February 10, 2017
We are writing to update you on DHT’s business and our current thinking.
As you know well from our communications to you, the tanker market is cyclical, seasonal and volatile, and we manage these cycles proactively through our approach to operations, costs and capital allocation. By following this strategy, we produced very strong operational results in 2016:
The average earnings of our VLCC fleet came in at $43,300 per day for the year – a strong number in our opinion;
We delivered stable and competitive operating cost for our ships reflecting our modern quality fleet of ships run by a very experienced team with a long-term view on safe and reliable operations;
We have further driven down our administrative cost by right-sizing our organization following the Samco acquisition in 2014, benefits that will be evident in our financial results this year.
The above translated into a solid EBITDA of $209 million for 2016 equivalent to ~ $ 2.24 per outstanding share.
With asset values down some 25-30% last year and close to the trough levels we saw in 2013, we think we have reached a period of attractive asset prices whereby we will gradually focus on investment and fleet renewal. In keeping with that outlook, we have just placed an order for two VLCC newbuildings at Hyundai in South Korea. The shipyard has offered us early delivery in July and September 2018 in combination with attractive payment terms whereby we will pay 70% at delivery. The contract price is very attractive and includes large deadweight design of 318,000 metric tons as well as our typical upgrades to the shipyard specification. The ships will be financed by about 50% equity and 50% bank debt. Importantly, the equity component will be funded with cash at hand and future cash flow, hence no additional shares will be issued to finance this project. The combination of the attractive contract price and prudent financing results in very competitive cash break-even levels of about $17,600 per day to cover operating expenses, dry docking, debt amortization and interest payments.
We are allocating our capital to position DHT for growth in the long term and to return the most capital to you, the shareholder. We have paid cash dividends in 28 consecutive quarters. Our well defined capital allocation policy includes a formula based distribution related to earnings. During periods with strong tanker
earnings, the cash dividends have been generous yet prudent. We have in fact paid a total of $1.27 per share as cash dividends over the past two years. When earnings have run through softer periods, we have still paid quarterly cash dividends albeit in nominal numbers. It is however important to see the dividends in relation to how our capital is allocated in general. During the periods with strong cash flows, we also had the opportunity to prepay debt extraordinarily, and more recently, repurchase our convertible bond at a discount to par. As mentioned earlier, we are now in a period where some of our cash flow will be applied towards what we think will be attractive investments for DHT while adhering to our stated capital allocation policy.
Other companies have recognized the value in our high quality asset base and our employees. Frontline, a Norwegian-based tanker company, made an unsolicited, non-binding and highly conditional offer to acquire DHT. We understand why they want to buy DHT with our modern high quality fleet – we are also buyers of modern quality ships in this environment. However, our board unanimously concluded that the offer of exchanging 1 share in DHT for 0.725 shares in Frontline (equivalent in value at the present time of about $5 per DHT share) was wholly inadequate and substantially undervalued our company and undervalued what DHT’s contribution across key metrics would have been to a combined company. Additionally and importantly, Frontline proposed to pay for us in highly inflated Frontline shares that trade significantly above their underlying ship values. The result would have been a dilution of more than 20% of net asset value per share for DHT shareholders. This is clearly unacceptable. It should be recognized that our VLCC fleet has an average age of about 6 years whereas Frontline’s VLCC fleet has an average age of almost 11 years. Frontline’s VLCCs represent about 40% of their total fleet based on broker values. Their Suezmaxes and LR2 product tankers are relatively young but are predominantly built at what we consider to be second tier shipyards in China.
We like DHT’s current position with a robust balance sheet, quality fleet, first class people, solid customer base and supportive banks. We have a mix of fixed income contracts and spot exposure thereby protecting the downside yet retaining significant upside. Our customers are some of the most demanding oil majors and refiners out there, which we think reflects well on our services and operations. The fact that we extend contracts and get repeat business should be a testament to DHT as a trusted business partner.
We are, as you know, meaningful shareholders ourselves and have a continuous focus on building and running a highly respected tanker company providing attractive returns to investors. We believe the execution of our strategic plan will drive significant and sustainable value for our shareholders.
With best regards,
Trygve P. Munthe Svein Moxnes Harfjeld
Co- CEO CO-CEO