DHT Holdings (DHT) is a pure play on oil tanker shipping with a particular focus on the largest carriers -- Very Large Crude Carriers (VLCCs). Twenty of the 22 ships in DHT's fleet are VLCCs, and rates in that market have been on an upswing in the past three months. Some of this is seasonality, as the Northern Hemisphere's winter spurs demand, but I believe the tanker names are being discounted too highly based on normal fluctuations in day rates.
To value an equity, look at the secular trends, not the cyclical pops and drops. The long-term secular megatrend for large crude carriers is increased demand. If you've read any of the dozen or so columns I've written in the past year on Navios Maritime (NM) and the dry bulkers, you'll know from whence that demand is springing: China.
In case you don't read Hellenic Shipping News as avidly as I do, here are two nuggets from the past week:
- China's top crude oil producer, China National Petroleum Corp., said on Thursday that crude oil demand will grow by 3.4% this year to a record of 11.88 million barrels per day.
- The country's crude oil imports jumped to a record 36.38 million tonnes in December, data from the Chinese General Administration of Customs showed on Friday.
So Chinese demand for oil has not abated, and I'm going to boldly forecast that it never will. Some observers question how much coal and iron ore (the raw materials in carbon steel) China will need going forward given the high rate of building over the past 10 years. I would note that those skeptics have been proven dead wrong over the past 11 months as dry bulk rates have more than tripled in that period and so have shares of my Real Money Best Idea, Navios Maritime Preferred Series G (NM-G) .
No one who has been to China, however, could ever question the country's huge need for fuel to run its rapidly expanding vehicle fleet. Chinese vehicle sales are running in the 22-million-unit annual range versus the 17.5 million we sell in the U.S., and those cars need to be gased up. China's domestic oil E&P industry is, frankly, unimpressive and not particularly well run, but the country has expanded refinery capacity rapidly. So those refineries are going to continue to require cargos of crude and those cargos will come in on VLCCs.
Of course, since it's shipping, the outlook for the VLCC market can never be constantly rosy. Ship owners ordered too many new buildings when the market was truly buoyant -- as they always do -- and that has capped rates. I would note, however, that a significant proportion of new buildings have not been delivered and the majority are being delivered behind schedule as Chinese shipyards have had difficulty obtaining financing.
DHT's average VLCC rate fell from $53,500 in the second quarter to $20,300 for the third quarter. It's a typical shipping whipsaw, but seasonality goes both ways, and DHT's average VLCC rate rose to $34,000 in the fourth quarter. DHT management announced in a press release last week that early returns from first-quarter spot fixtures are showing an average rate of $53,000 for DHT's VLCCs.
More than half of DHT's ships trade in the spot market, so investors need to be prepared for the volatility in DHT shares caused by market reaction to changes in day rates. Also, DHT has implemented a capital allocation policy indicating that at least 60% of the company's ordinary net income should be returned to shareholders in the form of dividends or repurchases of the company's convertible notes.
So DHT's dividend can fluctuate with VLCC rates and, in fact, DHT's third-quarter dividend was $0.02 a share after a payout of $0.23 in the second quarter. To a computer, that payout reduction could signal financial distress, but actually, DHT's balance sheet is fine. With long-term debt of just under 50% of Sept. 30 vessel book value, the company is not highly levered.
So, DHT Holdings is a smaller stock -- market cap of about $385 million -- but it offers an opportunity for large returns as shipping markets benefit from positive long-term secular demand trends.
