Frontline Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 31, 2023

There are 7 speakers on the call.

Operator

Day, and thank you for standing by, and welcome to the Q1 2023 Frontline Plc Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. I would now like to hand the conference over to the CEO, Mr. Lars Barstard.

Operator

Please go ahead.

Speaker 1

Thank you very much. Dear all, and thank you for tuning in to Frontline's Q1 earnings call. We're a bit late, but better, good than early or whatever the expression is.

Speaker 2

Never.

Speaker 1

Yes. We've had an unseasonally strong Q1 of the year. Russia still Has an impact on the market or there is sanctions on our share. But I think kind of the key Part of the action in Q1 was related to China. The strong Q1 has It's given us the ability to book quite strong numbers into Q2 as well as the Frontline team relentlessly Growing to create shareholder value.

Speaker 1

Before I give the word to Inger, CapaRTC numbers on Slide 3 in the deck. In the Q3 sorry, in the Q1, Frontline achieved $52,500 per day on our VLCC fleet, $64,000 per day on our Suezmax fleet and $56,300 per day on our LR2 Aframax fleet. We are, in fact, back to a somewhat reverted earnings relationship between our segments with the Suezmaxes outperforming the VLCCs And the same for LR2s. We have secured quite firm numbers as we progressed into Q2 with 78% Of our VLCC days booked at $75,000 per day. 71% of our Suezmax days The book is at $65,000 per day and 63% of our LR2 Aframax days at a very Respectable $65,700 per day.

Speaker 1

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. And mind you, this is Q2, which is supposed to be the weak point in the market. With that, I'll give Ingrid, and she'll take you through the financial highlights.

Speaker 2

Thanks, Lars, and good morning and good afternoon, ladies and gentlemen. Then let's then turn to Slide 4, The profit statement and look at some highlights. As Lars already have stated, Q1 2023 is the highest first quarter profit since 2008. Q1 'twenty three is also the first interim financial information presented by the company on IFRS. And following the transition to IFRS, one important thing is that drydocking costs will be capitalized and subsequently depreciated over the period to the next scheduled dry docking, which is from 2 to 5 2.5 to 5 years.

Speaker 2

The Q1 2023 drydocking cost was €3,600,000 that has been capitalized and 3 vessels were drydocked in the quarter. I will also mention that the company has revised the estimated useful life of its vessels from 25 years to 20 years, And that was effective from January 1, 2023, which resulted in an increase in depreciation expense of €12,700,000 in Q3 compared to Q4 'twenty two. Then let's turn to Slide 5 and look at some balance sheet highlights. The company has no remaining newbuilding commitments in Q1 2023 After completing delivery of the 2 last PLC newbuildings, Frontera and Frontera in January 2023. The company has strong liquidity of EUR584,000,000 in cash and cash equivalents, including then the undrawn amount of unsecured facility, marketable securities and minimum cash requirements.

Speaker 2

Then the company lastly has a healthy leverage ratio of 52.9%. Then I would like you to turn to next slide. And lastly, let's look at the cash flow potential of the company. We estimate industry leading cash It's a great 300 fleet average, and that includes drydocking costs for 8 Suezmax tankers in 2023. 4 of them is to be expected to be drydocked in the 3rd quarter and 4 is expected to be drydocked in the 4th quarter.

Speaker 2

The Q1 2023 average OpEx, excluding dry dock, was $7,300 per day. The free cash flow indicates strong potential return for the company, as you can see from the table on the right hand side. Just picking the scenario where we assume VLCC rates of $75,000 per day With 5 year historic spreads you will see for Suezmax and the 2 tankers, the annual free cash flow potential is about $1,400,000,000 Or $6.29 per share, representing a free cash flow yield of 42%. And with this, I'll leave the word to Juel, Gennadars.

Speaker 1

Thank you very much, senior. So let's Have a quick kind of look back at the Q1 2023 tanker market. So I already mentioned that it wasn't typically seasonally Strong. Normally, in Q1, we'll kind of get sober after the Q4 hype And markets will fairly quickly start to deteriorate into February. What happened this time around was that we have the 2nd peak in the market in March.

Speaker 1

And all segments from plant operates were performing very, very strong. If you look at the chart at the bottom left here, you will find how elevated the average weighted market earnings are. The reason for this is obviously that it's not only VLCC and Suezmax, but it's also Aframax and Everture Being very, very strong. If you compare it to the period that we like to look back on, the period from 2,003 until 2009 in the most recent times, we are actually quite high up On the earnings side, the markets are performing very, very well. Chinese imports moved to all time high if we look at the chart at the bottom right.

Speaker 1

We also saw the highest number of the Plc shipments to China. As I already said, Russian sanctions continue to yield inefficient trading patterns, but it is more about China As that situation seems to have found some sort of plateau. We did, however, have a very mild winter in the Northern Hemisphere, both in Q4 and Q1, and this muted oil demand to some extent. If we then move on to Slide 8 or Page 8. And we did receive an OPEC cut Or a voluntary cut.

Speaker 1

The volumes are indeed down for May, but what about ton miles? So Russia continued to export. With the current oil price scenario we're in, the G7 cap is Not an obstacle to Russian oil exports. And we see Russia pump relentlessly. This is Quite interesting, now ahead of OPEC meeting on June 4.

Speaker 1

Both OPEC plus and non OPEC volumes We're down in May. But this is and we need to remember, this is the seasonal slow point of the year with high refinery turnarounds. Global oil demand is expected to rise by around 2,000,000 barrels Today in second half of twenty twenty three. And if we look at the whole picture, the global exports overall are indeed back to pre COVID levels, albeit a little bit slow in May. It's going to be very interesting to see what the U.

Speaker 1

S, Brazil and West Africa are able to do post summer as those are the 3 candidates to have ability to export more volume as we proceed into winter. Let's then move to Slide 9. So vessel utilization is still high, but it's volatile. We'll see that on the bottom left hand side and this data is from SingleOcean where they basically record every fixture Done on the various asset classes and measure the amount of days the vessels are laden. And if you look at the chart at the bottom left, if you look at the VLCC, we are quite elevated compared to historical patterns.

Speaker 1

You have corrected down, yes. It might be a bit muted right now. But the VLCC is probably still They too are high relative to the previous years, but again have corrected over the last couple of months. LR2s are back to trend, I'd say, although high in the trend. But I think the key takeaway From these three charts is to look at the overall direction of the utilization and of the ton mile demand Throughout the year, it's clearly that we are firstly at the low point in the cycle and secondly that The direction towards the end of the year, well, judging on history, could be very interesting.

Speaker 1

Let's then move to Slide 10 and have a quick discussion on the order book. And I'm not going to go through all these charts in detail. I think they tell their own tale. It's It's quite incredible that by the end of this year, we'll have 111 VLCCs still operating in the market, Above 20 years of age. That amounts to 12.6% of the current trading fleet.

Speaker 1

The order book Stands at 16 vessels yet to deliver, and that's 1.8% of the fleet. If you look at the Suezmaxes, about 14% of the fleet will be above 20 years as this year ends. And the order book stands at 18 after having grown actually quite a bit in Q1 and Q2. That amounts to 3% of the existing fleet. LR2, Afras, the global fleet is only 4.15 vessels.

Speaker 1

25 of those are over 20 years. Here it's actually more relevant to look at 15 years. But just to be kind of conservative, let's just look at the 20 years. That amounts to 6% of the existing fleet. The order book there is growing and is sizable.

Speaker 1

So it currently stands at 12.8 percent of the existing fleet. If you look at overall for the segments That frontlines are exposed to or the asset classes that we are engaged in, about well, close to 12% All those fleets are above 20 years of age and the order book stands at 4.6%. It's very, very difficult To see a scenario on the supply side that will rock kind of the tanker story At least until well into 2026. And then finally, to sum up. So Frontline delivered the highest Q1 profit since 2,008, €193,000,000 and a cash dividend of €0.72 per share.

Speaker 1

We continue to capture value on time charter analysis At an elevated basis point in the cycle, there are new orders being seen for Suezmax and LR2. The 2025 is now firmly sold out, and you can build in 2026 in China. In Korea, you probably need to look to 2027. On the LCC, only 2 orders are rumored year to date, Although more are being discussed and 12% of the tanker fleet that we are exposed to It's going to be about 20 years by the end of this year. The OPEC transactions have had a limited impact so far in May, And it looks like it's counted by 10 miles.

Speaker 1

And again, China will be the X factor as we grind through the summer like below. Lastly, I'd like to explain a little bit on the chart below. I just had a presentation for A group of students from Denmark and basically explaining the long term picture in oil and tankers. And what you see in the blue line is oil demand, which tends to grow with population growth. And on the right hand side So the yellow graph is annual fleet growth as we get into 2025.

Speaker 1

And although this is a bit of apples and peers, it just doesn't add up. And with that, I would like to open up for questions.

Operator

Ladies and gentlemen, we now begin the question and answer session. We are now taking the first question. And the first question is from John Couple from Evercore ISI. Please go ahead. Your line is open.

Speaker 3

Thank you. Good morning, Lars. Good afternoon. First question is on strategy. Some interesting developments since the end of the quarter with the sale of the vessel and the two time charters on the LR2s.

Speaker 3

Are you at the point in the cycle now where you're looking at harvesting some of the older tonnage, which may not be core? I think there's 10 ships that are over 8 years old. And then also, are you at the point where you're looking to do more time charters maybe on the LR2s and keep the bigger crude ships available for spot?

Speaker 1

Yes. Kind of first of all, when we look at the fleet and which vessels that Could be potential sales candidates. We look at efficiency primarily. And we are preparing for a tighter regulatory framework for CII and ETFs and whatnot. So it's basically with that in mind, we look at it.

Speaker 1

And obviously, the values that are achievable As it's been so far, it's on the time charter side. We've seen elevated values on the Aframax LR2. And we've seen a lot of kind of price action on the secondhand Suezmax side. So I think it's just natural. But yes, we will kind of tap into the market when we see values that are Basically, what we call it internally is when you can achieve unicorn numbers on certain asset classes For a sustained period of time, we basically just have to take it.

Speaker 1

The average cost the average cash breakeven On our Aframax's LR2s, we'd expect to keep that in mind. When you can achieve 46 $500,000 per day against the cash breakeven of 16,800 It's basically something you can't pass. On the asset side, we're not Publicly offering all our vessels has really a good strategy. But yes, for the less efficient That was, we will be prone to take advantage if the opportunity is there.

Speaker 3

If I could just follow-up on both of those topics, which is kind of a more recent update. There seems to be a lot more skittishness, the OPEC cut, Global recession, oil prices weak, etcetera, although you've laid out a framework where the next 2 years should remain quite robust. Have you seen any slowdown in transaction activity in the older vessels, which seem to be pretty parabolic over the last 12 months? And in the same token, have you seen any slowdown in the willingness for charters to lock in for that 2 to 3 year period?

Speaker 1

I would lie if I didn't say yes. And as you know, you've been in this industry for a long time. We tend to be more focused on big deals when the spot market is strong rather than the opposite. And right now, we've had volatility. We also have some weakness in the segments.

Speaker 1

And that's basically It changes sentiment somewhat. So but I wouldn't say I see this as a kind of ebb and flow Short term kind of event. I don't foresee unless we end up in a situation where global oil demand falls Out of bed, I don't see that being sustainable. So it's very typical for Q2 to be quite honest.

Speaker 3

Yes, that makes complete sense. Thank you, Lars.

Speaker 1

Thank you.

Operator

Thank you for your question. We are now taking the next question. Please standby. And the next question from Hamid Mehrotra from Deutsche Bank. Please go ahead.

Operator

Your line is open.

Speaker 4

Hey, good morning and good afternoon. This is Chris Robertson on for Amit. Thank you for taking our questions. I just wanted to touch on the LR2 fleet for a moment. How many of those are currently trading dirty At the frontline level, but also do you have a general sense maybe across the fleet of how many LR2s are engaged in the dirty trade at the moment?

Speaker 1

Thank you, Chris. That's a very good question because the switch between clean and dark has become increasingly effective over the last Half year. So it's actually very difficult to follow. Not obviously not on our own fleet, I'm quite Comfortable, but with what happens kind of out there in the world. Just to explain to you, you Turn around a dirty vessel into clean in the Middle East fairly quickly by doing a couple of short trips with the common state.

Speaker 1

And at least up till now, the market has been willing to price hefty premium for that ability. So basically motivating The owners to do exactly that. But at least on our own of the vessels that we still control that are not On time charter out, that would be 14. There are 4.

Speaker 4

Okay. Got it. Switching gears here, just looking at shipyard capacity, you mentioned the Limitations, the Chinese yards maybe for 20, 25 delivery in 2026. But I guess do you have a sense of how much Mossbald capacity could come back online over the next few years. And is the limitation out there right now more of a labor issue?

Speaker 4

Or is it more of The yards themselves, the real estate aspect of it?

Speaker 1

I think we have seen Not new kids on the block that we've seen. I wouldn't call them mothballed, but yards in China with very, very much reduced The capacity that are kind of getting revitalized and willing to take orders, this is obviously a risky exercise, But if you're an owner to utilize these yards, but there are a few. I think it's difficult To quantify it, but if you look at some of these new kids, you can't get a ship before 25, or you can't even get it before 26, and that's basically because it takes time To get these yards up and running. I think on the labor side, I don't it doesn't seem like China has much of a problem. In Japan and Korea, that's definitively a factor.

Speaker 1

Also in Korea, what we see is that Although a tanker is a fairly complicated ship, they tend to focus on That's more labor intensive or more technology intensive ship types. So they're actually not really well, they're offering, but they're pricing themselves out of the equation to build up high. And that's 27. But with regards to kind of the overall potential volume there, It's very difficult to gauge and there is not a potential volume until well, it's starting in 2026.

Speaker 4

Okay. Yes, that's great color. Last question for me. This just relates to, I guess, your expectations around The OPEC meeting coming up here in a few days. The Brent prices are trending well below $80 The barrel, which we kind of see as the threshold price, some market commentary out there Around the speculators in oil pricing, is your fear that there could be additional cuts on the table going into this meeting?

Speaker 4

Or how are you thinking about that?

Speaker 1

Well, I can't really do much more than reading, I think, what you guys read in the press. I must say, however, that when you do a cut with effect in May to then suddenly start A additional cut in June is kind of it looks a bit strange because you need this And it's also at the low point in this demand cycle. So I guess you need to have a little bit of patience when you do such a big move Coming being an OPEC strategist. I think what's disturbing the situation is that Russia, although Claiming to adhere to the voluntary cuts strategy. Physically, they are obviously not doing that.

Speaker 1

So it's yes, it's going to be an exciting one. It's It's almost impossible to give a qualified kind of guess. What I have to what I will say though that any kind of demand increase, since this is a voluntary cut, it's going to be reversed very quickly Once demand kind of shows its out.

Speaker 4

Yes, I think that's fair. It seems more like a compliance enforcement issue in the short term And then they can ram back on over time as you said. Okay, yes. Thank you very much for taking the questions.

Speaker 1

Thank you, Chris.

Operator

Thank you for your question. We are now taking the next question. And the next question from Omar Nochta from Jefferies. Please go ahead.

Speaker 5

Thank you. Hi Lars. Hi Inger. Good afternoon. Just wanted to just check back on the newbuilding discussion.

Speaker 5

Clearly, I think that the Slide 11, Very simple chart, but probably just says it all in terms of oil consumption growth and the fleet growth. I remember, Lars, on the last call you had mentioned, I think it was the last one You had mentioned new buildings weren't that interesting to Frontline. Just wanted to see kind of if you have an update there. Obviously, you just highlighted in your comments about how we're looking at firmly into 'twenty six, perhaps 'twenty seven to take delivery. But just in terms of how you're seeing the opportunity to get into the new building market, I guess, 1, is that something you're perhaps revisiting?

Speaker 5

And then 2, how would you maybe compare the opportunities when it comes to maybe placing VLCC orders versus Suezmaxes and LR2s?

Speaker 1

Yes. No, it's a good question. But regretfully or not regretfully, I think the answer is the same. There are 3 things that we need to consider when we look at the newbuilding market. Number 1 is obviously what technology we're going to go for.

Speaker 1

But say you were looking for a conventional, Then it's the delivery time until you can actually get the cash flow from that investment. And then lastly, It's the price of the asset itself. So and basically what we're seeing is I hear arguments that inflation has kind of yet to hit asset prices because if you look at If you look at asset prices adjusted for inflation of long dated, a 2,008, 2,009 VLCC Equivalent would be $70,000,000 today. So but in order for that to be true, you need inflation also to hit the rates and so forth. And then we need like the long term time charter market to be far higher than what we've seen kind of glimpses of in the last couple of quarters.

Speaker 1

So I think kind of with that in mind, it just doesn't look very interesting to Frontline. I also note that some of the orders we're seeing, it's either against long term charter commitments, which is not something Frontline would engage To our proposition to our shareholders is to give spot exposure. Secondly, the ones that are not connected to long term Charter, that seem,

Operator

at least

Speaker 1

to me, as somewhat opportunistic. So basically, you pay a 20% or 25% down payment on a call option For a market that could be quite interesting in, say, 2026. So and we are not in that business either. So this is why we obviously we look at it, we observe it, but we're not there to press the button.

Speaker 5

Makes sense, Lars. Thanks for that. I guess as we think about that, clearly, you do need inflation in terms of the impact on charter rates to really induce some ordering. How do you then think about, I mean, obviously, Frontline, you guys have been very acquisitive over the years. But in general, when you think about deploying capital, Obviously, you have a capital allocation policy of paying out meaningful dividends.

Speaker 5

But in terms of where maybe there's an opportunity or the value set or whatnot, is it New buildings clearly off the table. How do you then think about whether doing stuff in the sale and purchase market? Is there opportunities in the Younger tonnage, are there opportunities maybe in the older tonnage where people have maybe ignored because of the transition here towards a greener future? Any kind of thoughts about Where there could be an opportunity to pluck some assets on the cheap, whether it's age range or perhaps

Speaker 6

vessel class

Speaker 1

Yes. No, I think on the vessel class side, we would be kind of Studying closely, any LR2, Afra, Suezmax or VLCC that is below 5 years, But or at the 5% or below, but if you look at the visibility on the offering in that kind of portion of the market, It is virtually 0. So it's a lot of the modern we also see, You can say that that have been delivered over the last few years are actually on time charters and even re let again to talk raters or traders or oil majors. So these guys are not really sales candidates. And so there is basically a vacuum for vessels in that kind of age group that would be interesting to us.

Speaker 1

So I think that's basically the answer. And with that in mind, we'd rather sit tight and churn out the best The return we come from the assets we hold until we make kind of an investment decision.

Speaker 5

Yes, it makes sense. You already have that critical mass. Maybe just one, if I could, Obviously, very sensitive. But just wanted to check-in and see since you're having this call, Any public comments that you're willing to make in terms of the situation at Euronav with the shift in management and the Board? And then also I would note I'll be probably more sensitive and not necessarily directly related to Frontline, but any comments to make about the back and forth With International Seaways yesterday.

Speaker 1

Yes. No, I understand the question, but It's not really for me to comment, to be quite honest. I'm an observer just like you are on both the Euronav situation, while we are shareholders, but That's basically as far as it go. And International Seaways is the same. It's I read what you read, And I have limited visibility.

Speaker 5

Good. That's good enough. Thanks, Lars. I figured I'd ask. I'll turn it over.

Speaker 1

Thank you.

Operator

Thank you for your question. We are now taking the next question. And the next question from Chris Chung from Webex Research. Please go ahead. Your line is open.

Speaker 6

Hey, good afternoon, Lars. How are you?

Speaker 1

I'm good. Thank you. And yourself?

Speaker 6

Good, good. Thanks. I wanted to just ask, like in your deck, you highlighted Russian sanctions and relatively Inefficient trading patterns, which has obviously been a tailwind for a lot of tanker owners. Do you believe these inefficiencies could be worked out? Or are they more structural in nature until the war is over and until sanctions are removed?

Speaker 1

Well, what I'll say is and I was contemplating adding that to this deck, but I wanted to do further checking, but with basically All the whatever that's called. Basically, what I'm observing or what we are observing is that If you look at the Suezmax and Aframax fleet and you look at how many are calling on Russia, if you do that study for the last three months, You'll find that approximately 30% of the Afra and 30% of the Suezmax fleet is still at one point calling on Russia. So this suggests that kind of the interconnection between the gray fleet, if you call it that, On the white fleet, if we use that word, is actually very, very high. So it means that they are obviously inefficiencies, But maybe not as pronounced as one would expect because it's not so that we've lost 30% of the ships in the Well, non Russian trading market. So I think it is a bit more balanced picture.

Speaker 1

What is true though is that a vessel of less quality and kind of outside of the age restrictions and so forth or maybe operated by a company that has a red flag attached to it. They will obviously not be able to access the compliant market. But it seems like the interconnectivity It's actually quite efficient as you would expect in the tanker market. But this has actually some positives to it because It actually means that the risk on well, it's wrong to call it a risk. But Whenever this situation reverses, maybe the negative impact on the tonnage won't be that kind of grave as well.

Speaker 6

I see. Thank you. And maybe just one follow-up on the Arbitration. I just wanted to ask if there are any notable milestones that we should be on the lookout for from now through June 2024?

Speaker 1

No, not at the moment.

Speaker 6

Okay. Fair enough. I'll turn it over. Thank you, guys.

Speaker 1

Thank you.

Operator

Thank you for your question. We are now taking the next question. And the next question is from Sherif Ermaghribi from BTIG. Please go ahead. Your line is open.

Speaker 3

Good afternoon. Thanks for taking my question. First, I want to do a quick follow-up on an earlier question about the clean and dirty LR2s. How long does it take to switch an LR2 back to the clean trade? And what are the costs associated with doing so?

Speaker 1

It obviously depends a bit on how you do it. But if you do 3 very short condensate Calls across AG say, you can be partially cleaned up within 21 days. And then you'll just do a manual clean to get the remaining whatever is left. So add a few more days. So yes, somewhere between so let's say 25 days.

Speaker 3

That's helpful. Thanks. And then given the limited fleet growth you highlighted on Slide 10, if demand holds up, could ships over 20 years See retrofits to extend their life or maybe slip into the Russian trade? Or are there other factors that are going to push them to the scrapyard?

Speaker 1

No, I think you're hitting the nail there. Obviously, in the more opaque Tanker markets, there is life that's over that's past 20 years of age. But I have to say, though, that what we've seen over the last month or so is that certain In China, you have the Shandong province, which is Home to a lot of the independent refiners in China. And so it's a huge discharge port for all pieces of crude. And the fact that they have started to clamp down on some of the older kind of less The maintained vessels is actually a positive sign that people are starting to have a proper look at this.

Speaker 1

Also, if You probably read about this Pablo, I think it was called, in Aframax sitting outside Malaysia or Singapore that blew up. I think this is kind of raising the attention from regulators on the risks in this market. So but for a well approved tanker and there are probably many and well maintained, There is no reason why it shouldn't be extended. But this again with kind of common scrutiny with the vetting of the various It's kind of vetting departments in the charter on the charter side. What we basically are assuming in our kind of fleet modeling is that a ship that passes 17.5 years, we'll lose about 25% of its efficiency.

Speaker 1

And if you go beyond 20 years, You lose 50% of your efficiency. So utilization wise or your ability To kind of service the oil market falls by 25% 60%.

Speaker 3

That's really interesting. Thank you. I'll turn it over.

Operator

Thank you for your question. There are no further questions at the moment. There are no further questions. I will hand back the conference over to management for closing remarks. Please.

Speaker 1

Well, thank you very much for dialing in. It's been a pleasure To report yet another good quarter, hopefully, we'll continue to do that and look forward to what's to come. Thank you.

Operator

And that concludes the conference for today. Thank you for participating. You can all

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Frontline Q1 2023
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