DHT Holdings, Inc. (“DHT”) is a multi-year call option on oil tanker spot rates.  The option is derived from DHT’s low cash operating rates, spot rate exposure, and recently refinanced capital structure - which doesn’t require a major debt repayment until Q2 2016.  This provides DHT significant legroom to survive the current negative operating environment and prosper when day rates improve.  If spot rates revert to their historical average, DHT will be trading at 3.0x EBITDA and 1.1x FCF.  Downside is protected as DHT trades at 64% of its NAV – a steep discount to peers that trade at ~135% of NAV.

Several negative events, that left DHT a remnant of its former self, have been resolved, specifically:

1. OSG exposure weighing on DHT’s fundamentals and share price;
2. Oversupply in the oil tanker market dragging down spot rates;
3. Mandatory and unpredictable quarterly debt prepayments required for DHT to remain current on its debt;
4. A large rights offering at a 37.5% discount (March 2012);
5. DHT was deleted from the Russell 3000 causing forced selling. 

All of the issues mentioned above, except for the weak oil tanker market, have been resolved as of last month.  As “experts” generally have a hard time predicting when spot rates will improve, our thesis is not based on predicting when spot rates will rebound, but rather a belief that rates should revert to a normalized level in the future.  DHT is both levered to a rebound in spot rates and able to withstand years of weak spot rates waiting for the rebound.

Background:

DHT was established in 2005 through a spin-off from OSG, which is now bankrupt.  Since its spin, DHT has transformed from a “leasing type” business with one client (OSG), one lender, and outsourced operational functions, to an independent shipping company with zero OSG customer exposure, multiple lenders, and in-house operational skills.  OSG fully divested its 42% ownership in DHT in 2007 and late last year defaulted under the two remaining long-term charters it had with DHT.  The two vessels were subsequently returned, leaving DHT’s fleet OSG-free and exposed to spot rates.  DHT’s current fleet is comprised of eight vessels (four VLCCs, two Aframaxs, and two Suezmaxs) with an average age of 12 years.

Capital Structure:

In March 2012 DHT executed a rights offering raising $76 million in net proceeds - $13.6 million of which was used to prepay debt, with the rest reserved for future growth and general corporate purposes.  The offering was backstopped by Anchorage Capital, which now owns 32% of DHT and chairs the investment committee on the Board of Directors (note: Anchorage Capital’s recent representative on the Board has left the firm, so Anchorage is in the process of filling his seat on the DHT Board).  As a result, DHT hasn’t made any acquisitions since the offering and has cleaned up its capital structure significantly.  Like any oil tanker company, DHT will want to grow its fleet at some point, but our understanding is this won’t happen until market dynamics turn. 

The rights offering and capital discipline have left DHT with a relatively well capitalized balance sheet consisting of $28.2 million in pro-forma cash (adjusted for a $47.3 million April debt prepayment) and $155.4 million in pro-forma recourse debt ($113.3 million with RBS covering six vessels, $18.3 million with DVB covering one vessel, and $24.8 million covering a final vessel with DNB).  The preferred shares outstanding will be automatically converted in July and are included in the 15.4 million share count. 

DHT amended its largest credit agreement with RBS in April and, after prepaying $47.3 million in debt, RBS waived the minimum value covenants, which had previously resulted in unpredictable quarterly cash prepayments.  Under the new agreement, no prepayments are required under the RBS facility until Q2 2016 and then the prepayments are based on a variable amount equal to FCF – capped at $7.5 million per quarter.  The DVB and DNB facilities have required repayments of $2.4 million and $2.5 million in 2015, respectively.  These facilities have a minimum value to loan covenant of 120%, which both vessels meet with considerable headroom - our understanding is the vessels are currently at ~145% value to loan.  DHT now has significant flexibility within its capital structure allowing plenty of time for rates to rebound and DHT’s stock to respond accordingly.

Debt Maturity Profile:	2014	2015	2016	After	Total
RBS	-	-	-	113.3	113.3
DVB	-	2.4	15.9	-	18.3
DNB	-	2.5	22.3	-	24.8
Total	-	4.9	38.2	113.3	156.4
Unamortized upfront fees					(1.0)
Total Debt					155.4
Note: PF for April 2013 prepayment

 

Net Asset Value:

We estimate that DHT’s NAV is $6.74/sh, 56% higher than DHT’s current price of $4.33/sh.  The values below are based on the most recent debt-financing appraisals.

Net Asset Value:
RBS	169.7	<< 120% VTL less cash from asset sale
DVB	26.5	<< 145% VTL
DNB	36.0	<< 145% VTL
Total	232.2
Net Debt	($128.2)	<< PF for April prepayment
NAV	$104.0
Shs Out	15.4
NAV/Sh	$6.74

 

OSG Claim:

Last year OSG defaulted on two long-term charters it had with DHT that were guaranteed by the parent company.  This left DHT with a claim of $51.8 million in the OSG bankruptcy.  Earlier this year DHT ran a sales process to monetize these claims and in March, Citigroup purchased the claim for 33.25% of the full claim ultimately allowed by the bankruptcy court.  Citigroup made an upfront cash payment of $6.9 million to DHT and will return the remaining value plus interest when the claims are allowed by the bankruptcy court.  If the full value of the claim is allowed, DHT could receive another $0.67/sh in cash, or 15% of the current stock price.  Adding this to NAV per share estimate of $6.74 results in a fair value of $7.41/sh, 71% above the current price.

Model Assumptions:

DHT is a simple business to model and it’s up to each individual to plug in their own spot rate estimates, but the main assumptions based on management guidance (other than day rates) are:

Vessel Type	Fleet Size
VLCC	4
Aframax	2
Suezmax	2
Current Rates	Rate/Day
VLCC	$15,500
Aframax	$12,000
Suezmax	$17,500
Historical Rates	Rate/Day	<< Avg of Clarkson's quarterly rates from 2007 for each vessel type
VLCC	$41,253
Aframax	$24,322
Suezmax	$35,580
Vessel Operating Expenses	Rate/Day
VLCC	$10,000
Aframax	$9,000
Suezmax	$9,500
Other Quarterly Expenses ($ Mil)
Utilization	98%
Depreciation	$7.5
General & Administrative	$2.3
Interest Expense	$0.9
Capital Expenditures	$0.8	<< Will fluctuate depending on dry docking/special service schedules
NTM at Current Rates	Amount	Multiple
EBITDA ($ Mil)	$6.5	29.7x
Free Cash Flow / Share	($0.02)	N/M
NTM at Historical Rates	Amount	Multiple
EBITDA ($ Mil)	$65.1	3.0x
Free Cash Flow / Share	$3.78	1.1x

 

Since 2007, DHT has traded at average valuation of 6.5x EBITDA, which implies fair value of $19.21/sh.  Including $0.67/sh of value for the bankruptcy claim results in a fair value of $19.88/sh, 359% above the current price.

Risks:

The risks to an investment in an oil tanker company are well-known and plentiful.  Major risks include:

1. The oil tanker market remains oversupplied which will continue to weigh on spot rates.
2. The oil tanker business is a commodity business with plenty of competition and very few barriers to entry.
3. If spot rates don’t improve by 2016, DHT will have to spend its cash buffer and possibly raise capital to prepay debt.
4. If spot rates do improve, at some point DHT will issue equity to grow its fleet as all oil tankers are in the business of issuing equity to expand their fleets and grow their dividends.

Summary:

We believe DHT provides a compelling opportunity to invest in a cheap and under-followed shipping company at a cyclical trough with sufficient capital flexibility to withstand the storm.  If the sky clears and spot rates revert to their historical average, DHT is trading at an attractive valuation of 3.0x EBITDA and 1.1x P/FCF and the stock should meaningfully re-rate.  Fair value is 71-359% above the current share price. 

We believe DHT provides a compelling opportunity to invest in a cheap and under-followed shipping company at a cyclical trough with sufficient capital flexibility to withstand the storm.  If the sky clears and spot rates revert to their historical average, DHT is trading at an attractive valuation of 3.0x EBITDA and 1.1x P/FCF and the stock should meaningfully re-rate.  Fair value is 71-359% above the current share price.