Update on DHT Holdings, Adding Epsilon Energy

My views on DHT Holdings have not changed. I want to re-iterate that I’m bullish on it. But to not update my readers would be pretty damned irresponsible so I’m going to do so here.

The basis of the update is this: DHT Holdings has a convertible debt to equity note out there floating with a conversion price of $5.347. The situation is simple.

If DHT decides to call the notes back and repay the debt, holders of the note get to convert notes to equity at $5.347 per share, which means that if the share price as of that date is above it, they profit from the difference in arbitrage. In sum, the full dilution is +16%.

This can and probably WILL create some short term downwards share price movement as (1) dilution (2) negative effects of reduced dividend per share takes place. The full article is on seekingalpha written by another author. The link is here. (https://seekingalpha.com/article/4356848-dht-convertible-notes-are-zero-cost-arbitrage-opportunity)

The notes are callable anytime between August 21, 2020, until the bond’s maturity on August 15, 2021. I expect DHT Holdings to try and address this asap starting Aug 21st, so I expect a conversion to be announced between Aug-Dec if any. Note that the conversion may not go through if there are no arbitrage opportunities – ie; the share price is at, or below $5.347.

My previous assumption was that DHT Holdings was trading so badly, no one would want to exercise that right. For them to think it would be profitable, they’d have to bake in a strong assumption that the resulting dilution would NOT drive prices to below $5.347 plus commissions. At 16% dilutions, that’s a hell of a margin of safety to bake in. At what level would they feel comfortable doing it? I know if it was me, it’d probably be around $8-$10. Then again, I’m no expert, and I don’t want to be caught w my pants around my ankles. Better to be safe than sorry.

Tldr; I will be adding short dated slightly otm put options to the portfolio covering the period from Aug2020 to year’s end.

Epsilon Energy

There are several main reasons why I like Epsilon Energy as of now.

  1. No debt
  2. Large cash balance of $15m, or approx 22% of market cap
  3. Cheap trailing ev/ebit of 5.635 (approx 6x).
  4. Low cost producer of natural gas, for which demand isn’t as heavily impacted as oil.
  5. Company just bought back 7.7% of total outstanding shares
  6. Management has skin in the game with with board and management owning 25% of the shares
  7. Gas macro is very unsurprisingly bullish given massive drop in gas rigs and production across the board as well as via associated shale production.
Range Resources slides

The focus is simple. The space is currently hated and generally experiencing negative share price momentum thanks to being lumped together with the oil sectors.

But common assumptions should always be examined. This is especially the case for natural gas – it does not suffer the same negative demand impact as oil, which is mainly a transportation fuel.

These are basic information pieces you can source from literally anywhere on the web. This is the demand side. So what’s the supply side? Let’s take a look at the futures as of now and see what it indicates.

Ownership Exhibit

per company presentation as of June 2020, here. (http://www.epsilonenergyltd.com/investor-center/news-and-presentations)



I believe that the relative cheapness of the company, combined with sharebuybacks, thin liquidity, no debt, large insider ownership, and relatively low cost producer (as evidenced by being cash flow positive DESPITE low natural gas prices) indicate a compelling opportunity to be long Epsilon Energy.

Disclaimer: I hold no positions as of yet. This is not an inducement to invest.

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