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DHT Logo (DHT website)

Investment thesis

In my last article on DHT Holdings (NYSE:DHT) in February, titled “DHT Holdings: The Best House In A Bad Neighborhood” I alluded to the fact that the spot market did not cover most ship owners’ costs, but DHT was in a good position as it had little debt and some shelter from the poor market with part of their fleet on period time-charter.

Three months have gone. The pandemic is starting to wane from most people’s minds unless they live in China. That is a good thing, as demand for oil should go up with more traveling taking place. A spanner was thrown in the works with the terrible war which is taking place in Ukraine.

What are the prospects of a recovery in the demand for very large crude oil tankers, and how well did DHT perform in the first quarter of the year?

We aim to answer these questions, here.

DHT’s revenue came in at USD 76.4 million in the first quarter of this year.

That is a decrease Quarter over Quarter of 8.8% as a result of lower spot market earnings and slightly lower time charter coverage.

This translated to the bottom line with a loss of USD 17.3 million in Q1 as opposed to a loss of USD 2.9 million in Q4 of 2021. On a per-share basis, this means a negative EPS of USD 0.10

More important than earnings are whether they are able to produce positive net cash from their operation.

This came down from USD 10.9 million in the last quarter of 2021 to USD 5.7 million in Q1 of 2022. Having said that, I am not saying that one should simply ignore depreciation and amortization, as ships do not increase in value over time. After all, it is USD 33 million for just Q1 of 2022. That is 43% of revenues.

DHT is running a tight ship. In this inflationary environment, it was positive to see that they have actually managed to reduce their average cash break-even rate has even gone down from USD 15,800 in Q3 of 2021 to USD 15,100 in Q1 of 2022.

The balance sheet is still strong, with interest-bearing debt being reduced by just USD 1.3 million to USD 521 million. Cash and cash equivalent fell from USD 60.7 million to USD 58.6 million.

I was somewhat surprised to learn that the number of outstanding shares increased by 672,000 over the last quarter. After all, they have been regularly buying back their own shares and canceling them, which is a good thing. During the Q&A session of the conference call, we learned that these shares were issued as part of their incentive program for directors and management.

DHT recently sold two VLCC ships built in 2006 and 2007 at a combined sum of USD 78 million, generating a profit of USD 12 million which will show up in Q2 results. After paying off the low debt of just USD 13 million on these vessels, their cash position will improve by about USD 65 million.

Management commented that this cash could be used either for the purchase of newer vessels or to reduce debt further.

Present and future market conditions

The demand for transporting crude in VLCCs has not increased sufficiently yet enabling the shipowners to get an upper hand in negotiating for higher rates. There are simply put too many ships in the market.

Exacerbating this situation are owners of older less attractive ships who are willing to close one eye when it comes to embargoes on trade with parties that falls under sanctions. If and when that trade disappears, many of those ships might be sent for demolition.

According to DHT, the current number of ships older than 20 years could grow close to 100 ships by the end of this year.

As of April, this year, there was a total of 846 VLCC actively trading in the world. That puts the overaged part of the fleet at 11.8%.

Tanker Fleet Development (Allied Shipbrokers)

One can only hope that some of them find their way to demolition yards. But history has shown that to get ship owners to actually scrap their ships is a bit like a parent trying to wrestle a toy away from a toddler.

Not easy.

Looking at a graph, it does look like it is too early to conclude that the spot rates have bottomed out.

DHT – Spot versus Time-charter (Data from DHT. Graph by author)

On the topic of future earnings, DHT has secured 69% of the available VLCC days for Q2 at USD 24,800 per day. This does give them a comfortable cushion against lower spot rates, should this occur.

Conclusion

As I often state here on SA, you seldom come across a top executive in the shipping field that is not optimistic about the future prospects for their business. DHT is no exception. Although, I would like to give some credit to their CEO Svein Moxnes Harfjeld because he is clearly not sugar-coating it.

He rightfully says that longer-term, the potential for good returns is certainly there. However, he also makes it clear that it is indeed very difficult to predict when it is going to happen.

Furthermore, there are reasons why I think DHT is probably “the best house in a bad neighborhood”, as my earlier article explained. These facts are still very much intact.

Nevertheless, with macroeconomic headwinds and uncertainties abound, I change my stance from Buy to Hold.

It does seem like the time of a meaningful recovery is being pushed out somewhat.