THE SHIPPING NEWS – BUYING DHT HOLDINGS DHT-NYSE
Last January I bought DHT Holdings, an oil tanker company, thinking that low oil prices would increase shipping. I got bored with the flat trading of the stocks and sold it a few months later for no gain.
The dividend wasn’t important to me then, but it is now–as it’s 12% and could be 20% later this year.
Today, oil tanker stocks are collapsing as J.P. Morgan downgrades the sector. TAnker rates are coming off the peak of Q4 15 of $100K/day and are now sitting at $69K/day, and God knows they could go lower. These day rates are VERY volatile.
But amongst this fear, I bought 2500 shares at $6.01–which works out to a 12% yield in US$ (18 cents a quarter or 72 cents a year), knowing that the sector could still go lower this week with a bad market and the downgrade. (This is likely why GMLP has come back down into buy range as well.)
The reason to look at the stock today is because:
- despite tanker rates coming down, DHT has several ships that were contracted very cheaply last year, and they are now coming out–and even reduced rates are higher than what they were getting, so cash flow should go up this year. If you divide Q3 revenue by number of available vessel days, their revenue per ship day works out to $42,700 per day.In their Q3 financials they said their spot vessels earned $59,000 in Q3 – and being as they also said that half spot and half charter, that would put their contracted rate at $27,000–very low. And 3 contracts were announced in December were at $63,000. So I’m pretty confident that their financials and cash flow will improve through 2016.
- this team is only paying a small bit of cash flow to the dividend, so there is room for dividend increases in 2016 and 2017 even with reduced day rates–possibly as high as 20% yield off today’s $6
- they are broadcasting a 60% payout of earnings, and the Street will like that
DHT has the leverage – a $616 million market cap with $430 million of net debt (including the convertible debenture) and 18 active tankers (14 VLCC–Very Large Crude Carriers) and another 5 VLCCs on order.
They only paid out $14 mln of their $44 mln CFFO (cash flow from operations) – 3.14X coverage! As contrast, GMLP has coverage of just 1.3, and that’s considered OK to good.
DHT is holding back cash now to pay for their newbuilds ($580 million, of which $237 million has been paid and $50 is yet to be paid out of cash, with the remaining $290 to be debt-financed with pre-arranged financing), which is why the dividend is so low relative to cash flow, but their slideshows show how they generate $400 million of annual cash flows at $60,000 VLCC rates and $300 million at $42,500 rates. That’s not bad for a $1.04 million Enterprise Valuation.
DHT is quite smartly only 18% covered (chartered) for 2016.
They pay out 60% of ordinary income (basically 60% of EPS), so back of the envelope numbers show they can do $.50 EPS in Q4 and paying out $.30 or $1.20 annualized – a 20% yield. (Subscribers should remember than when doing financial projections, I keep one foot planted firmly in the air.)
Like MLPs, they adjust their dividend every few quarters, however and may be slow to do a big increase because of their newbuilds (although they have $150 million gross cash on the balance sheet).
As a sidebar note, history shows that as tanker rates peak and start to come down, oil price goes up. Here is a list of the average yearly VLCC rates from 2004-2015:
and tanker rates are now coming down from over $100,000/day to $69,000 today. You can check it out each day at:
It’s quite possible that as the oil price falls to deep lows, contango makes storing oil on ships profitable and so more ships get used for floating oil storage, taking part of the fleet out of commission for actual transport. A VLCC stores 2 million barrels, so $1/b contango = $2 million a month, or about $63K/day…that’s underpinning the market as long as we have steep contango here.
The problem (with all sectors of the resource market) is ZIRP–Zero Interest Rate Policy. Debt is free so Big Money and Wannabes overbuild everything, taking the margin out of everything from the top of the first business cycle onwards. And there are a lot of new VLCCs on order for 2017, which is ostensibly the reason why JP Morgan downgraded the sector.
Again, if this is a bear market, yields will go up. I see one of the big opportunities this year is to buy well covered (financially, not by analysts) yieldcos which will pay me 10- 20%–and preferably in USD.
DHT fits that bill. But the emotion of this market could take this stock another 10% lower before it finds a bottom.
You can read the original full report on DHT (which I’m now updating) in the Members Centre. It’s in the Company Report section and the chronological section from January 2015.
On another note I see the crack spread barely budged up today but VLO flew….right trade wrong timing perhaps…hope I don’t have to cover up at $73 but the Street really wants this stock to work…sigh.
AND don’t forget….
CORTEX CONFERENCE CALL / WEBINAR
Thursday January 14 at 115 pm PST, 415 pm EST. Here is the dial-in information:
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