DHT - Why We Bought DHT Holdings Recently

2023-09-11 22:34:45 ET

Summary

• VLCC spot rates are extremely low, with owners potentially paying cargo owners to ship their crude oil.
• The supply of VLCCs looks bullish, with few new vessels being ordered, particularly in comparison to product tankers.
• Despite concerns about the demand for crude oil, the growth in the market is expected to continue, benefiting shipowners of VLCCs.
• Patience is required.

Investment Thesis

We have often referred to some of the shipping rates being so volatile that they often change between feast and famine in a matter of weeks.

Spot rates for Very Large Crude oil Carriers, or VLCCs, were so low in week 35 that owners time-charter earnings equivalent, depending on the specification of the vessel was hovering around -$1,300 per day.

So, shipowners must pay the cargo owners to ship their crude oil.

The middle of the year is traditionally a slow season for tankers, and this can certainly be a good description for the “summer of 2023”.

We have been bullish on Frontline ( FRO ) and DHT Holdings ( DHT ) for quite some time.

With such a gloomy spot market, how can we remain bullish?

Fundamentals

The supply of VLCCs to transport the crude oil looks super bullish to us. Here is what FRO just reported in their Q2 presentation.

In a recent blog on tankers by J. Mintzmyer he points to the difference in share prices between the product tankers and the crude oil tankers not being aligned with current spot market earnings capabilities. Shares of product tankers should be flying high, while the crude oil tankers “not so much”. However, the opposite is taking place.

First, let us say that we like both products and crude oil tankers.

We are the first to acknowledge that market participants are often wrong in their assumptions about the future. Perhaps the bigger and more important question is what is the timeline these assumptions are based on?

For the period covering the next six months, which I believe J. Mintzmyer ’s blog covered, it will be hard to argue against his conclusion.

But we think that the keener interest in crude tankers stems from a more favorable newbuilding order book. Very few VLCCs are ordered. According to Frontline's latest information, it is just 13 vessels. The picture looks less favorable for product tankers.

Although the contracting of MR and LR1 tankers surged significantly, it was the LR2s that increased the most. So far this year, 5.6 million dwt of LR2s have been booked for construction, bringing the order book to 21.6% of the present LR2 fleet.” - Splash 247

It could be that both investor groups, product or crude, will get their rewards.

Perhaps, just not at the same time.

The other side of the fundamentals is the demand.

Last month, IEA came out with its latest oil market report. In it, they estimate that the demand for crude oil will grow by 2.2 million barrels per day to 102.2 million barrels per day this year. The growth is expected to slow to “just” 1 million barrels per day next year.

But we are still talking about a growing demand with a fleet that is aging and with few new vessels coming.

The picture looks bright for shipowners of VLCCs in our opinion.

DHT’s share price

DHT’s share price is only up 7% year-to-date. Only Euronav ( EURN ) is worse.

FRO has been the big winner so far this year. It has dual listings, both in the U.S. and in Norway. DHT is only listed in the U.S.

Fredriksen is still a popular man in Norway, judging from the massive media coverage he gets there. That could be one reason for the big difference in the rise in the share price.

Nevertheless, judging from the above graph, it seems that DHT is going “under the radar” so far.

Risks to the Thesis and Conclusion

A lower volume of crude oil movements has been insufficient to push the rates higher in the spot market.

With Saudi Arabia extending its voluntary oil output cut of 1 million barrels per day at least up to the end of December 2023, and Russia doing the same to the tune of 300,000 barrels per day, it is possible that improvements in rates will be slow.

We follow closely what is happening in China. Its development is not alpha and omega, but it does matter greatly as a swing factor in supply and demand for all commodities and hence the transportation of them.

Every news you read now is how terrible things are in China. You would think it's the end of the world there. We tend to be more optimistic and realistic. Every country will have its ups and downs. As they say "Every dog will have its day"

Last week, there was a gem of a news story that came out from SCMP in Hong Kong. It was in the context of the "terrible" real estate market in China. What journalists and analysts conveniently ignore is that the commercial real estate industry in China is actually doing quite well. In the same article, it said that:

Air traffic within China have surged to 116% of 2019 levels, according to data from JPMorgan"

That bodes well for VLCCs.

The fact that some charterers recently were willing to fix in a modern VLCC for 3 years charters at close to $55,000 per day is a testament to cargo owners also seeing that the market will be tight.

We believe the market will gradually point in the direction of favoring the shipowners.

Patience is required.

To put our money, where our mouth is, we have started a small position in DHT with the aim to buy in through staggered purchases over the next 3 to 5 months.

Our Buy stance remains.

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