DHT - DHT Holdings: Riding The Wave Of VLCC Rates

2023-06-28 23:05:10 ET

Summary

• In this article, I argue that despite a recent pullback in share price, the bull case for DHT Holdings still exists. This is due to strong VLCC rates, with time charter rates for 1-year contracts currently at $55k per day, and spot market rates exceeding $100k per day.
• DHT Holdings' Q2 2023 spot market booking were estimated at $70k per day, a figure that I believe is conservative given current market conditions.
• Additionally, three of the company's seven time charter contracts are set to expire in the next few months, potentially allowing for increased spot market exposure.
• Despite the positive outlook, I acknowledge risks such as rate volatility and potential economic headwinds from future interest rate increases.
• However, I remain long on DHT Holdings, based on the strong performance of VLCC freight rates and the $100 million share buyback program that is in place.

About 5 months ago I wrote my last article about DHT Holdings ( DHT ), with the main argument being that VLCC rates could support dividends and company growth throughout 2023. I wrote this article when DHT’s stock was trading at approximately $9 per share, while indeed, in the next couple of weeks the stock reached the $12 area.

However, here we are now, with the stock struggling to hold $8 per share, after the Q1 2023 financial results. For those who don’t remember, the company fell short of street expectations by $0.01 and $3.46 million, regarding EPS and revenues respectively. Subject to that miss, the company was downgraded by Jeffries to Hold from Buy, with a price target of $10.

Today, I’m writing this article to support my view that the bull case still exists, with DHT Holdings, despite the recent pullback of the share price.

Rates still holding strong

Before jumping into freight rates, let’s first take a look at the company’s fleet. DHT holdings owns a total of 23 VLCCs, the majority of which are exposed to the spot market. Only seven of their vessels are chartered out. According to the company’s Q1 2023 earnings presentation, the average rate of the spot market exposed vessels was $54.6 per day, while time charter revenues reached $35k per day. Overall average rate per day reached $49.1k, during Q1 2023.

So, the main question is where do we stand today, in terms of VLCC rates? Well, looking into that answer brings up our first bull argument about this company. As we can see in the table presented below, VLCC time charter rates for 1 - year contracts are currently at $55k per day, while in the early March 2023, they were trading at $42k – 45k per day. On the other hand, during Q4 2022, VLCC rates for 1 – year time charter contacts were trading at $48k – 50k per day.

As one would normally expect, this trend is also true for the spot market. According to a recent Trade Winds article , VLCC rates have recently “skyrocketed”, exceeding $100k per day, citing the scrubber fitted “Nissos Nikouria” 300k DWT VLCC, which was voyaged for 39 days at $104k per day, on the West Africa to Northern Europe route. This is a repetition of the market picture that we witnessed in the second half of 2022, which resulted in the big moves and dividends of seaborne oil companies.

In the company’s Q1 2023 earnings presentation, it was mentioned that Q2 2023 spot market booking were in the ballpark of $70k per day, while time charter daily rates were reaching $35k. As we can see, these assumptions are significantly more conservative than the prevailing market conditions at the moment. Although we’re a little bit late inside the second quarter of the year, there’s still room for outperformance, compared to these numbers.

Finally, another question that makes sense, given the information listed above, is this: When do the company’s seven time charter contracts expire? The answer is that three of them expire in the next couple of months, enabling the company to increase their spot market exposure, if needed. In the Q1 2023 earnings call , it was stated that it is the company’s “intention and ambition to rebuild the time charter portfolio through the right opportunities with the right customers.” Also, the DHT Puma is chartered out on a waterfall style contract, where the company has secured a base rate of $33.5k per day, while any surplus up until $40k per day goes 100% to DHT Holdings and any additional surplus beyond that point is split on a 50/50 basis between DHT Holdings and the customer. So, all in all, from the seven chartered out vessels, the three are on contracts that expire in the third quarter of 2023, while DHT Puma’s deal allows the company to benefit from the rise in time charter rates, despite the three year charter contract in place.

Never forget about the risks

Where I come from, we have a saying: Big money, big troubles. Small money, small troubles. This also applies to the shipping industry. As I have written in many of my articles before, larger vessels are associated with a larger degree of rate volatility. This, in turn, can significantly affect expected net income and dividend distributions.

What is the main factor affecting global oil demand? Economic growth. While during the past 6 months or so there was a belief that interest rate increases could continue at a harder pace, the Fed decided to pause the rate hikes , at least temporarily. This is something that makes sense, as it gives the economy time to digest the changes and to slowly find a new equilibrium point. However, chances are that a few more interest rate increases will happen later on this year, which could again create some more headwinds.

Bottom Line

I am long in DHT Holdings. To say the truth I had taken a defensive position with selling come calls against my shares, after that fierce drop of the share price, but I think that now is the time to cut the leash on those contracts and wait for an upward move of the stock. Let us not forget that a $100 million share buyback program is in place with a 12 - month duration. And it seems that the market is finding a nice bottom in the $8.00 - $8.05 point. Based on the above, I remain long in DHT Holdings with a strong conviction.

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