Frontline Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 30, 2024

There are 6 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Q1 2024 Frontline Plc Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please note that today's conference is being recorded.

Operator

I would now like to turn the conference over to your CEO, Mr. Lars Fastad. Please go ahead.

Speaker 1

Thank you very much, dear all. Thank you for dialing in to our client's quarter earnings call. The Q1 of 2024 was, to a large degree, tainted by the security situation for the passage between the Red Sea and the Gulf of Yemen sorry, the Gulf of Aden, in fact. There are still charters insisting and owners willing to collect region, ignoring the security for the seafarers. But we, as Frontline, we simply don't.

Speaker 1

The highlights of Q1 of 2024 was that all the Euronav vessels are now sailing under the Frontline flag. And as we progress into 2024, we will take the full advantage of having a fleet of 41 modern low consuming VLCCs in addition to our efficient Suezmax and LR2 fleets. Utilization seems to be edging higher on all asset classes, but again, the LR2s are the ones to shine. Before I give the word to Ingrid, let's take a look at the SEC numbers on Slide 3 in the deck. So in the Q1 of 2024, Frontline achieved $41,100 per day on our VLCC fleet, $45,800 per day on our Suezmax fleet and $54,300 per day on our LR2Aphamax fleet.

Speaker 1

LR2s have been yielding VLCC numbers in the quarter as this segment has been affected the most by the disruptions in the Suez Canal Passages. The Suezmax is actually called that for a reason. Hence, the change in flows has forced the effect to new trading patterns during the quarter. So far in the Q2 of 2024, 78% of our VLCC days are booked at $60,400 per day, 73% of our Suezmax days booked at $46,400 per day and 72% of our LR2Aframax days at a very firm $64,700 per day. Again, all these numbers in the table are on the low to discharge basis, and they will be affected by the amount of balance days we end up having at the end of Q2.

Speaker 1

I'll now turn the financial highlights.

Speaker 2

Thank you, Lars, and good morning and good afternoon, ladies and gentlemen. Let's then turn to Slide 4 and look at the profit statement. In the Q1, we report profit of $180,800,000 or $0.81 per share, and we also report an adjusted profit of $137,900,000 or $0.62 per share. Adjusted profit in this quarter increased by $35,800,000 compared with the previous quarter, and that was primarily due to an increase in our TCE earnings. That was also again due to delivery of the 24,000,000 we have seized from Euronav in the previous quarter and also in this quarter and also to higher TCE rates.

Speaker 2

Again, this is partially offset by an increase in ship operating expenses, depreciation and finance expense as a result of delivery of the 24 VLCCs from Euronow. Let's then look at some balance sheet highlights in Slide 5. The balance sheet movements this quarter are related to taking delivery of the remaining 13 of the 24 VLCCs acquired from Euronav last year. Frontline has a strong liquidity of $404,000,000 in cash and cash equivalents, including undrawn amounts of the senior unsecured revolving credit facility and also the marketable securities and minimum cash requirements to the bank as per March 31, 2024. We have no remaining newbuilding commitments and no meaningful debt maturities until 2027.

Speaker 2

If we then look at Slide 6, let's move to that one. Following the delivery of all the 24 VLCCs that we acquired from Euronav and also the sale of the 7 older vessels in the 1st and second quarter of 2024. Our fleet consists of 41 VLCCs, 23 Suezmaxes and 18 LR2 tankers. The fleet has an average age of 5.9 years and consists of 99 percent eco vessels, whereof 56% is scrubber fitted. We estimate average cash costs for the breakeven rates for the remainder of 2024 were approximately $31,200 per day for VLCCs, dollars 23,500 per day for Suezmax tankers and $22,200 per day for LR2 tankers.

Speaker 2

And the fleet average estimate is about $27,100 per day. This is slightly up from the previous quarter as a result of the financings and refinancings done. The fleet average estimate includes drydock of 2 Suezmax tankers and 5 VLCCs in 2024, where our 2 Suezmaxes and 2 VLCCs will be docked in the Q2, 1 VLCC in the Q3 and 2 VLCCs in the 4th quarter. We recorded OpEx expenses, including dry dock in the Q1 of $8,100 per day for VLCCs, $8,800 per day for Suezmax tankers and $7,400 per day for LR2 tankers. And this includes drydock of 2 Suezmax tankers.

Speaker 2

The 1st quarter fleet average OpEx excluding drydock was $7,700 Then we can move to Slide 7. Frontline has about 30,000 earnings days annually, whereof about 28,000 are spot days. The cash generation potential at current fleet and spot market earnings from Clarksons Research as of May 29 of $55,900 per day for VCCs and $50,000 per day for Suezmax tankers and $65,500 for LR2 tankers is $835,000,000 a year or $3.75 per share. If you look at this slide to the right hand side, we can see that 10% increase from the current spot market will increase the potential cash generation with about 19%. And with this, I leave the word to Lars again.

Speaker 1

Thank you very much, Inger. Let's move to Slide 8 and have a look at the current market narrative. We're still in a situation where the situation between Israel and Amaz and the other way that between Israel and Iran, we are in an environment with growing political risk. We're also seeing increased sanction evasion scrutiny from the U. S.

Speaker 1

And EU, and this causes kind of what I refer to formally as the gray fleet to move further into the document, which is growing as we move forward. On the very positive side, the global load demand is now estimated, according to EIA, to reach all time high in June at 103,760,000 barrels per day. I think we need to kind of recognize that although we are in a transition mode into greener fuels and we're part of the green transition. But as the overall energy demand globally is growing, oil and hydrocarbons plays a part and continues to grow. What's kind of very interesting in Q1 and following into Q2 has been that the period markets have really started to show some strength.

Speaker 1

On the chart on the right hand side, we basically used drugs and indices to execute, we're looking now that VLCC, a 3 year time charter from EPOS scrubber VLCC, is closing in on $55,000 per day. This puts the time charter market actually in almost like a contango, where 1 year, 2 year and 3 year time charters for VLCC are actually that differently. We also you should note that the LR2 and the Suezmax market is more or less priced equally. Another exciting kind of development is that the TMX pipeline is now kind of the expansion. It's coming into reality.

Speaker 1

And we're starting to see or will start to learn how that oil will move. We're talking about 650,000 barrels per day when the expansion is finished into the Pacific Basin. And that will have an effect on basically utilization in that region. The port where the TMX pipeline comes out can only cater for Aframaxes. It cannot cater for FCS operations, and there is virtually no storage there.

Speaker 1

So we'll see trading patterns where depending on where the oil is heading, where you'd either have Aframaxes taking down the coast to a suitable SDS location or going into the U. S. Refining system. And lastly, on that note, the Dangote refinery, which I know that the market has kind of speculated how that will affect ton miles going forward. It's a significant refinery starting up in Nigeria finally after 16 years.

Speaker 1

So it's quite interesting to see that they are also then taking feedstock from the U. S. Gulf, which is not expected sitting next door to Nigerian crude supply. The order books continue to grow. But as the order books grow, the delivery will be in the rough in time, and I'll get back to that later.

Speaker 1

We see that on the charts at the bottom on the slide, you see that the VLCC, I've said it many times now, we seem to be in this kind of grind, positive grind, where the bottoms are higher for every cycle. We go through and that still seems to hold. The Suezmax, I mentioned it in the introduction. Suezmax and Suez Canal are connected. So Suezmax has seemed to be very range bound, around the 40 dollars 1,000 per mark and doesn't really seem to have legs to go anywhere.

Speaker 1

But the LR2 are the ones to shine. They're most affected by the disruptions in Suez Canal passage, and we see the volatilities increasing. We're also seeing examples, and Frontline has participated in Suezmax's cleaning up in order to kind of compete in the particularly gasoil going from the Middle East Gulf to Westbound. So let's move to Slide 9 and look at some of the kind of developments in flows. I have kind of talked about this earlier.

Speaker 1

OPEC is maintaining its cuts, which is predominantly located around the Middle East Gulf. Non OpEx supply has been given kind of the opportunity to grow, and this growth continues. So on the top left hand side, you can see tonne miles generated from Americas oil exports. Americas is basically the whole continent included, and we see that continuing at a very, very kind of high level. And we also see VLCC are starting to get favored, particularly so in May.

Speaker 1

And this basically is an indication that a lot of this volume is going long haul. We also see that Europe continues to draw oil from a kind of longer distances on the bottom left hand chart. So the ton mile generation by Europe avoiding Russian crude is continuing. But I think lastly and very interestingly, we're seeing that in the Middle East is accelerating course growth are much larger deploying oil further apart, so basically West on the registered vessels, so based on all numbers issued. So I think we should expect that this will grow as more and more confirm.

Speaker 1

Is now reached a level of 26.6 percent of the existing LR2 fleet. But I think one has to take into the consideration here that as LR2s pass 15 years, they tend to turn into Aframaxes. And I think kind of to truly reflect the picture in the Aframax size class, one should actually include the overall Aframax number, which would drastically reduce this percentage. But anyway, we continue to see these order books grow, but to a lesser and lesser degree in 'twenty seven. And actually now, we're talking about 2028.

Speaker 1

And let's move then to Slide 11. And I think if there is one slide that's important in our quarterly presentation this time, it's this one. And I have a look at the bottom left hand chart. So from 2024 onwards, we're in fact hitting a wall of replacement needs. Based on tonnage, that has to be phased out at the age between 20 or 25 years, depending on asset class, there is a monster of vessels that are deadweight tons that was built between 2004 2011 that basically come to age.

Speaker 1

2011 was the absolute peak year of newbuilding, and this is again all asset classes included. And at that point in time, we had 5 19 shipyards in the world. Now we have 2 47 shipyards in the world. So in amount of shipyards globally, the amount the number of yards has been reduced by 52%. Roughly tons capacity as some of these yards are bigger, the reduction is somewhat less being 40%.

Speaker 1

We're seeing that in South Korea and in Japan. They're struggling basically to be able to expand this existing yard capacity basically due to demographics, being able to attract workers and so forth. I've said it on a few presentations. In South Korea, we're looking they actually need to take in the workers from Philippines to get basically the capacity need. In Japan, one is saying that the average age of a welder is 56 years.

Speaker 1

So this is a demographic challenge. There's not that many kids in South Korea and Japan that really, really wants to work in the shipyard. China has potentially a lot of capacity. But this is a structural supply story. In order to replace all this tonnage that needs to be replaced over the next 10 years, we have an issue.

Speaker 1

If you look at on the tanker replacement alone, we're actually if you put the long goggles, the big goggles on, from now until '30s, we need more than close to 400 VLCCs built. We need 300 Suezmaxes built. We need 187 LR2s built and close to 400 Aframaxes. So this is kind of massive, and it's a structural problem. So it's not easily solved.

Speaker 1

And as all market intelligence agree on oil demand to continue to grow, although ton miles may contract short to medium term if Ukraine, Russia is resolved and if the Red Sea passage is opened up, one cannot escape the fact that shipping supply growth looks to be challenged. With that, let's move to Slide 12 and go through the summary. So again, the highlight of Q1 for Frontline is that we have a fully delivered VLCC fleet sailing under the Frontline flag. We have concluded the sale of the non and it's given Frontline one of the most fuel efficient fleets in the market. We finalized and inked the expansion in financing, completing our strategy of re leveraging the existing fleet.

Speaker 1

The security situation in Red Sea, Gulf of Aden and Middle East in general remains. There's continued contracting in the tanker markets with building capacity is coming into question as delivery dates now move into 2028. Short and medium term all demand picture remains firm, and we're also kind of being alerted by the market that OPEC plus can see in second half of twenty twenty four. There is increased liquidity in the period market with long term time charter rates moving up. And this is, in all fairness, the intelligent money coming into the market.

Speaker 1

So with that, I would like to open up for questions.

Operator

Thank you, Thank you. We are now going to proceed with our first question. The questions come from the line of Omar Nochtar from Jefferies. Please ask your question.

Speaker 3

Thank you. Hi, Lars and Inger. Good afternoon. Thanks for the presentation. Always very detailed and informative across different elements of the story in the market.

Speaker 3

I guess a couple of questions from me. Maybe just first on the financing. As you just highlighted, you finalized and ink the expansion financing. You've unlocked a good amount of cash here recently. And it looks like I'm just telling the numbers $417,000,000 has been unlocked and that's going to basically repay the human holding borrowings of $395,000,000 which was used initially on the Euronav deal.

Speaker 3

But what about the 7 tankers, the 7 older ships you just sold, those unlocked $275,000,000 after you paid down the debt. Is that cash, is that earmarked for anything in particular? Or will these go into further debt reduction?

Speaker 2

You have to remember that we used more to finance the Urner vessels than the SEK 395,000,000 that we drew under the Sterner facility and also the Hemann shareholder loan. We spent some cash from operation until we sold the vessels the older vessels. So that's the answer to your question.

Speaker 3

Okay. Yes. So just as simple as that then. Okay. And I guess just more kind of sticking with, Lars, you talked quite a bit about the market and the LR2s being the sector that's shining.

Speaker 3

And you've also talked about TMX. How are you thinking about the LR2 fleet and the way it's trading currently the or how are you balancing say that the LR2s between dirty and clean given the strength in the outside the Suez market and then also the potential pull into Vancouver?

Speaker 1

Yes. No, it's a good question. This is a time where we probably would have wanted to have some Aframaxes in our fleet, to be quite honest, uncoated. But the so basically, the question in regards to Della II shining, this is obviously related to the fact that with the Suez Canal virtually closed products From east to west, the arbs work periodically. But west to east, there is very little material going.

Speaker 1

You need to incentivize an owner to actually balance the ship going east, and that means that the rates actually have to go up. So the utilization of the LR2 fleet is simply increasing quite a lot basically by this inefficiency. And also to the point where great efforts have been done in order to clean up Suezmaxes for this trade. Suezmaxes can obviously clean Suezmaxes can obviously not cater for all the cargoes. Basically, gas oil is probably as far as it goes.

Speaker 1

But this is basically what's driving this market. Dangote, I don't think we've necessarily TMX, I don't think we've seen that fully affecting the Aframax market. But at least as we can see now, as we've the market is developing or evolving, It looks like a lot of these barrels are actually going to the west, sorry. It's the other side of the world. And so basically, what we see is trade emerging where Aframaxes will go up and down the coast.

Speaker 1

You have certain SPS locations in you have some in U. S, you have Mexico and you have Ecuador. Ecuador, you also have tankage. And we see this to be where you collect the oil from TMX on Afris. So increasing utilization on Afris to some extent, but not necessarily to the extent as if the Aframaxes were going all the way west to China.

Speaker 1

And then SDS activity and then put into VLCCs that takes it over to our West to clients there. So I think we still need to have a look at this trade for a few more months until we understand how it's going to work. But you could say that the worst case scenario, which is obviously the best case scenario for a shipowner, is that all this you need to load an Aframax every day. So it's you talk ships. And if they need to travel for 40 days before the discharge, you have 80 days until they're back.

Speaker 1

It's going to take a lot of vessels. But as far as we see it initially, is that it doesn't you don't use that amount of days because you're basically just going down the coast to a possible SDS location. And then it's a larger vessel. And so far, it looks like going into VLCCs.

Speaker 3

Okay. Thanks, Lars. That's helpful. And just a final one for me, just kind of on the VLCC performance in the Q1. The repositioning of the Euronav ships is obviously there's a big divergence between what your initial fleet earned and what those ships have done.

Speaker 3

Should we think about further repositioning dynamics in the Q2? And then is 3Q really the first kind of true quarter of ongoing operations on the VL?

Speaker 1

Yes. I think you have a good one, but there are a few points I want to make. Number 1 is one has to remember that Euronav fleet has a lower scrubber penetration than the former the existing front line fleet prior to the transaction. So that obviously affects the earnings you can get. Secondly, initially, all the vessels were delivered on basically all vessels were delivered around Singapore.

Speaker 1

So we have kind of an introduction trade that maybe didn't yield what we would have wanted. It's also a timing issue. When this entered the market, we got them very concentrated in time. So it meant that we hit basically a very narrow window in the Middle East, which just to top it was the weak spot in Q1. But anyway, I think you're absolutely right.

Speaker 1

As we move forward here, we'll spread the fleet more evenly around the globe. And we will see that the Euronav vessels will just blend in. And we're probably not going to comment on or kind of distinguish between the two fleets going forward as we report. But also, you have a very good point. And these ships are done on long voyages.

Speaker 1

So it takes a bit of time before everything is kind of fully acclimatized or whatever the word is into the total fleet. So Q2 will maybe, to some extent, be effective. But Q3, we should be running a normal show. Okay.

Speaker 3

Very good.

Speaker 1

But obviously, to a lesser degree in Q2 than Q1, obviously.

Speaker 3

Okay. All right. So 2Q will be better and then 3Q is full on. Okay. Yes.

Speaker 3

Excellent. Thanks, Lars. Thanks, Inger.

Speaker 1

Thank you,

Operator

Thank you. The questions come from the line of Craig Reese from BTIG. Please ask your question.

Speaker 4

Yes. Hey, thank you and good afternoon and thanks for taking my questions. Lars, it looks like the depth of the time charter market is picking up. I mean, obviously, you're taking advantage of that. As we look at the back half of the year and the outlook for rates and the spread between, I guess, the curve and spot market, I guess, kind of curious what you're seeing and how you're thinking about the opportunities to continue to put some vessels on some term

Speaker 1

charters? We're constantly kind of but I think keep in mind that our view is that we're in for a longer one here. I hate saying it because we used the expression stronger for longer back in 2020, and that was absolutely not right. But there, we were actually quite aggressively chasing cash order coverage. But now we are watching it, and we want to kind of it makes sense.

Speaker 1

We want to lean into the market, but we're not going to kind of we have like a rule of thumb in frontline that we try to cover 30% of our largest exposure being revenues, interest rates and the bunkers. So that's kind of the rule of thumb. We're very close to that or fairly close to that on interest rate swaps, fantastic timing. On the bunker side, we're a bit below. On the revenue side, we have virtually apart from on the LR2s, we have virtually 0 revenue kind of secured going forward.

Speaker 1

But we will lean into this, but we are in absolutely no hurry because we believe this cycle kind of gradually getting into here and back to the I mentioned this structural issue you have in the supply side and oil demand looking to be very, very resilient, it's going to take us a little bit of time. So but we want to ask me when or well, it's always a when we get out of the cycle. We want to have some proper coverage, But we are not aggressively pursuing this right now.

Speaker 4

Okay, great. And then just I did want to ask a little bit about you had those asset sales, I guess looking at the maybe you have 2 more Suezmaxes that are in that 20 ten-twenty cycles, older vessels have outperformed or the spread is converged for older vessels versus modern tonnage and it's typically made sense to own the older vessels in bull markets. And just kind of curious, I mean, I guess since the Frontline acquisition was announced, we've sold 16 do you see this cycle playing out differently where there's that much more discrimination against older vessels that maybe that spread that traditionally converges during these multi year up cycles doesn't play out the way it has historically has?

Speaker 1

That's a big question. I think kind of in our analysis and looking at this market, we as I've said numerous times to subscribe to this kind of notion about the revenge of the old economy. So the way this is going to play out is, which obviously it hasn't yet, but oil prices and everything is going to kind of go up. The commodities boom that we're facing going forward. And with that, we'd rather have the most efficient tools.

Speaker 1

We are seeing some scrutiny, preference from clients for more efficient tonnage. We cannot forget the regulatory framework we're facing to have and if it's kind of disappeared a little bit in the narrative over the last year, 1.5 years. There is still this thing about CII and there is still this thing about kind of energy efficiency and so forth. And we basically we subscribe to that a lot and that's a part of our strategy. So I think kind of it could be that looking back in 2, 3 years' time that what you should have done is focus on 12 to 15 year old vessels and where you get most bang for the buck.

Speaker 1

But we continue to kind of build long term to be in the 20 to 30 years, and that's basically the plan we're aiming for.

Speaker 4

Okay. Super helpful. Thank you very much.

Speaker 1

Thank you.

Operator

We are now going to proceed with our next question. The questions come from the line of Peter Houghton from ABG Sundalcone. Please ask your question.

Speaker 5

Yes, good afternoon, guys. Thank you for taking my question. Just on the final sentence in the summary here, Lars, you talk about the longer term time charter markets. And I guess the question is popped in too. Firstly, in terms of the requirements, is it the traders?

Speaker 5

Or is it sort of the fundamental cargo owners which are asking for longer period? And the second part of the question, have we seen an interest for sort of 5 to 7 years charters for new builds with 27, 28 deliveries as of now? This

Speaker 1

sorry, this is the oil This sorry, this is the oil majors, the kind of the guys who have transportation needs. So this is basically the big boys entering the market, oil majors, national companies and so forth. Secondly, yes, there is interest for longer term business in the market. So maybe not 10 years, but 5 to 7 years definitively and 7 year charters, absolutely. So but this is kind of a little bit different market.

Speaker 1

And just to remind everybody, our proposition to our investors is to give you spot exposure. These kind of deals, we might we're very likely to pass on. We don't have an order book either. So but it is absolutely starting to merge a market around its longer term deals as

Speaker 5

well. And if I could just follow-up on that. What sort of rates would you expect let's say that if you had a new build with 727 delivery, what sort of rate would you expect to get for a 5 year time charter deal from there?

Speaker 1

That's a big question. It's a difficult question to answer actually. But it looks like the curve is pretty flat. And it's also what gives the owner a decent return on the equity. So you're talking somewhere around $60,000 per day regardless on the VLCC that is.

Speaker 5

Okay.

Speaker 1

But that doesn't really sorry, the $50,000 per day doesn't really make it makes some excited, but others maybe not. It's the 2027 delivery, depending on when you order it, is setting you back $110,000,000 $215,000,000 to $120,000,000 So it's a big number. But I think at least for now, that's where these prices are.

Speaker 5

Okay. Thank you. And just the final one from me in terms of dividends going forward. Yes, I know that you have this discretionary policy, but this time, you pay out everything, which I think is appreciated by, well, most. How should we think about the payout ratio going forward here?

Speaker 5

And I'm thinking perhaps in particular in next quarter because in next quarter and potentially Q3 with a summer market, it could be, well, less, I suppose.

Speaker 1

I think you should kind of the rule of thumb, which is, again, not a policy, is 18% of adjusted net income. And I think you that's what you should have in the back of your head, if that's what happens. But I think also why we chose to go for 100% this time is that we have good visibility. We are in a good kind of liquidity position. And our job is to give our shareholders the money we make.

Speaker 1

So but obviously, depending on how the markets evolve going forward, you can speculate whether if we're going to do 100% again or if it's going to be 80%. But I think it's going to be linked to kind of the general market temperature. And this is what we've tried to do all along is kind of when the market corrects sharply downwards, we're not going to drain the company's cash. But then again, if the market stays firm and maybe even improves, we have room to unless we're doing something structurally that where we rather reinvest the cash on behalf of our shareholders, and then you should be handsomely rewarded.

Speaker 5

Thank you for that, Lars. That was all for me.

Operator

We have no further questions at this time. I will now hand back to you, Mr. Basten, for closing remarks. Thank you.

Speaker 1

Thank you very much, and thank you all for listening in. These are exciting times still, although we're still missing some of the volatility we wish for. But let's just monitor how these markets develop and see the next quarters to come. Thank you very much.

Operator

This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you.

Powered by Quartr
Earnings Conference Call
Frontline Q1 2024
00:00 / 00:00