in recent quarters, this has been impossible to repeat as the bond has traded meaningfully above par, at times seemingly as if the call option was not priced in.

So in this context, we elected to call the bond at par. With that, I'll turn it over to Svein.

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Thank you, Trygve. The COVID-19 virus continues to present significant challenges with respect to changing crews at regular intervals. Consequently, many seafarers are serving longer periods on board than originally planned. There are too few ports and countries that facilitates crew changes and a variety of nationalities and immigration practices does not make this task any easier.

Additionally, the time required for crew changes are longer than normal and result in some off-hire. At DHT we have, however, had increasing success with crew changes and have to date had two-thirds of our fleet in ports to change some or all the group. This is a significant effort and achievement from both our seafarers and shore-based staff. As Trygve have discussed, we have taken advantage of the strong freight markets to build a meaningful book of fixed income for our fleet.

Importantly, this level of fixed income covers a significant portion of the company's cash costs and lowers the required rates in order for the spot ships to cover the remaining cash costs for the company. Specifically, we estimate that our 17 spot ships need to earn $2,800 per day for the company to be cash-neutral for the remainder of the year. This does not take into consideration third-quarter bookings to date. Hence, we are well ahead of this number.

Similarly, we estimate that the spot ships need to earn $11,400 per day to cover our cash costs in 2021. Cash breakeven might mean different things to different people. At DHT, it includes all true cash costs, i.e., opex, G&A, scheduled debt repayments, interest, and maintenance capex. Both these numbers are very robust and come as a result of our TC strategy and debt prepayments.

We believe that they make DHT stand apart with staying power and ability to generate cash even in weaker markets. Our industry is highly cyclical. Our industry is also very capital-intensive. Further, it is essentially a spot business, offering limited opportunities to build truly long-term fixed income at rewarding returns.

In recognition of this, DHT strategy is countercyclical. This means that we do different things depending on where we are in the business cycles. As you can see on this graph, our actions have been very focused during troughs and peaks. In late '13, early '14, we expanded aggressively by acquiring 16 VLCCs.

In the following period when earnings and asset values appreciated, we stopped investing and shifted our focus by paying handsome dividends, buying back bonds at a discount, securing time charter contracts as well as prepaying debt. In the trough of '17, we again expanded by acquiring 13 VLCCs at attractive prices. During the recent period of strong earnings, we have continued to execute on our well-defined strategy and extend our solid track record. This included the following three key components: one, rewarding shareholders with generous formula-based quarterly cash dividends; two, securing fixed-income contracts for several of our ships at attractive rates; and three, allocating a significant portion of our cash flows to prepay debt and further strengthen our balance sheets.

These achievements are very important in anticipation and preparation for the next step in our strategy as we expect the next leg in the market to offer attractive investment opportunities. Our balance sheet will have capacity to make meaningful investments without relying on raising additional equity. This will ensure additional investments will be accretive to earnings. Further, we enjoy excellent support from our lending banks and are confident in credit being available when we require.

In sum, we are now coming out of a period with exceptionally healthy freight levels and now position the company to be able to take advantage of attractive growth opportunities when they arise. And with that, we open up for Q&A. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question come from the line of Chris Tsung from Webber Research. Please ask your question.

Chris Tsung -- Webber Research -- Analyst

Hey. Good aternoon, guys. How are you?

Trygve Munthe -- Co-Chief Executive Officer

Good. Thanks.

Chris Tsung -- Webber Research -- Analyst

Good. Good. Good. Great.

Congrats on the great quarter. I guess, I wanted to just kind of dial in on the two-year time charter that you guys are able to sign for Stallion, I think $41,000 -- $42,000 a day. Is there a profit share component to this? And two, are there plan to do more of these? I know that you guys fixed in April for about $61,000 a day, probably capturing before any storage trade. But it kind of just sends like, I guess, a bear signal that current spot rates, which are around, let's call it, $18,000 a day, that these rates might persist.

And I guess, put another way, is there a price level or duration that would encourage you guys to do more time charters versus spot? And is there like a percentage of fleet that you guys are just aiming for to have like time charter versus spot that you guys think offers an optimal risk/reward return?

Trygve Munthe -- Co-Chief Executive Officer

To the first part, there is no profit sharing element on the time charter on Stallion as you referred to. To the second part, if there is a magic number on percentage covered on time charter and so forth, it is not, and that is really unchanged from over the years. We will pursue time charters when we think that the numbers make sense. So if we can lock in rates that give a good return on the investments in the vessels that we have, then we'll do it but it is not like we are desperate to lock in cash flow no matter where the rates are.

So we've done it in this up cycle, done as many charters as we could find. We did it in prior high markets, but you will note that in lower markets, we have not been nearly as eager to develop new time charter business. So it's more a reflection of what rate levels we see doable and not so much about the percentage of the total fleet.

Chris Tsung -- Webber Research -- Analyst

OK. Fair. Great. Thanks.

And I guess there's like recent news coming around -- surrounding congestion in China. I think Kepler peg like around 80-some-odd tankers currently being held up. And I guess, do you -- would you guys be able to have some sort of visibility into how much of this is a result of plan floating storage where charters are purposely holding or slow steaming right outside the ports as a form of floating storage or is there like a some sort of structural bottleneck or COVID-related congestion in China? And are you guys exposed to this in any way? And if you are, are the demerit charges, are they greater than the current headline spot rates?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Well, we think that number you mentioned certainly jives well with the reports that we are reading and also what are in terms -- sort of in terms is picking up. We believe this is really a reflection of inventories being quite full in China or latest issues with tanks. So it takes time for the refiners that have now also reduced some of the throughputs to consume these inventories, and that's holding up ships. We don't really believe this is so much of a contango play.

That was a much talked about in the spring. Also to your other part of the question, these ships, they do earn demurrage rates, under the demurrage rates will very much be a reflection of when these charters were fixed. We have had some ships on demurrage in China, and we still have. So -- and this is where we get paid every day.

And the rates certainly vary but as the market has come off recently, most of these demurrage rates are meaningfully higher than the current spot market.

Chris Tsung -- Webber Research -- Analyst

OK. Great. Yes, that's great. And it's kind of good to kind of be able to capture something steady to come in while spot rates have kind of taken a bit of a dip.

And I guess just my final question. I know that you said most of the crew discharging changes are going to take up a lot of the off-hire days and in your presentation or report, I think you had 77 off-hire days in Q3. I just wanted to get a sense of how much of that is the crew changes? And if you guys are still going ahead with the five vessels that are just starting to go scrubber retrofits and if that will still happen this year.

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

The crude changes are included in the scheduled off-hire days that you will see on the list. So it's sort of relatively minor number in the total scheme of things. But in general, it does take longer than what has been the norm in the past. Typically, you will do this while you do other operations, either discharging or loading or bunkering imports.

But now it might involve some deviation and some more time to sort of make the logistics work. So --

Chris Tsung -- Webber Research -- Analyst

And -- OK. Yes, it makes sense. And the scrubber retrofits?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Yes. So we postponed a number of these ships earlier as the earnings were very strong. And so some of these are yet to take place, and we are trying now to focus on these to coincide with natural dry docking days and/or when we will take the ships off-hire in any case. So that is something that we'll develop later this year and also into next year.

Chris Tsung -- Webber Research -- Analyst

Yes -- no it makes sense. That's super efficient. All right. Great.

Thanks, guys. Thanks for your time. Have a great rest of your day.

Operator

Your next question comes from the line of Randy Giveans from Jefferies. Please ask your question.

Randy Giveans -- Jefferies -- Analyst

Howdy, gentlemen. How's it going?

Trygve Munthe -- Co-Chief Executive Officer

Good. Thanks.

Randy Giveans -- Jefferies -- Analyst

Great. So I guess first question, just trying to get some more color around your decision to convert the 4.5% note at this time, right, given that the shares are trading well below NAV. And has there been a lot that have already been converted? And then I guess, the last part of this question, to avoid the dilution, will you look to possibly repurchase some of the amount of shares that you'd exercise?

Trygve Munthe -- Co-Chief Executive Officer

As we said in our remarks, we've really been trying to see if we could buy some of these bonds in the open market, but we found the pricing to be unattractive. And then back in mid-July, our share price was basically right at the conversion price. So we thought and we were hopeful that we're going to be able to sort of call it and redeem it in cash. But, of course, it's a 30-day notice period, so the share is trading -- or the stock is trading freely in between.

So it is still too early to say whether it's going to convert or not or redeemed in cash but I think in terms of consequential action on the outcome, that's speculative at this point. So we'd prefer to see how it all shakes out at the end of next week before we decide a potential next move.

Randy Giveans -- Jefferies -- Analyst

OK. And then [Inaudible]

Trygve Munthe -- Co-Chief Executive Officer

Randy, let me just add also that it is, of course, the dilution issue, if it is converted, but you see the pretty strong dividends for this quarter. You've seen our booking guidance for the current quarter is up. So by just waiting, we were afraid that dilution was just going to increase. So we elected to go ahead now that when the share price was at the conversion price.

Randy Giveans -- Jefferies -- Analyst

Got it. All right. That's fair. And then speaking of those quarter-to-date rates, obviously, very strong numbers, especially ahead of the benchmark rates you've been seeing in the last few weeks, but a little below your peers.

Is this because of your time charters, I guess, gave away some of that spot exposure upside in May and June? I mean what kind of premium did your scrubber-fitted VLCCs earned last quarter and maybe so far this quarter? And then what are kind of the current rate levels that you're booking at VLCCs, maybe your most recent or this week?

Trygve Munthe -- Co-Chief Executive Officer

We don't have a specific dollar per day number for you, but what you see in the different broker reports on the delta between compliant fuel and old-fashioned heavy sulfur or sulfur fuel is a good indication. And just multiply that delta with a daily consumption, and that's really our answer. So of course, this spread is -- it's much tighter now than what most people anticipated at the beginning of the year. But year to date, we have essentially recovered half of the capex on the retrofits that we have done, and it is not obvious to us that the margin is going to stay where they are.

They might as well expand or go back out again. But that's speculative to have a strong opinion on it.

Randy Giveans -- Jefferies -- Analyst

And then most recent booking or rates this week for VLCC?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Well, we had advised what we have booked quarter to date, the current spot market is $20,000-plus per day, maybe low 20s. So, yes that's the market that it is today.

Randy Giveans -- Jefferies -- Analyst

Got it. All right. And then just a quick modeling question, the $9 million quarterly earmark. Should we use that for the rest of this year and into -- throughout 2021?

Trygve Munthe -- Co-Chief Executive Officer

No. For the rest of this year, it's sort of full regular installment schedule. So what we have prepaid is the year 2021 for those two big facilities, but we've not prepaid any regular installments for this year. And the reason for that is that our time charter coverage is so much stronger this year than what it is for next year.

So with a cash breakeven at $2,800 a day for the spot ships this year, it was better use of the cash to prepay next year's installments.

Randy Giveans -- Jefferies -- Analyst

Got it. So it's just timing difference.

Trygve Munthe -- Co-Chief Executive Officer

Does that make sense?

Randy Giveans -- Jefferies -- Analyst

Yes. That's fine. Thanks so much and congrats again.

Trygve Munthe -- Co-Chief Executive Officer

Thank you.

Operator

Our next question from the line of Dan Nolan from Stifel. Please ask your question.

Ben Nolan -- Stifel Financial Corp. -- Analyst

Thanks. This is Ben Nolan. Close, though a bit. I have a couple.

The first is -- I know that you guys take a very formulaic and systematic approach to how you think about buying and selling assets countercyclically, as you've talked about. But -- and it does sound like you're a little bit more open to the idea of expansion now than you probably have been in the previous quarter. Can you maybe just remind me where you -- or where those thresholds are in terms of what you view as historically good prices versus historically prices where you'd rather stay on the sidelines?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

No, we haven't been in an investment mode now for more than three years, so -- and we are in no rush to make new investments. I think all these preparations that we made for the company is to be ready when those things arrive. So we still think it's a bit earlier. We're not going to sort of flag a particular price for a ship.

But if you look back at the sort of trough in '13 and '17, you would note that five-year-old ships were sort of below $60 million and newbuildings were below $90 million. So in '13 -- and then it was below $80 million in '17. So that's sort of some indication but time will tell where this asset price will go. We think one key parameter to look at here is that the yards, in general, are -- well, they have got very, very little business.

And that might drive them to further reduce their pricing. And that will also, we think, impact the opportunities on second-hand ships. So that is really what we need to watch carefully now. But again, there's no rush.

We are just preparing the company, and this might be a next year event. So --

Ben Nolan -- Stifel Financial Corp. -- Analyst

Sure. And then I wanted to get back to the convert question a little bit. I mean, obviously, you guys -- it's complete common sense to want to take this out ahead of the dividend. There was no question that, that needed to be done but -- and obviously, I would say, at this point, pretty clearly, most of that is going to be converted into equity, but it does leave your share count a lot higher than what it has historically been.

From a longer-term perspective, is that -- are you good with that or would you view the company is underlevered, assuming that all of that is converted?

Trygve Munthe -- Co-Chief Executive Officer

I think if you -- if it converts, your leverage is going to be maybe south of 30% and so forth. But we don't have a fixed answer to what the right percentage is. As we've said many times that, for us, leverage really translates into cash breakeven levels, and we have been very, very careful not to run those up. But our leverage is going to change with the cycle.

So right now, we're maybe very conservative. You said underlevered, but frankly, if we were able to get it down closer to 0% leverage at this point in a cycle, we'd be even more excited because then we have tremendous financial muscle built in so that we can go out and buy things when nobody else there to do it when it's really at the trough. So that's what this is all about. And at that point, we'll still be happy to lever up to 50% or something like that.

But again, it's the nominal numbers that drives it. But that's the whole clue here that we're setting up the balance sheet so that we can do the right moves in the trough.

Ben Nolan -- Stifel Financial Corp. -- Analyst

OK. And then lastly for me, in the June update, you talked about the Scandinavia missing its time charter. Could you maybe just give a little bit more color on that? And I don't guess there was any ability to recapture that or anything of that sort?

Trygve Munthe -- Co-Chief Executive Officer

No. So when you agree to do a time charter, you'll agree for a delivery window of the ship. And this ship was impacted by what we talked about earlier on this call, [Inaudible] or shore tanks being [Inaudible]. So Scandinavia has spent almost two months getting their cargo out.

And just by a simple nature of that, she needs to reconciling, and we didn't plan for the ship to discharge for two months. The discharge terms was only three days. So -- and obviously, we will pay the demurrage in that period, but the unfortunate consequence was that we missed the charter.

Ben Nolan -- Stifel Financial Corp. -- Analyst

OK. All right. I appreciate it. Thank you.

Operator

Your next question comes from the line of Omar Nokta from Clarksons Platou. Please ask your question.

Omar Nokta -- Clarksons Platou -- Analyst

Hi, guys. My first question actually is -- relates to Svein, your comments in Ben's question, in relation to the potential change in tactics. After the three-year hiatus from the investment window, is there a particular part of the fleet you're looking at targeting? We've seen pressure really over the past several months on older vessels, resales, newbuilding prices. You mentioned it's still all under evaluation, but anything right now that jumps out of you as attractive?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

No, not really. So as we mentioned, this is just a question of explaining why we have done all the things we've done recently and preparing the company on what we expect to be sort of the next sort of significant activity in the company. So it's way too early to say that. And if you look at our past activities, we have done M&A, we have done newbuildings, we've picked up distressed assets.

So it could still be a mix of those things. And we'll look at where the best value is simply.

Trygve Munthe -- Co-Chief Executive Officer

I think, in addition to that, when we do go out and acquire things, there is another aspect, and that's some sort of fleet renewal.

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Sure.

Trygve Munthe -- Co-Chief Executive Officer

The preference would clearly be to look at ships built since 2015 or resales, but it is, at this point, difficult to see ourselves going out buying 18-year-old ships to gamble on an immediate spike in the freight market.

Omar Nokta -- Clarksons Platou -- Analyst

Yes. That makes sense. And obviously, it's a question that we've known the answer for some time, but how do newbuildings at this point with some of the uncertainty out there, how do those fit into the equation?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Pricing today in Korea is sort of mid, high 80s. And in China, it's low 80s. Last time we contracted, we did Hyundai big ships with a lot of equipment below 80. So you get delivery today in first half of 2022.

But again, point being, we are not sort of -- very sort of trigger-eager right now. We are preparing the company, and I think you will certainly be notified when we do something.

Omar Nokta -- Clarksons Platou -- Analyst

Yes, yes. Understood. And I have just maybe a follow-up to some of the discussion points. You've prepaid a lot of debt -- or sorry, you've prepaid a lot of debt that's due in '21.

You're in the middle of redeeming the converts. You're bringing down your scheduled repayments down drastically here for next year. You'll have plenty of flexibility. How do you think about utilizing the cash flow that's generated during the second half of this year.

We know it's not going to be bonanza earnings, but you do have the TCs in place. As you mentioned, the party is going to go until next year. How do you think about the cash that comes into the company in the second half? Do you want to prepay debt further or do you not want to maybe build a bit of a mini war chest ahead of the potential next wave of strategy?

Trygve Munthe -- Co-Chief Executive Officer

We think it's in the best interest of all shareholders that we prepay debt. You're reducing your interest expenses when you do that. So rather than building a war chest, earning nothing in deposit accounts, we think it's better to prepay debt. And as Svein said, we're confident that the credit is going to be there when we think it's right to start to invest again.

So in the short term, it's really more of the same that we will continue to prepay debt. It takes down the leverage, increases the financial flexibility, and it also gives us unbeatable cash breakeven levels in a market where we may be hit by negative surprises from a freight perspective.

Omar Nokta -- Clarksons Platou -- Analyst

Yes. Yes, absolutely. OK. Well, thank you.

That's it for me.

Trygve Munthe -- Co-Chief Executive Officer

Thank you.

Operator

Next question comes from the line of George Berman from IFS Securities. Please ask your question.

George Berman -- IFS Securities -- Analyst

Thanks for taking my call and congratulations to a great quarter.

Trygve Munthe -- Co-Chief Executive Officer

Thank you.

George Berman -- IFS Securities -- Analyst

Quick question. Last conference call, you mentioned that one of your ships had been involved in an accident and was out of service. Has that been covered, repaired and is back in service?

Trygve Munthe -- Co-Chief Executive Officer

Yes. The ship was repaired. It's definitely back in service. And there's an insurance claim, and that will obviously take time to settle.

But -- so the ship is fully operational.

George Berman -- IFS Securities -- Analyst

OK. Great. Next question I have is on the convertible debt that you're calling. Back-of-the-envelope calculation at 187 per 1,000 would facilitate the issue of about 23-some-million shares at the current conversion rate, if everyone is converted.

Somewhere in your press release, they talk about 34 million shares. Could you explain the difference there?

Trygve Munthe -- Co-Chief Executive Officer

I don't know if you want to add color to that, Laila. But you're absolutely right that the convert itself is 33-point something -- excuse me, 23-point something shares. So I'm not -- I don't have the answer to that.

Laila Halvorsen -- Chief Financial Officer

Yes. No, that's correct. A bit over 23 million is the conversion if every bondholder chooses to convert. But under Note 7, it's stated, assuming the maximum fundamental change conversion rates.

So that's different. This is not a fundamental change.

Trygve Munthe -- Co-Chief Executive Officer

It would be a make-whole event?

Laila Halvorsen -- Chief Financial Officer

Yes.

George Berman -- IFS Securities -- Analyst

OK. So if everyone converts, you would -- there would be about 23 million more shares out?

Trygve Munthe -- Co-Chief Executive Officer

Correct.

Laila Halvorsen -- Chief Financial Officer

Yes, that's correct.

George Berman -- IFS Securities -- Analyst

All right. And just for argument's sake here, if I don't convert, you will pay me cash. I don't get the dividend but if I do convert, and I have to convert before the ex dividend date, I would get the $0.48 cash dividend on my shares?

Trygve Munthe -- Co-Chief Executive Officer

Correct.

George Berman -- IFS Securities -- Analyst

OK. And I would assume a couple of the callers have asked the question, with the tremendous amount of cash on hand, everything prepaid, rates still very positive, that you would probably entertain a stock buyback program unless the stock really trades up to its real value closer to the $9, $10 level?

Trygve Munthe -- Co-Chief Executive Officer

Yes. I'm sure you're aware that we do have a buyback program in place. It hasn't been used in a little while, but we have certainly done buybacks both on the convert and on the common equity in -- on prior occasions. So this is something that the board will always look at whether we should focus on cash dividends or a mix with buybacks.

George Berman -- IFS Securities -- Analyst

OK. Great. And maybe one last question, in general, on the oil trade, do you still see a lot of transportation requests from South America and the U.S. into the Far East or has that ebbed down?

Trygve Munthe -- Co-Chief Executive Officer

No. As you alluded to, we certainly see a strong program out to South America with Brazil, in particular. So that is going quite strongly. The U.S.

is a little more irregular. But in the recent weeks, the Atlantic market has certainly been more active than the Arabian Gulf market in terms of loading of VLCCs. So these are becoming more and more important to load ports or load areas for the VLCC trade, no doubt.

George Berman -- IFS Securities -- Analyst

So the ton miles are still overall at an increasing rate now?

Trygve Munthe -- Co-Chief Executive Officer

The distances are increasing but, of course, right now, we're suffering from a very low level of fixtures out of the Arabian Gulf.

George Berman -- IFS Securities -- Analyst

Right. OK. Well, you surely put in a great, great quarter, and I look forward to a very profitable future from here.

Trygve Munthe -- Co-Chief Executive Officer

Great. Thank you.

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Juan Lopez from -- a private investor. Please ask your question.

Unknown speaker

Hello. Good afternoon. Congratulations on the results. Most of my questions have been answered already.

Just a quick one on how you look at the long-term investment projects in terms of what are the economics you look at, what is the internal rate of return you look at when buying a ship for the whole investment period? That will be very helpful at this point. Thank you.

Trygve Munthe -- Co-Chief Executive Officer

Your line was a little blurry, but I think what you were asking some of the things that Ben was touching upon earlier, and what is our return requirements or expectations when we make investments. And the formula we've been discussing in the past is that, and when we contemplate an investment, we really look at what the required rate is to provide a 10% unlevered -- key unlevered return on the investment. And we want that required rate to be meaningfully lower than historic average spot rates. So that is really as simple as it is.

We have made investments with required rates from the sort of mid, high $20,000 per day up to mid $30,000 per day, while the long-term historic average is about $42,000 a day, if I remember correctly. And so that gives you some sort of indication on when we think it is interesting to deploy capital.

Unknown speaker

OK. That's very helpful. Thank you very much.

Operator

Your next question comes from the line of Robert Silvera From R.E. Silvera. Please ask your question.

Ronald Silvera -- R.E. Silvera and Associates -- Analyst

Hello, gentlemen. And thank you for a wonderful performance, especially during this quarter. But more reflective, I think, of your long-term strategy and approaches, it shows that you're running the company extremely well. I love the philosophy of going to 0% debt.

So that you have built your cash the way you have built your cash to one of the highest levels on the records at this point. This is extremely encouraging to us to see you doing that. I would imagine you will announce that after next week the amount of conversion that have taken place.

Trygve Munthe -- Co-Chief Executive Officer

Sure.

Ronald Silvera -- R.E. Silvera and Associates -- Analyst

Yes. I'm asking you after next week, will you announce the amount of conversion of the convertible debt that has taken place?

Trygve Munthe -- Co-Chief Executive Officer

Yes. So post the 21st, there will be an announcement of the decision that noteholders have taken whether to convert or whether they want to be redeemed. So we will send out a sort of -- at the conclusion, if you like, once that is behind us.

Ronald Silvera -- R.E. Silvera and Associates -- Analyst

Wonderful. Now help me understand one thing. On your charts that you presented, you show the net debt, which you have reduced this year alone by over $100 million to be down to $581.5 million on the net debt. And yet as of August 10, you show the notional net debt to be $730.6 million.

Can you help me understand why there was such a large increase in the debt between the end of June and August 10th?

Trygve Munthe -- Co-Chief Executive Officer

Laila, would you take that, please?

Laila Halvorsen -- Chief Financial Officer

If you look at Note 4, you can see the total interest-bearing debt as of 30th of June. What you're referring to with net debt is interest-bearing debt plus cash, so I guess that answers your question.

Ronald Silvera -- R.E. Silvera and Associates -- Analyst

Well, no, you -- that's what I'm having trouble understanding. In the end of quarter 2, the interest-bearing debt was $719.2 million, yet you say the net debt is only $581.5 million. And that is because of the cash and cash equivalent differential, correct?

Laila Halvorsen -- Chief Financial Officer

Yes. That's correct.

Ronald Silvera -- R.E. Silvera and Associates -- Analyst

OK. Well, then the real interest-bearing debt is the one we're interested in, and I'm complementing you on reducing it so significantly. I love the fact that you have continuously increased that cash and cash equivalents to put you in a position to now move strategically as the market shows you opportunity. That's wonderful.

Could you give us some indication of how you see within the next year, with the current rates being what they are and scrappage rates being what they are and the small order book being what it is, so do you have any feeling for the rest of this year and going into the next year the rates that will be present in our market and the spot market?

Trygve Munthe -- Co-Chief Executive Officer

Our industry is certainly not only cyclical, but it's also very volatile and seasonal, and it's also impacted by curveballs and political decisions and OPEC and what have you. So we've been in this industry long enough. And we find it very, very hard, if not impossible, to have a credible rate projections. But as you alluded to, the way we manage these teams, right, is to really be able to withstand sort of any tough market, but at the same time, without giving away the upside should sort of good times spring upon us.

So we think now the company is very well positioned in order to sort of just move into a period that we expect will have a weaker rate. To give you one indication, if you look over the past 25 years, the three worst years in this time period had earnings at about $18,000, $19,000 a day on average, those three extremely bad years. So we're also not suggesting that, that is representative of what's to come, but it is to put in context to the cash breakeven levels that we have in the company. And even in a market like that, we will generate cash.

Ronald Silvera -- R.E. Silvera and Associates -- Analyst

Yes. And I think that is because you have strategically thought ahead and done a wonderful job in this decision-making that you have made. I'd like to just say thank you very much that as a shareholder, our company and I'm receiving the sweet dividend you just gave to us as well as increasing the cash the way you have, just a testimony to a very well-run company. Thank you.

That's all I have.

Trygve Munthe -- Co-Chief Executive Officer

Thank you.

Operator

[Operator instructions] Your next question come from the line of Jeffrey Scott from Scott Asset. Please ask your question.

Unknown speaker

Good afternoon. Industrywide, there's been a lack of demolition activity. Kind of the -- have the ships that have reached 20 years or even seventeen and a half years really been going in for special survey or have the owners been able to defer that activity because of the -- because of COVID?

Trygve Munthe -- Co-Chief Executive Officer

I think there's been very little demolition predominantly because of very strong freight market. So it sort of afforded owners of older ships the opportunity to continue to trade and actually pay for the dry dock. Also, we believe that a lot of these older ships have been engaged in storage of oil following the contango opportunity that presented itself earlier this year. But I think, if the market continues at current levels and you see some of the storage activity unwinding now over time, demolition activity will increase.

But you asked about the COVID, and you're right there have been sort of a stop in the activity for a while, where it was just, frankly, not -- it wasn't really possible to take ships ashore and get crews off, etc., etc. But that is easing up in -- and although only on a minor scale. But it's more the sort of market economics, we think, that is driving this than just the logistics -- the logistical ability of the scrap yards.

Unknown speaker

OK. What are you hearing from the people in the recycling industry regarding the prospects for more demolition in the fourth quarter?

Trygve Munthe -- Co-Chief Executive Officer

Yes, I don't really see any prospects of that, but the brokers have suggested that there's some level of increased activity in this quarter to -- compared to what you saw in the spring. So we don't really have any ships in that category. So we're not sort of following this market on a daily basis, if you like. But prices has gone up from the lows in the second quarter.

I think that's also a reflection of some more activity.

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

And the activity certainly halted by the COVID and that is starting to get a little bit more normal now.

Unknown speaker

So your expectation would be there would be more demolition in the fourth quarter?

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

It all depends on freight rates, we think, that as you touched upon, certainly, there is an inventory of ships or good big classes of ships that are coming up for special surveys and intermediate surveys. So if the rates are lackluster and expectations are low, that's typically when you see people call it quits and start recycling, but it really rides on where the spot market is and where people think it's going to go.

Unknown speaker

OK. Let me ask a follow-up. The fourth quarter is usually stronger than the third quarter. If things remain the same, when you -- when would you expect rates to go up? And conversely, if rates don't go up, by what time period would you begin to worry that the future is not going to be the same as usual?

Trygve Munthe -- Co-Chief Executive Officer

I think what we're experiencing now is a very, very unusual year. So we have seen a phenomenally strong market in the first half. It has been really stronger than most people anticipated in the third quarter, and that's partly because what we discussed on the congestion, especially off of China, but also off of the U.S. West Coast to pick another area.

So this has tied up a lot of ships, and freight rates have held up much better than normal at this time of the year. Fourth quarter, normally, yes, it's a boost. And if we see an unwinding of the congestions around the world, then you could well see a situation where the fourth quarter is not as relatively strong as it normally is. So right now, everything is really a bit up in the air.

It's hard to have a very strong conviction case on where rates are going to be in the fourth quarter compared to the third quarter.

Unknown speaker

OK. I appreciate it. Thanks very much.

Trygve Munthe -- Co-Chief Executive Officer

Thank you.

Operator

There are no further questions at this time. Please continue.

Trygve Munthe -- Co-Chief Executive Officer

All right. Then we'll just say thank you very much for your interest in DHT. We've had a fantastic quarter, and we're starting the third quarter on a strong footing as well. So thanks for your interest.

Have a good day.

Operator

[Operator signoff]

Duration: 53 minutes

Call participants:

Laila Halvorsen -- Chief Financial Officer

Trygve Munthe -- Co-Chief Executive Officer

Svein Moxnes Harfjeld -- Co-Chief Executive Officer

Chris Tsung -- Webber Research -- Analyst

Randy Giveans -- Jefferies -- Analyst

Ben Nolan -- Stifel Financial Corp. -- Analyst

Omar Nokta -- Clarksons Platou -- Analyst

George Berman -- IFS Securities -- Analyst

Unknown speaker

Ronald Silvera -- R.E. Silvera and Associates -- Analyst

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