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Introduction and business model
DHT Holdings is a company dedicated to maritime transportation, specifically the transportation of unrefined oil (crude tankers). The company has a fleet of 24 VLCCs (very large crude carriers), which are the largest type of tankers with sizes ranging from 200,000 to 320,000 deadweight tons (dwt). Out of these, 5 are operating under long-term contracts, while the rest operate on the spot market.
The estimated lifespan of a VLCC is around 20 years (although it can vary depending on the cycle's prosperity and may be extended or reduced), and beyond the 15-year mark, their cash-generating capacity significantly declines, making the vessels candidates for scrapping. DHT's tankers have an average age of 9.4 years, so while not having a very modern fleet, it still presents an interesting profile. Their fleet operates globally, covering major international routes. The type of vessel they operate, VLCCs, can carry 2 million barrels or more of crude oil and are typically used for long-haul routes: between the Arabian Gulf and North America, Europe and Asia, and from West Africa to the USA or distant Eastern regions.
The market for oil tankers, specifically the rates (daily fees received by operators for cargo transport), displays a clearly seasonal behavior, reflecting the dynamics of underlying oil demand. Demand peaks usually coincide with the period prior to the Northern Hemisphere winter (for energy or heating purposes) and the summer driving season, the summer period (again, in the Northern Hemisphere) with higher transport demand. In recent years, however, due to the growth of Asia with different (and often inverse) seasonal patterns than the traditional ones, the seasonality component has become more diluted and smoothed, improving rate stability.
In general, all maritime transportation segments, including crude tankers, exhibit a clearly cyclical behavior and are not good long-term investments (the buy and hold approach is not suitable in this sector), yielding very poor returns. These cycles typically last around 15 years from start to finish and always follow the same pattern:
Demand exceeds the supply of available ships, tightening the market and generating very high rates, from which companies obtain extraordinary returns, much of which they return to shareholders.
With these new cash generation prospects and considering that demand, except for some macroeconomic hiccups, is always on the rise, the estimated return for acquiring a new ship becomes very attractive, increasing the value of already built ships (second-hand), and prompting many companies to order new constructions from shipyards.
After 2/3 years (delivery time), all this new supply, often too ample due to excessive expectations, enters the market, reversing the market balance from supply deficit to surplus. Rates reflect the abundance of options, plummeting and creating financial problems for many operators.
The market consolidates, ships that no longer make sense to maintain in this new environment of low returns are scrapped, and we return to point 1.
The ideal entry point in this market is point 4, where stock prices are very depressed, and we capture all the upside of the new cycle. Right now, we are in the middle of point 1, where some of the value has already been realized, but some atypical catalysts make this cycle particularly interesting, creating a very attractive investment opportunity.
Investment thesis
Next, we will review the key points, both sector-specific and for DHT in particular, on which the investment thesis is based.
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