Q1 2024 Frontline Plc Earnings Call

Participants

Lars Barstad; Chief Executive Officer of Frontline Management AS; Frontline Plc

Inger Klemp; Chief Financial Officer of Frontline Management AS; Frontline Plc

Omar Nokta; Analyst; Jefferies LLC

Craig Ellis; Analyst; BTIG LLC

Peter Hogan; Analyst; ABG Sundal Collier

Presentation

Lars Barstad

They're all thank you for dialing into Frontline earnings call the first quarter of 2024 was to a large degree tainted by the security situation from the passage between the Red Sea and the Gulf of Yemen sorry, the Gulf of Aden in fact. There are still shelters insisting and owners willing to collapse region, ignoring the security for the seafarers, but we ask from client, we simply don't.
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 efficiencies, Aframax 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 Inger, TCE numbers on slide 3 in the deck, in the first quarter of transition before 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 LR2/Aframax fleet. LR2s have been yielding VLCC numbers in the quarter as this segment has been affected the most by the disruptions in the Suez Canal passage.
The Suezmax is actually call that for a reason, hence the change in flows has force with respect to new trading patterns during the quarter. So far in the second quarter 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 LR2/Aframax 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 date we end up having at the end of Q2.
I would now like to let Inger take you through the financial highlights

Inger Klemp

Thank you, Lars, and good morning and good afternoon, ladies and gentlemen.
Let's turn to slide 4 and look at the profit statement. In the first quarter, we report profit of $180.8 million or $0.81 per share, and we also report a adjusted profit of $137.9 million or $0.62 per share. Adjusted profit in this quarter increased by $35.8 million 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 24 VLCCs from Euronav in the previous quarter and also in this quarter and also the higher TCE rates. Again, this is partially offset by an increased ship operating expenses, depreciation and finance expense as a result of delivery of the 24 VLCCs from year now.
Let's then look at some balance sheet highlights in slides 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 million 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.
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 seven older vessels in the first 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% ECO vessels, they are 56% is scrubber fitted.
We estimated average cash cost for the break-even rates for the remainder of 2024 were approximately $31,200 per day for VLCCs, $23,500 per day for Suezmax tankers and $22,200 per day for LR2 tankers. And the fleet average estimate is about $27,100 per day. It is slightly up from the previous quarter as a result of the financing for refinancing done. The fleet average estimate increased drydock of two Suezmax tankers and five VLCCs in 2024, where our two Suezmaxes and two VLCCs will be docked in the second quarter, one VLCC in the third quarter and two VLCCs in the fourth quarter.
We recorded OpEx expenses, including dry dock in the first quarter 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 startup of two Suezmax tankers. The first quarter fleet average of OpEx, excluding drydock was $7,700.
And then we can move to slide 7. Frontline has about 30,000 earnings days annually. Whereof about 28,000 are stock based. The cash generation potential at current fleet and spot market earnings from Clarksons Research as of May 29, it was $55,900 per day for VLCCs and $50,000 per day for Suezmax tankers and $65,500 for LR2 tankers is $835 million a year or $3.75 per share.
If you look at this slide to the right hand side, you can see that 10% increase from the current spot market will increase potential cash generation with about 19%.
And with this, I leave the word to Lars again.

Lars Barstad

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 Hamas (inaudible) Israel and Iran. We are in an environment with growing political risk. Are we also seeing increased function innovation scrutiny from the US and EU. And this causes kind of a what I refer to formulate the gray fleet to move further into the Dangote, which is growing as we move forward.
On the very positive side, the global oil demand is now estimated according to EIA to reach all-time high in Jun at the 103.76 million barrels per day. I think we need to recognize that although we are in this transition mode into greener fuels and then you know, we're part of the green transition. But as the overall energy demand globally is growing, oil and hydrocarbons place apart and continues to grow.
What's very interesting in Q1 and following into Q2 has been that the period markets have really started to show some strength. On the chart, on the right hand side, though, you can basically use the trucks and the indices to issued. We're looking now about so that we also see a three-year time charter from Eco, Scrubber VLCC is closing in on $55,000 per day. This puts the time charter market actually in almost like a contango where one year, two year and three year time charters for VLCCs are actually that differently. We are also you should note that the LR2 on 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 is coming into reality, and we're starting to see or we'll 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.
We need the port where the TMX pipeline comes out can only cater for Aframaxes. It cannot cater for SPS operations and there's virtually no storage there. 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 SPS location or going into the US refining system.
And lastly, on that note, the Dangote refinery, which I know that the market has come speculated how that will affect tonne Miles going forward. It's a significant refinery starting up in Nigeria, finally after 16 (inaudible). It's quite interesting to see that they are also then taking feedstock from the US Gulf, which is not expected sitting next door to Nigerian crude supply. The order books continue to grow, but the order books grow the delay provide are up in time, and I'll get back to that later.
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. And that still seems to hold. The Suezmax, I mentioned it you know, in the introduction, Suezmax and Suez Canal are connected.
Suezmaxes seem to be very range bound around the $40,000 per mark and doesn't really seem to have legs to go anywhere. But there are two other ones to shine their most affected by the disruptions in Suez Canal assets. And we see that volatility is increasing. We're also seeing examples and Frontline has participated in Suezmaxes cleaning up in order to kind of compete in (technical difficulty) particularly gas, oil going from the Middle East Gulf to West Banks.
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. The OPEC is maintaining its cuts, which is predominantly located around the Middle East Gulf non-OPEC 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 America's oil experts.
Americas is basically the whole continent included, and we see that continuing at a very, very high level. And we also see VLCC are starting get favored, particularly so in May, and this basically is an indication that a lot of this volume is going longer. We also see that Europe continues to draw oil from a kind of longer distances on the bottom left-hand chart.
So the tonne Miles generation by your avoiding Russian crude is continuing. But I think lastly and very interestingly, we're seeing that is very close to this fortunately being in Middle East is, of course, growth. Our much larger inventory pulling oil further problems basically was two.
Let's move to slide 10, all customers and to continue to grow that we've now run dynamic size based on a very sensible government. I am all numbers, so I feel confident that this will resume growth. Once more confirm, you'll have more than (inaudible) the last couple of years. Have been coated tankers is now reached a level of 26.6% of the existing LR2 fleets.
But I think one has to take into consideration here that LR2s past 15 years, they tend to turn into Aframaxes. And I think kind of 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 this order books growth, but to a lesser and lesser degree in 27. And actually now we're talking about 2028.
And let's move then to slide 11. And I think if there's one slide that's important in our quarterly presentation this time, is this one. And I have a look at the bottom left-hand chart. So from 2024 onwards, we are, in fact hitting a wall of replacement needs. Based on tonnage that has to be phased out at the age between 20 to 25 years, depending on asset class, there is a monster of vessels part or deadweight tons, that was built between 2004 and 2011 basically come to age.
2011 was the absolute peak year of new building. And this is, again, all asset classes included. And at that point in time, we had 590 and shipyards in the world now that 247 shipyards in the world. So in amount of shipyards globally, the number of yards has been reduced by 52%. (inaudible) tons capacity or some of these yards are bigger, the reduction is somewhat less being 40%.
We're seeing that in South Korea and in Japan and they're struggling basically to be able to expand this the 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 look, they actually need to take in the workers from Philippines to get basically the capacity needs.
In Japan, one is saying that the average age of a wild deer is 56 years. So this is a demographic challenge. There's not that many kids in South Korea and Japan that really wants to work in a shipyard. China has potentially a lot of capacity. That business 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. If you look at on the tanker replacement alone, we're actually if you put the long googles, big googles 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 massive and it's a structural problem. So it's not easily sold.
As all market intelligence agree on oil demand to continue to grow. And although tonne 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 childish.
With that, let's move to slide 12 and go through the summary. So again, the highlights of Q1 from Frontline is that we have a fully delivered versus the fleet sailing under Frontline flag. We have concluded the sale of the month and it's given Frontline one of the most fuel-efficient fleets in the market. We finalized and inked the expansion in financing, competing our strategy of re-leveraging, the existing fleet.
The security situation in Red Sea, Gulf of Aden and Middle East in general remains. There's continued contraction in tanker markets, but building capacities coming in to question of delivery dates now move in to 2028. Short and medium term Oil demand picture remains firm. And we're also kind of being alerted by the market that the OPEC+ can see in second half of 2024. 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 markets.
So with that, and I would like to open up for questions.

Question and Answer Session

Operator

(Operator Instructions)
Omar Nokta, Jefferies.

Omar Nokta

Thank you, Lars and Inger. Good afternoon. Thanks for the presentation. Always very detailed and informative across different elements of the story in the market.
A couple of questions from me. Maybe just first on the financing. As you just highlighted, you finalized the expansion financing. You've unlocked a good amount of cash here recently, and it looks fine telling the numbers $417 million has been unlocked, and that's going to basically repay that Hemen Holding borrowings at $395 million, which was used initially on the Euronav deal. But what about the seven tankers of the seven older ships you just sold those unlocked $275 million after you paid down the debt. Is that cash? Is that earmarked for anything in particular or will these go into a further debt reduction?

Inger Klemp

You have to remember that we used more to finance the Euronav than the $395 million that we drew under the external facility and also the Hemen shareholder loan. We spent some cash operation until we sold the vessels, the older vessels. So that's the answer to your question.

Omar Nokta

Okay. Yeah. So just as simple as that, and okay, and then I guess just more kind of sticking with Lars, you talked quite a bit about the market and the LR2s being the sector that shining and you 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 LR2 is between 30 and clean given the strength and outside the Suez market and then also the potential Poland to Vancouver?

Lars Barstad

Yeah. Omar, it's a good question. And this is a time where we probably would have wanted to have some Aframaxes in our fleet to cut almost uncoated, but the same basis, you answered the question in regards to the love to signing now 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's very little material it growing 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 their 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 before for this trend and Suezmaxes can obviously clean Suezmaxes, can obviously not cater for all the cargoes. That basically has the gasoline is from there as far as it goes.
But you know, this is the thing that was driving this market dongle that I think is necessary at TMX. I don't think we've seen that fully affecting the Aframax market. That's at least as we can see now as we sit with them and you know, the market is developing or evolving, it looks like a lot of these barrels are actually going at the West sorry, on the other side of the world. And so basically what we see is a trend emerging where Aframaxes will go up and down the coast.
You have certain dislocations in. We have some in Europe, you have Mexico and you have Ecuador, Equatorial's tankage. And we see in addition to, we collect the oil from TMX on offers. So increasing utilization on factor on our price to some extent, but not necessarily to the extent as if the Aframaxes were going all the way over to China. And then SES activity and then put into VLCCs that takes it over to west which 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 what are your target? And if they need to travel for 40 days before the discharge, you have eight days until they're back is going to take a lot of lessons.
But as far as we see it initially is that it doesn't you don't use that merchandise because you're basically just going down the coast to a possible access location analysis of a larger network. And so far it looks like going into VLCCs.

Omar Nokta

Okay. Thanks, Lars. That's helpful. And then just a final one for me just kind of on the VLCC performance in the first quarter, the repositioning of the year and half ships is obviously there's a big divergence between what your initial fleet earned and what those ships have done? And should we think about further repositioning dynamics in the second quarter? And then is 3Q really the first kind of true quarter of ongoing operations on the VL?

Lars Barstad

Yeah, I think yeah, and good momentum, and there's a few points I want to make number one. One has to remember that you were in our fleet has a lower scramble penetration than the former in under the existing Frontline fleet prior to the transaction. But that obviously affects the earnings you can.
And secondly, you know, initially, all the vessels were delivered on basically all the vessels were delivered around Singapore. So we have tougher introduction trade that maybe didn't yield what we would have wanted. It's also a timing issue when they entered the market. We've gotten very concentrated in time segment that we hit basically a very narrow window in the Middle East, which is just the topic was the weak spot in Q1.
But anyway, I think you're absolutely right. As we move forward here, we'll spread the fleet more evenly around the globe. You will see that Euronav will just blend in. And we're probably not going to comment on kind of distinguish between the two fleets going forward as to report, but also you have a very good point in the and these initiatives are done on long voyages. So it takes a bit of time before everything is kind of fully acclimated to whatever the word is into the total fleet. So Q2 will maybe to some extent the effect of the Q3, we should be running a normal show.

Omar Nokta

Okay, very good.

Lars Barstad

That obviously led to a lesser degree in Q2 than Q1 obviously.

Omar Nokta

Okay. All right. So 2Q will be better and then 3Q, just a follow on.
Okay, excellent. Thanks, Lars. Thanks, Andrew.

Operator

(Operator Instructions)
Craig Ellis, BTIG.

Craig Ellis

Hey, thank you and good afternoon and thanks for taking my questions. Lars, it looks like the depth of the time charter markets 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 charters?

Lars Barstad

We're constantly in kind of that, but I think keep in mind that our view is that we're in for a longer run here at I hate saying it because we use the expression stronger for longer. But in 2020, and that was absolutely not right. But there we were actually quite aggressively chasing contract coverage, but now we are watching it and we want that kind of it makes sense.
We want to lean into the market, but we're not going to kind of you know, we have like a rule of thumb in frontline that we tried to cover 30% of our largest exposure being revenues, interest rates on the bunkers. So that's kind of the rule of thumb, and we were very close to that or fairly close to that on interest rate swaps plus the timing.
On the bunker side, there were a bit below on the on the revenue side that we have virtually no apart from on the LR2s, we have virtually zero revenue kind of secured going forward, but we will lean into this that we are absolutely in a hurry because we believe this our sites are tackling gradually getting into here.
And back to the you know, I mentioned this structural issue that have endless 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, you know, when or well, it's always a when we get out of this cycle. We want to have some proper coverage, but we are not aggressively pursuing this right now.

Craig Ellis

Okay, great. And then just I did want to ask a little bit about on you had those asset sales on, I guess looking at the maybe you have two more Suezmaxes that are in that 2010, 2011 range. Like we kind of agree with the outlook for the market where generally in previous cycles, older vessels have outperformed or the spread is converge 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 vessels and so I guess my question is, do you see this cycle playing out differently where there's that much more discrimination against older vessels that may be that spread that traditionally converges during these multi-year up-cycles doesn't play out the way it has historically has?

Lars Barstad

That's a big question. I think kind of in our analysis and looking at this market, you know, we have said numerous times to scoop 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 the oil prices and everything is, can I kind of go what the modalities mean that that we're facing going forward.
And with that, we'd rather have the most efficient tools. We are seeing some scrutiny preference from clients for more efficient tonnage. We cannot forget the regulatory framework we're facing. And if it's going to dissipate a little bit in the narrative over the last year, year and a half. There is still this thing about CII and there's 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, as you know, it could have been could mean that looking back in two three 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 that. But we continue to kind of build a long term (inaudible) will be in the 20 to 30 years, and that's basically the plan we're aiming for.

Craig Ellis

Okay. Super helpful. Thank you very much.

Lars Barstad

Thank you.

Operator

Peter Hogan, ABG Sundal Collier.

Peter Hogan

Yes, good afternoon, guys, and thank you for taking my question. Just on the final sentence in the summary or Lars, you talk about the longer term time charter markets. And I guess the question is popped into. And firstly, in terms of the requirements, the traders, or is it sort of the fundamental cargo owners which are asking for a longer period?
And the second part of the question, have we seen an increase for sort of five to seven years charters for newbuilds with the 27, 28 deliveries as of now?

Lars Barstad

Thank you about that. First one absolutely. Yes or sorry, this is the oil majors in other class, the guys to have transportation needs. And so this is basically the big boys entering the market from oil majors, national oil companies and so forth. Secondly, yes, there is interest for a longer-term business in the market, so maybe not 10 years, but five to seven years definitively and seven their charters subsequently.
So basically, this is kind of a little bit different market than just to remind everybody, our proposition to our investors is to give years of exposure from these kind of deals we might have. We're very likely to pass on. We don't have an order book either. So that's but it is absolutely a convener starting to emerge a market around this longer term deals as well.

Peter Hogan

And if I could just follow up on that, what sort of rates would you expect, but let's say that if you had the newbuilds was 7 -- 27 deliberate, what sort of rate would you expect to get for a 5-year time charter deal from there?

Lars Barstad

That's a big question, it's a difficult question to answer, actually, maybe it looks like the curve is pretty flat and it's of course, what gives the owners a decent return on equity. So you're talking somewhere around $50,000 per day regardless of the VLCC that is.

Peter Hogan

Okay.

Lars Barstad

That doesn't really mean that that sorry, the $50,000 per day doesn't really makes some excited, but others maybe not it's you know, the 2027 delivery, depending on one hand, when the order is the setting you back [$110 million], [$250 million] and $220 million. So it is a big number, but I think at least for now, that's where we are in this process.

Peter Hogan

Okay, thank you. And just the final one from me. In terms of dividends going forward here, 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? And I'm thinking perhaps in particular in the next quarter, because in Q1 and potentially Q3 with the summer market, it could be well less?

Lars Barstad

And I think you should be confident in the rule of thumb, which is again, not a policy is 80% of adjusted net income. And I think you that's what you should have in the back of your head and if that's what happens. But I think also, you know why we chose to go for 100%. This time is that we have good visibility where we are in a good kind of liquidity position and our job is to give our shareholders the money we make.
So but you know, obviously depending on how the markets evolve going forward, you can speculate whether it's going on under 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, you know, we kind of when the market corrects sharply downwards, so we're not going to drain the company's cash.
And then again, if the market stays firm and maybe even improves, we have room to unless we do something structurally there for that, the where we rather reinvest the cash on behalf of our shareholders (inaudible), and then you have the usual bounce, but handsomely rewarded.

Peter Hogan

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

Operator

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

Lars Barstad

Thank you very much, and thank you all for listening in. This are exciting times still, although we were still missing some of the volatility we wish for. But, you know, let's just monitor how this market develops, and thank you very much.