DHT Holdings (DHT) Q3 2012 Earnings Call October 24, 2012 8:00 AM ET
Operator
Good day, and welcome to the DHT Holdings Q3 Results 2012 Conference Call. Today's conference is being recorded. At this time, I'd now like to turn the conference over to Mr. Eirik Uboe. Please go ahead, sir.
Eirik Uboe - Chief Financial Officer and Principal Accounting Officer
Thank you. Thank you, and good morning. And before we get started with today's call, I'd like to make the following remarks. This conference call is also being broadcast on our website at dhtankers.com, and a replay of this conference call will be available on the website. In addition, our Form 6-K, evidenced in this news release, will be filed with the SEC.
As a reminder, this conference call contains forward-looking statements that are governed by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which include statements regarding DHT's prospects; the outlook for tanker market in general; expectations regarding daily charter hire rate and vessel utilization; forecasts of world economic activity; oil prices and oil trading patterns; expectations regarding seasonal fluctuations in tanker demand; anticipated levels of new building and scrapping; and projected dry dock schedules, involve risks and uncertainties that are more fully described in our filings made with the SEC. Actual results may differ materially from expectations reflected in these forward-looking statements.
And with that, I'll turn the call over to Svein Moxnes Harfjeld, Chief Executive Officer of DHT Holdings.
Svein Moxnes Harfjeld - Chief Executive Officer
Thank you, Eirik, and welcome to our third quarter 2012 call. Thank you for attending. While I walk you through the highlights of the quarter, and following that we will open up for questions.
The EBITDA for the quarter came in at $7.3 million, resulting in a net loss for the quarter of $4.2 million after adjusting for a non-cash impairment charge of $92.5 million. Net cash provided by operating activities for the quarter was $8.5 million. We will pay a dividend of $0.02 per common share and $0.28 per preferred share for the quarter payable on November 12 for shareholders of record as of November 6.
When determining the dividends, our Board has taken into account the general business conditions, the continued weak tanker market and the recent 8-K filing by OSG. Following the recent announcement by OSG regarding its solvency and due to the continued weak tanker markets, we adjusted the carrying value of our fleet to a non-cash impairment charge of $92.5 million.
The decline in revenues during 2012 is primarily due to 2 vessels being sold during the second quarter and increased spot market exposure as vessels have come off charters. We are in compliance with our loan facilities and had an unencumbered cash balance of $72.2 million as of September 30.
We have no scheduled principal installments under our 3 credit facilities in 2013 and 2014. Scheduled principal installments totaled $12 million in 2015. However, further decline in vessel values may result in additional prepayments in order to remain in compliance with minimum value covenants.
One vessel was redelivered from time charter with OSG during the quarter, and 2 more vessels are expected to be redelivered from OSG during the next 6 months. Following these redeliveries, the remaining charters with OSG will be 2 Suezmax vessels, which are on long-term bareboat charters to December 2014 and January 2018, respectively.
Following the fleet appraisal for the third quarter, we repaid $3.1 million under the RBS credit facility. Following the fleet appraisal for the fourth quarter conducted in early October, we repaid $4 million in October. The next scheduled principal installment under the RBS facility is in the fourth quarter of 2015.
The VLCC Venture Spirit, which was chartered in, was redelivered to its owners in September. The vessel traded in the spot market during the quarter. At our 2012 Annual General Meeting of Shareholders, the shareholders voted to authorize a 12-for-1 reverse stock split of our common stock par value at $0.01 per share. The reverse stock split became effective after the close of business on July 16, 2012.
And with that, we open up for questions.
Question-and-Answer Session
Operator
[Operator Instructions] We will take our first question today from Jon Chappell from Evercore Partners.
Jonathan B. Chappell - Evercore Partners Inc., Research Division
Pretty timely announcement, I guess, given what OSG put out on Monday morning, and you guys are out a little bit less than 24 hours later and making some big changes. So number one, were you already in conversations with OSG? Had you anticipated what was happening there? And then, how did you get to the math surrounding the magnitude of the write-down? Is that just assuming that the contracts are no longer generating cash anymore? I mean, how did the $92.5 million come about?
Svein Moxnes Harfjeld - Chief Executive Officer
Just on your first question, we are not privy to any other information with respect to OSG than what the market has been informed about. So let's be clear on that. I think, in general, on the impairment, the non-cash impairment charge, it is largely driven by IFRS accounting rules and thereby, considering the general market environment. And the one key in this analysis is to reduce the expected life of the vessels under depreciation line from 25 to 20 years. And then, as I mentioned, it's really then adjusting also for a potential loss of the bareboat revenues in particular with -- for the 2 Suezmax vessels.
Jonathan B. Chappell - Evercore Partners Inc., Research Division
Is OSG current on all the charters as it stands today?
Svein Moxnes Harfjeld - Chief Executive Officer
Yes, they are.
Jonathan B. Chappell - Evercore Partners Inc., Research Division
Okay, and what -- I mean -- 2 of the contracts expire in January and April. So I would think that they would continue to honor those given their short duration, but the bareboats are obviously somewhat at risk. What will your plans be for the Suezmax vessels if OSG were to try to renegotiate? Would you accept a much lower rate from them? Would you look to put it out to a third party and kind of reassess the employment of those vessels?
Svein Moxnes Harfjeld - Chief Executive Officer
We are prepared to take over management of these vessels. We are not engaged in any discussions with OSG for potential renegotiations or other solutions. And so, I think, in general, the markets are quite weak, and we would consider really all options for what would be the best resolution for the company and whether that is spot through pool participation or entertaining alternative time charters. But again, as we speak, the charters are still in place. OSG has not filed and not requested any renegotiations on these structures, and they are current on their payments to us.
Eirik Uboe - Chief Financial Officer and Principal Accounting Officer
But of course, as a contingency, we're prepared for all eventualities, and we will react swiftly.
Jonathan B. Chappell - Evercore Partners Inc., Research Division
Right. Just a question about the magnitude of the dividend cut. If we just assume that the contracts with OSG were to go away and you had to recharter those vessels at market levels, by my estimate, it's a little over 20% hit to the 2013 EBITDA. Yet, the magnitude of the dividend cut was far higher than that. Was this -- is this kind of more than just the OSG issue? Is this potentially a transition of DHT's strategy from one of yield to one of growth? I mean, I understand that the market wasn't giving any credit for $0.24. The yield was ridiculous, but is this now the time where you maybe look to retain cash and maybe transition a little bit more to a growth strategy?
Svein Moxnes Harfjeld - Chief Executive Officer
I think on a general note and as we have stated in the release, our Board has taken into account the general business conditions and the continued weak tanker market. But I think also, adding to that, as we have stated all long, the company, DHT, we have growth ambitions, and we certainly hope to expand the company during the downturn when the right opportunities will arise. And we feel that the company are in position to capture those.
Jonathan B. Chappell - Evercore Partners Inc., Research Division
Okay. Last question just for Eirik. The D&A run rate, obviously, you cut the lifespan of the vessels from 25 to 20, so the $10.6 million in the third quarter, is that the run rate to be used going forward?
Eirik Uboe - Chief Financial Officer and Principal Accounting Officer
John, I think it's actually not -- Q3 was a special quarter because we have to assume that their life was to reduce orders from July 1. But of course, at the end of the quarter, we did the impairment charge and wrote down the book values. So going forward, we have estimated the run rate depreciation to be about $7.5 million.
Operator
We will take our next question today from Herman Hildan from RS Platou Markets.
Herman Hildan - RS Platou Markets AS, Research Division
I think you briefly touched upon many of my questions. I'm just wondering in terms of what time do you feel like it would be interesting to expand your fleet? Is that more a timing issue or price issue? And if it's a price issue, what kind of levels would you find it interesting to acquire assets, and what kind of assets would you like to acquire?
Svein Moxnes Harfjeld - Chief Executive Officer
I think we are not communicating a specific time or price target on our ambition to expand. so we are very much following the general market. And we feel we have an attractive deal flow and are looking to a number of opportunities. So -- but there are a number of things that we would like to see in place, so to speak that -- in order to make a move. I think ideally, we would like to maybe contemplate ships in the B2C sector and also more -- somewhat more modern ships than what we have. And -- but it's too early to say really what that specific growth opportunity will be whether it's a single ship or whether it's a fleet and so forth. So...
Eirik Uboe - Chief Financial Officer and Principal Accounting Officer
And with so much unclarity about our future cash flow due to the OSG situation, we are going to play it very cautiously in the near future. So I don't think you should expect any acquisitions from our side until we see a little more clarity on the OSG situation.
Operator
We will take our next question today from Brian Shearer from Deutsche Bank.
Brian Shearer
Just a quick follow-up on OSG. If OSG were to file for protection under Chapter 11 of the Bankruptcy Code, do you -- and they then sought to project the charters on the Newcastle and the London. Do you have -- can you give us any color in terms of how that would sort of unfold for DHT?
Eirik Uboe - Chief Financial Officer and Principal Accounting Officer
I think it's important to note that our balance sheet has, by design, been built for sort of all eventualities. So I think you'll recognize DHT with a sort of a moderate leverage, a pretty significant cash cushion and again, as we have said many times, very low cash breakeven levels. So we have planned conservatively. So I think the company would be able to deal with that eventuality although we, of course, hope that OSG will stand by its obligations to us. But I think, at this point, it's a little premature to speculate in exactly what we would do if OSG files.
Operator
We will take our next question today from Matthew Ryder from Crédit Suisse.
Matthew Ryder
I just have a quick question about the bank facility, kind of your anticipation of the use of cash kind of run rate or -- over the next 2 years maybe to kind of have to cure those -- continue to cure those covenants based on how the valuations have been going for you guys?
Eirik Uboe - Chief Financial Officer and Principal Accounting Officer
Your line broke up. Matthew, your question wasn't all clear. Could you please repeat the question?
Matthew Ryder
I'm sorry. I'm sorry. Yes. I'm just -- I'm asking about the bank facility covenants, the value to loan covenants. You seem to continue to need to use a little bit of cash here and there every quarter to cure those covenants. I guess, just based on how valuation have been going for tankers in general, what do you kind of see the run rate use of cash going forward, kind of, are they on an annual or quarterly basis to continue to pay those to meet those covenants, as well as kind of the decision between just outright selling the vessel and [indiscernible] cash to pay it down permanently, how do you, kind of, weigh those things with the use of cash? I know the installments are 2015 and beyond. I'm just curious about the interim use of the cash.
Eirik Uboe - Chief Financial Officer and Principal Accounting Officer
Actually, as you know, we have 3 loan facilities, and the largest one is with RBS. And that is the one where we've had to make prepayments on the past several quarters. And the covenant in question is value to loan of 120% based on shipbroker value assessments. And we collect these assessments once a quarter, and it's really pretty simple math. If you see a 10% growth in values, then there's a 10% prepayment requirement. And the outstanding balance of that loan today is $168 million. So it really depends on your view on values going forward. On the other 2 facilities, we have more headroom based on the restructuring we did with these banks in the beginning of the year.
Matthew Ryder
Got it. Okay. So let's shift. You guys haven't really pro forma or anticipated any kind of what that might be over the next year or 2, totally dependent on where rates go and you haven't really earmarked any cash reserve for any of that stuff?
Eirik Uboe - Chief Financial Officer and Principal Accounting Officer
As you see, we're running with a pretty significant cash balance today. And of course, we think that's a good way to do it given the uncertainty and the pretty low freight market we're in.
Operator
We will take our next question today from Petros Kalligas from Delos Investment Management.
Petros Kalligas
I've got 2 or 3 questions. The first question relates to the decline in the useful life of your vessels, I mean, as you mentioned, from 25 to 20 years. What -- could you explain the rationale behind this? Secondly, regarding your receivables, obviously, that -- much of that I understand has to do with the payment in areas of Frontline, how confident are you that these payments will be made? And are there any sort of provisions to ensure prepayment on -- payment on these? And finally, regarding the RBS credit facility, you mentioned that after fleet appraisal, about $4 million was classified as the current portion of debt. Could you -- was that due to some kind of -- to a reduction in drop repayment, or was there something else?
Eirik Uboe - Chief Financial Officer and Principal Accounting Officer
On the first question on the economic life of the vessels, I think it's important to note that there's nothing technically that suggests that these vessels can only last 20 years. To the contrary, they have been built for certainly a 25-year life span. But under IFRS accounting, we will see you're supposed to examine your value and use assumptions on a regular basis. And it becomes more of an issue of how long you think the vessels will be trading in current trade -- current market environment. And we deemed that in the very low freight markets we're in today, we will see vessels being retired at a younger age on the average than during a high market. So we have taken it down from 25 to 20. That's an assumption now, but it could be a scenario where when the market recovers, that we will back it up to 25 again. And this is -- it's quite frankly dictated by the accounting standards.
Svein Moxnes Harfjeld - Chief Executive Officer
As to your second question on accounts receivables, the 2 lump sums due in December and April, May under the Frontline charter represent just north of 10% of the accounts receivable in total. And so, the majority of the accounts receivable are really working capital and, predominantly, bunkers for the vessels operating in the spot markets. And it has gone up because we've had ships being redelivered to us. When we have them on period charter, you get paid in advance. When you trade them spot, you get paid in arrears and you have to prepay a lot of expenses before you collect your revenue. As to your last question on the prepayment in the RBS facility, that is a consequence of the broker valuations made on the -- in that particular fleet at the beginning of the fourth quarter. And then, the asset values have a marginal drop from the third to the fourth quarter, and the prepayment was then required at $4 million. That prepayment was made -- has already been made.
Operator
[Operator Instructions] We will take our next question today from Jeff Rudner from UBS.
Jeffrey Rudner
Obviously, a difficult quarter, and just one really broad-based question. Being that you're in a better position than I would have think most of us on the call here to ascertain what the outlook for the market is over the next 6 to 12 months and going forward, can you give us any kind of feeling, any kind of assessment as to what you see for the next 6 to 12 months, and when you do see some kind of recovery in the freighter market?
Svein Moxnes Harfjeld - Chief Executive Officer
We expect continued tough freight markets in the foreseeable future. I think just on the -- some of the short-term aspects, over the summer, you had a significant drop in import of crude in China, and they've been growing their stocks. At the same time, they've also been through refining and maintenance season. So they've been running at -- in the high 5 million barrels a day import level during the first half of this year, and that drops down to kind of 4.3 million, 4.4 million barrels per day during the third quarter. That is now slowly climbing back up again, and we believe that they are currently -- that's close to 5 million. So assuming that the Chinese will continue to increase the import back to what was the run rate earlier, that could of course help the winter market on the margin. But we are not expecting any significant recovery in the near future and are really planning for a continued tough freight markets.
Eirik Uboe - Chief Financial Officer and Principal Accounting Officer
And on the supply side, we're -- we continued see new builds being delivered into this market, and we haven't seen much scrapping yet. But I think it's important to note that the first double-hull large tankers were delivered in '93 and '94. So we're hopeful that scrapping will pick up next year once these vessels are starting to phase there for special service and dry-docking cost and so forth. That would typically be the time when you have to make the tough decision whether to invest rather in your old assets or to retire them. But on the demand side, it's been soft as Svein said, and we don't see any sort of immediate rebound on that side.
Operator
[Operator Instructions] We'll take our next question today from Carras Holmstead from Stone Lion Capital.
Carras Holmstead
And I joined a little late, so this might already have been asked. But regarding the impairment charge, has a claim at all been filed with the counterparty?
Svein Moxnes Harfjeld - Chief Executive Officer
Just to be clear, our counterparty has not filed for Chapter 11. They have said that, that is one of the options that they are contemplating. So as such, these charters are still in place, and the counterparty is current on their payments to us. But the filing itself raised questions about the probability of those charters staying in place for their intended tenures. So hence, we decided to take that into consideration when evaluating the fleet -- or the carrying value of the fleet.
Carras Holmstead
Okay. And just where, if I can, does that -- the contractor -- who is the actual counterparty? Is it the parent company or is it is a subsidiary? Where that claim would be if it did arise?
Svein Moxnes Harfjeld - Chief Executive Officer
The counterparties are to a subsidiary, obviously. But these charters are guaranteed by, obviously, the main company.
Carras Holmstead
The parent company?
Svein Moxnes Harfjeld - Chief Executive Officer
That's correct, yes.
Operator
[Operator Instructions] As there are no further questions in the queue, that will now conclude today's question-and-answer session. And now -- I would now like to turn the call back to your host today for any additional or closing remarks.
Svein Moxnes Harfjeld - Chief Executive Officer
Well, thank you very much, all, for attending our conference call and continuing to take an interest in DHT. It's appreciated. Have a good day. Bye-bye.
Operator
That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.
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