DHT Holdings (DHT - Free Report) is a Zacks Rank #1 (Strong Buy) that operates a fleet of double-hull oil tankers on international routes. DHT pursues a strategy of stable and visible distribution, while positioning the company to use cash flow to fund future growth opportunities.
Recent events in the crude oil markets has the tanker and storage groups in high demand. In addition, rising estimates and tanker rates make this stock attractive at these levels.
Saudi’s oil pump and COVID-19
Saudi Arabia’s decision to flood the global markets with crude oil sent shockwaves through the energy markets. Both oil and gasoline prices have been cut in half in under a month. Crude oil has gone from above $40 a barrel to $20, while gasoline futures have fallen from $1.50 to $0.50.
The companies that have exposure to energy prices, such as oil services and refiners, have seen tremendous pressure on shares. Some American shale companies likely won’t survive the fundamental change in the industry.
In addition, the global shutdown due to the COVID-19 virus has crushed demand. Oil and gas helps people move and when humans are not moving there is reduced demand for those commodities. Since governments have shut down much of the global economic demand, we see an unprecedented oil glut that is amplifying the situation.
Where to put the oil?
Typically an oil tanker, also known as Very Large Crude Carrier or VLCC, would take crude from point A to point B. But because there is such a large excess of oil and nowhere to take it, these tankers are being hired to just sit and hold the oil. Because of this demand for VLCCs is so high, rates are going though the roof.
Rates have accelerated in March, going from just over $30,000 a day to close to $300,000 a day. While they have fallen from their peak, it looks like a bull market for the VLCCs in 2020. The Saudis seem to half no intention on backing down from pumping and COVID-19 is has yet to peak globally. For this reason, both the supply and demand side will leave the world flooded in oil.
DHT has seen its estimates shoot higher because of the higher demand and rates. For the next quarter, estimates have gone from $0.17 to $0.78 over the last 30 days, a rise of 358%. For fiscal year 2020, estimates have jumped from $1.11 to $1.76, a hike of 59%% over the same time frame. These estimates are coming purely from this extra cash that will be generated from the higher tanker rates.
This could be just the start of a bull market for the tankers as the glut continues to build. While rates might have peaked, DHT and other tankers will generate earnings power. While the cash flow could be used to improve the balance sheet or grow, shareholders should expect big dividends. Even if this high tanker rate environment doesn’t last to the end of the year, the tanker group will have improved fundamentals.
In a stock market that has been dominated by the bears, the tanker group has been a solid bull. DHT has two potential payouts for shareholders. One in the form of dividends derived from higher rates and the other in capital appreciation from improved fundamentals. The tanker group is extremely volatile and investors should be monitoring and change in the VLCC atmosphere.
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