DHT: Good 2023 Results & Likely Continued Earnings Strength Going Forward

Overview

DHT Holdings (NYSE:DHT) is a U.S. listed tanker company with 24 very large crude carriers (“VLCCs”). 79% of the fleet is presently exposed to the spot market, while the remaining portion is on time charters, at relatively healthy levels.

This is a company I have covered a few times, a couple of years back, where those articles can be found here. I have also owned the stock, but I did unfortunately reallocate that capital away from the tankers too early in 2022 and missed much of the impressive performance we have seen lately.

DHT has performed very well over the last two years, outperforming oil & natural gas producers and the overall market substantially during that period.

However, the stock has lagged many other tanker companies, which is partly because DHT has had a lower financial leverage than many industry peers, which naturally makes the company lag during periods of very strong tanker rates as we have seen lately. The different tanker types have also had a large impact. VLCCs have seen significantly higher tanker rates lately, but earnings have not been quite as good as they have been for tankers in the sizes below VLCCs.

However, if we do zoom out a bit further, we can see that DHT has performed better on a relative basis over the longer term, which is partly due to better relative rates for VLCCs over the longer term, but also because higher financial leverage works both ways. We did see tanker companies with more financial leverage struggle leading up to the recent period of stronger tanker rates.

2023 Results

DHT did in early February release its Q4-23 and 2023 full year results, where 2023 was a relatively strong year in a historical comparison. The company did last year generate $302.0M in adjusted EBITDA and $161.4M in net income. The earnings per share were $0.99, which equals the announced dividend per share, as DHT is presently committed to returning 100% of net income in dividends to shareholders.

The strong 2023 results were primarily due to a substantially improved spot market for VLCCs. DHT’s earned spot rate was $51,200/d and the average time charter rate was $36,400/d during 2023, where the spot rate is up significantly compared to 2021 and 2022.

DHT has so far in 2024, as of early February, had an average spot rate of $55,900/d and a time charter rate like what we saw in 2023. So, the spot market continues to be strong.

Given the increased number of conflicts around the world and sanctions linked to that, I do think we are likely to continue to see longer average transport distances than what we saw prior to Russia’s invasion of Ukraine. At the same time, the oil supply & demand has continued to grow globally, while we have seen relatively few newly built tankers. So, my base case is for a constructive tanker market going forward as well.

Balance Sheet

The company has over the last 5 years decreased its financial leverage substantially. The absolute level of total debt and net debt has been more than cut in half. The net debt to EBITDA and debt to equity ratios have come down substantially as well, even if the former is naturally impacted by the boost in EBITDA lately. Overall, DHT has a clean balance sheet with $144M in working capital as of Q4-23. The company also prepaid an additional $24M in January this year.

The low financial leverage means the P&L breakeven rate is $27,400/d in 2024 and the cash breakeven rate is as low as $18,500/d. So, DHT has a very healthy margin in the current environment.

Valuation & Conclusion

DHT has a market cap of $1.9B and an enterprise value of $2.2B using the latest share price and financials as of Q4-23. There are a handful of brokers on Koyfin that provide estimates for DHT, which are expecting the good rates we saw in 2023 to not just continue, but to improve substantially.

The stock is trading with a historical price to earnings ratio of 11.6, but much more attractive forward-looking valuation multiples. EPS is according to the consensus estimate expected to increase by 39% in 2024, and as much as 77% in 2025, compared to 2023. If the company can deliver on those expectations, DHT is likely to do reasonably well going forward.

On the other hand, If the next couple of years look more like 2023, which is not a bad year, it was above the historical average for VLCC rates. The stock price doesn’t look quite that cheap. Just to be clear, a historical price to earnings ratio around 10-12 is far from expensive compared to the overall market, which is trading at more than double that. However, if you look at oil producers, which are at least a partly related industry, those companies are trading at much cheaper earnings multiples or free cash flow yields, using relatively conservative oil price assumptions.

One clear benefit the tanker companies have over commodity producers is that it is much more difficult for government to cap their earnings by excess profit taxes, export restrictions, or increased royalties, as we have seen for some commodity producers over the last few years. With that said, DHT looks at this point to have priced in a very bright future, which I am not quite willing to use as my base case.

The below table that looks at the company’s buybacks over the last two years. With a stock price of $11.53 today, we are presently above the levels where the company has found the share price appealing.

So, while there is a lot to like about DHT as a well-managed tanker company, I am more neutral on DHT stock and would need a decent size pullback to buy DHT. For anyone looking for a relatively high quarterly dividend, DHT could still be a stock to consider, even if the quarterly payments will be variable.