Frontline plc (FRO) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Q3 2024 Frontline plc Earnings Conference Call and webcast. [Operator Instructions] please note that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Lars Barstad, CEO. Please go ahead.

Thank you very much. Dear all, and thank you for dialing into Frontline's quarterly Earnings Call. Tanker markets and stocks don't move in a straight line. I believe the last months have told us that. We have previously argued we are in a period comparable to the 2002 to 2008 bull run, although supply of tonnage driven rather than fueled by strong oil demand growth. That comparison still holds, I'd argue. And as an example, in November 2004, the market was said to be doomed and we corrected more than 30%. The bull rally resumed a few weeks thereafter, and we were off for the skies again. For the rate same reasons, it's difficult to predict the [ beary ] sentiment, the bull runs are equally hard to call to. So before I give the word to Inger, I'll run through our Q3 numbers on Slide 3 in the deck. In the third quarter of 2024, Frontline achieved $39,600 per day on our VLCC fleet, $39,900 per day on our Suezmaxes and $36,000 per day on our LR2/Aframax fleet. So far, in the third quarter, we have booked 77% of our VLCC days at $44,300 per day, 70% of our Suezmax days at $39,600 per day and 60% of our LR2/Aframax days at $34,800 per day. And again, all numbers in this table are on a load-to-discharge basis with the implications of [ dollars ] days at the end of the quarter. The market has not offered us the numbers we hoped for, but we are operating at decent margin still. With that, I'll let Inger take you through the financial highlights.

Thanks, Lars, and good morning and good afternoon, ladies and gentlemen. Let's then turn to Slide 4, the profit statement. We report profit of $60.5 million this quarter or $0.27 per share and adjusted profit of $75.4 million or $0.34 per share. The adjusted profit in this quarter decreased by $62.8 million compared to the previous quarter, and that was primarily due to a decrease in our TCE earnings, coming down from $357.7 million in the previous quarter to $292.2 million in this quarter. That results from lower TCE rates in the third quarter compared to the second quarter. Let's then look at the balance sheet at Slide 5. The balance sheet movements this quarter are related to refinancing to reduce debt in addition to ordinary items. Frontline has a solid balance sheet, strong liquidity of $526 million in cash and cash equivalents, which includes an undrawn amount of the senior unsecured revolving credit facility, marketable securities and minimum cash requirements as per the September 30, 2024. We do not have any remaining newbuilding commitments, and we do not have any meaningful debt maturities until 2027. If we then turn to Slide 6. Our fleet consists of 41 VLCCs, 22 Suezmax tankers and 18 LR2 tankers. The fleet has an average age of 6 years and consists of 99% ECO vessels, where 56% is Scrubber-fitted. We estimate average cash breakeven rates for the next 12 months of approximately $29,600 per day for VLCCs and $23,400 per day for Suezmax tankers and $22,000 per day for LR2 tankers. This gives a fleet average estimate of about $26,300 per day. This fleet average estimate includes dry dock of 5 VLCCs and 2 Suezmax tankers in the next 12 months, where 2 VLCCs are dry docked in the fourth quarter of '24, 1 Suezmax in the first quarter of '25, 1 VLCC and 1 Suezmax in the second quarter of '25 and 2 VLCCs in the third quarter of '25. This quarter, we recorded OpEx expenses, including dry dock of $8,700 per day for VLCCs, $7,900 per day for Suezmax tankers and $7,800 per day for LR2 tankers. This includes dry dock of 2 VLCCs. The Q3 '24 fleet average OpEx, excluding dry dock, was $7,900 per day. Then let's move to Slide 7. Despite current challenged spot market, Frontline generates decent positive cash flow. And with 30,000 earnings days annually, Frontline has a substantial upside potential. As you can see from this -- from the graph on the right-hand side from this slide, the cash generation potential at current fleet and spot market earnings from Clarkson Research as of November 26 is $304 million or $1.36 per share. And with a 30% increase from current spot market, it will increase the potential cash generation with about 100%. With this, I leave the word to Lars again.

Thank you very much, Inger. So the current market narrative is somewhat mixed. Global oil supply is increasing, but demand growth is very much muted. I'm on Slide 8 now. The geopolitical risk linked to Middle East continues, and it's very important to see how the new kind of U.S. policy is going to be going forward. 17% of the shipped oil hitting the market is sanctioned and 6% of global consumption includes sanctioned barrels. The very recent tariffs on Canada and Mexico may increase inefficiencies in oil flows -- and -- but more importantly, the order books have stopped growing for tankers as containers are starting to take center stage again. If you look at the chart on the right-hand side, this is basically comparing the balance between supply and demand according to IAA, which is the orange line versus the tanker markets and how they performed over the years. What we see, and this is notable is that although demand is disappointing somewhat, [indiscernible] expected to continue to grow. And when we move into 2025, we are looking to be in an oversupplied market again on tankers with kind of with the effects you then have on utilization on tankers. At the bottom 3 slides of the -- bottom 3 charts of this slide, you can see kind of how these markets are actually range bound, although at a very, very low level, apart with an exception of the clean market, there are LR2 exposure, which has corrected sharply during the period. Let's move to Slide 9 and look at the key oil flows. So as I mentioned previously, overall global demand growth is muted year-to-date, and this is across all regions. We do see oil supply continuing to rise. And this is predominantly happening around the Atlantic Basin. Countries like North America, Brazil, Guyana and to some extent, West Africa are increasing supply to the market. But the challenge we have is that this increase or increment of barrels tend to stay local. By local, I mean to remain in the Northern Hemisphere, of course, going into Europe to replace the lack of Russian barrels, but also trading inter-regionally. Having said that, it's a pretty stable flow of oil leaving the Atlantic Basin going to Asia, but there is no growth to be seen in those barrels. This basically means that although we've had for years a positive effect on ton miles as oil has traveled in general further, what we've seen over the last period is that the ton miles have actually not depreciated more than the volume coming out. And actually, to some extent, reduced if you incorporate what's the compliant fleet and what's not. We see the sanction exposed oil market as a share of Asian demand has reached a whopping 25% in Q3 '24. And this, we would argue, that tells us that the tanker market is increasingly exposed to any changes in sanctions and policies going forward. Let's move on to Slide 9 and have a look at the order book. The order books have increased materially during the year and specifically so for Suezmaxes and for LR2 Aframaxes, but also to a great degree on VLCC. But at the same time, we are seeing that the fleet continuing to age as virtually 0 ships have been sold for recycling. If you look at the current VLCC fleet, the order book is equating to 76% of the existing fleet, whilst 14.8% of the fleet is above 20 years and not trading the market that we recognize ourselves with. On the same metrics for Suezmaxes, the order book is now equal to the population of ships that are above 20 years. On the Suez -- sorry, on the LR2s though, we see that there is a whopping amount of ships on order. But if you take the LR2s and Aframaxes combined as there are very few uncoated Aframaxes being on order, the picture becomes more balanced, where you get as per the Suezmaxes, where there is an equal amount of vessels above 20 years that is on order. And with that, we basically don't look at the order books as a big threat, particularly so for the VLCC going forward. There's 5 vessels scheduled to be delivered next year, and there are 131 VLCC trading in the market, which formerly wouldn't be qualified to trade. Similar numbers is Suezmax are 108, about 20 years as the [indiscernible] come to an end. And if you look at the Afra LR2 market combined, you've got more than close to 200 vessels trading in the market, basically ships that are not necessarily accessible for the mainstream players. So moving from Page 10 and going to 11. So in summary, we like to call the [ holocoaster ] bull market still. Frontline has a modern fleet, strong balance sheet, and we have -- we continue to retain the upside here. Oil supply is expected to outpace demand in 2025 with the implications that may incur. The current trade flow developments are challenging as sanctions bite and I put "bite" because basically, the sanctions is forcing the long ton miles onto ships that we don't identify ourselves with. Policy changes on Middle East and with the maximum pressure, which Trump has been calling for going forward, this will be a very interesting space to watch. The order book growth has stopped and modern asset values remain firm. And a small note on that, with the order book now kind of moving into 2028, no shipyards are in any urgency of discounting tankers as they are or they continue to be busy contracting or getting interest or contracts on container ships and other asset classes. And also some fun fact at the end of the presentation oil trade is now serviced by the oldest fleet in more than 2 decades. You need to go back to 2002 to have an average tanker fleet of this age, which is somewhat surprising considering the efforts in trying to reduce emissions and to -- and the tightening kind of scrutiny around the world we're observing. So with that, I'll open up for questions.

[Operator Instructions] First question come from the line of Jonathan Chappell from Evercore.

Inger, I'm going to start with you. I know you've done a lot with the capital structure this year, refinancing, paying down debt, et cetera. As the market becomes a bit more volatile and maybe lower lows that people are concerned about, maybe just the leverage by appearances look still a little high. So has there been any thought about taking the strong market that we've had for the last couple of years, some of the strong asset values, some of the fleet -- older fleet that you've sold. And even though you don't have any near-term big debt maturities to be a little bit more proactive in deleveraging the balance sheet in this part of the cycle?

My thinking is that the loan to value that we have currently is just below 50%. And we don't really see any mix [indiscernible] fleet will decrease in value. So we don't see that this is a high leverage that you probably are [indiscernible]. We are comfortable with that debt level.

Okay. Lars, you touched on a couple of times, narrative, geopolitics watching what's going to happen from here. Maybe if we could just tease that out a little bit because sometimes the narrative kind of dominates the view of the market. I think there's probably two. Well, one thing that people are really focused on and one thing may be a little bit less so. So maybe a short answers to both, but if there were to be a resolution in Ukraine, but the sanctions and the pressure were to be ratcheted up on Iran, what would be the puts and takes of those two things happening somewhat simultaneously?

Well, if -- let's do the Russia-Ukraine first. The sanctions that are imposed on Russia are -- I would argue somewhat flaky. So Europe is buying record amounts of gas from Russia, whilst they're having this price cap on oil and products. We're also, just as a coincidence, buying a record number of fertilizer from Russia as well. So this kind of leads me to the thinking that any kind of long-term solution to the conflict or the situation from Russia and the Ukraine. I think these sanctions may be reversed fairly quickly. The political cost of holding these sanctions in place, particularly now coming into, or what's expected to be a cold winter in Europe could actually motivate politicians to actually walk back on these actions fairly quickly. This would almost immediately put a lot of oil, which locally belongs to Europe back into Europe. And that will push a lot of Atlantic Basin barrels to find another home, and that's more likely to be priced into Asia, incurring longer ton miles. If you are on top of that do something about Russia, sorry, about Iran. And I mentioned it numerous times that Iran are having a very, very great success in exporting a huge amount of oils despite sanctions. And if one is able to limit that, that oil also needs to replace. And there, the likely replacement is from OPEC. It's quite surprising to me that OPEC are happy kind of cutting the amounts of barrels they are, watching Iran growing their exports. And so if something happens there as well. This means that the Iranian flow needs to go on compliant tonnage, and that will kind of give an exponential effect on our markets. With regards to the Russian fleet, basically, what happened over the last couple of years, is that Russia is now more than what close to self-sufficient on tonnage. They require to 300 vessels split [indiscernible] kind of major or to the most part, it's Aframax and Suezmax meaning that they can cater for their own volume. So you're not going to have this massive shift. Of course, some of these ships are -- they coming back to the compliance market, once sanctions are lifted, but we have to consider that the average age of the fleet, more than half of these vessels are north of 20 years old. And those, we don't believe we're kind of compliant charters are going to change their age restrictions just yet.

Question come from the line of Omar Nokta from Jefferies.

Just a bit more kind of discussion from my end on the market itself. And I wanted to ask just in terms of how the VLCC market specifically, how that's been developing? It seems and I think, Lars, you touched on this earlier in the presentation, rates tend to be drifting at unexciting levels, then a run-up in chartering activity takes rates higher. But then activity kind of slows again and you're back to where we were. And it just seems that rates are in this narrow range of, call it, for modern ships, maybe 25,000 to 50,000. And that's been the case seemingly since August. Do you think that there's a case that we can see rates break out this winter? Or is there simply not enough cargo in the market to move.

As you know, Omar, that's a very difficult question to answer. I think kind of the fact that we are actually in fact [ ring ] is a sign that the market balance is not that completely awful. It's basically, we're just missing kind of those incremental barrels that we need to push the scale further. I wouldn't say though that the market has changed characteristics a little bit. We have the Middle East or the AV market, as we call it, which is kind of their Asian interest in more than 80% of those spot cargoes and Asians again, are friendly with each other, meaning that you don't really get pressure out of those negotiating. So basically, it's the Atlantic Basin that needs to price the market. This TB3C, which is the benchmark index for Middle East to China have kind of -- it's like the Dow Jones of freight, but it has the least kind of open interest to use the term from the oil market. So you basically need the Atlantic Basin to price, because the mechanism then is that vessels will just shun go straight to U.S. Gulf, Brazil or West Africa because that offer better return. And for that, we basically lacked the expansion in ton miles from the Atlantic Basin East. I mentioned that in my presentation that, that volume has been more or less flat. So we need some dynamics to change here in order for that to occur basically to force Atlantic Basin barrels to not force them, but attract them to Asia to a greater degree than what we've had. So I'd say, if you ask me right now, it seems like we are in this range bound kind of motion. But again, the balances are still tight. We're actually making black numbers on the fixtures we make here. So it's not an absolute disaster, but it's very difficult to split beyond this 50,000 per day as you described.

Lars, I appreciate that. And a difficult -- definitely difficult question to answer. Maybe I'll throw another one at you. That's probably perhaps just as difficult or we'll see. But I guess maybe just in terms of 2025. And as talked before and with John, there's so much going on between the Middle East conflict, Russia, Ukraine, the Red Sea, Iran, OPEC changes. There's just a lot of different variables. How in general, would you see -- from your vantage point, heading into 2025, what do you think is the base case next year for VLCCs in terms of earnings potential? I know it's obviously very difficult to define, but maybe just in relation to how 2024 has averaged, how would you say from your perspective, what 2025 will look like relative to this year?

I was actually hoping that 2024 would be what we now probably have to wait until 2025 to see. It's kind of -- we've completely underestimated to which extent this current state of the market can extend. I think if somebody is talking [indiscernible] that we will have [indiscernible] of the tanker fleet will be above [ 30 ] years old, 6%, 7% of the overall fleet on the sanctions and so forth, and everybody would be happy trading. I would say that's impossible. But currently, it's not. I think the exciting part is that the incoming kind of government in the U.S. are arguing for a very hard stance on kind of the sanctions evading. I think it's obvious to most what kind of these exports is financing. I think it should be also even at some point here, obvious to IMO that they should maybe focus on what's going on in the unregulated shipping markets rather than talking about decarbonization return. So I'm very hopeful. I'm also -- I think kind of -- we are extending ourselves here, not by way of Frontline, we're very happy, but the market itself is extending itself here. So any adverse events in this market, say, as we discussed, if something happens with Russia, Ukraine, that shifts the balances. If something happens to Iran and they miss their ability to export, we're extremely sensitive to these changes, which obviously would put the tanker market in all of a sudden and in a very, very strong position.

Question comes from the line of Sherif Elmaghrabi from BTIG.

I was hoping you could give a little bit more color on the sale and purchase market. Seems like asset values have softened slightly in the last month or two. And I'm wondering, is that due to more sellers coming to the market, maybe less appetite for vessels for the dark fleet? Any color would be helpful.

I think it's a combination of less appetite from the sanctioned trade. I mentioned previously that Russia are themselves more or less saturated in respect of the fleet they need in order to trade their markets. The margins as I believe we mentioned a little bit in our Q2 presentation. The margins in this market is under pressure. We're even seeing that discounts in Iranian crude are getting smaller and smaller, meaning that there's less cost for freight. So there is hope that these markets are getting saturated with the effect that the latter or the older part of the tanker fleet will lose that kind of bid, and you'll have an adjustment in values. This is exactly why Frontline has been so focused on selling [indiscernible] basically because you've seen that gap, you could say, our overperformance on asset values on the more older [indiscernible] to be extremely risky. So -- but I think kind of from what we're seeing, it's not many weeks ago that we saw fairly good prices on modern secondhand vessels. Right now, the market is a little bit paralyzed. There is nobody really exchanging kind of numbers, more trading shifts firm. But we're quite comfortable that for the modern part of this fleet, it hasn't actually grown at all for the last couple of years and that the downside is very limited. But for the older part of the fleet and the tail end of the curve, I think we'll need to kind of recycling parity fairly soon.

And then regarding this phenomenon of larger tankers that are trading products, hearing some industry reports that they're coming back into the dirty trade. My question is what keeps them in the dirty trade once they switch back, especially kind of you highlighted what's going on with the rate momentum heading into December?

Well, it's -- this is just pure mathematics or economics to build that way. If you have the ability, when the crude market is subdued, and you have a vessel on a cargo history that gives you the opportunity to within a reasonable cost to clean up. You will do that, but none of these ships of the -- on the crude tanker side are really designed to carry products. So it means that they can't do it for an extended period of time, but I think kind of the key motivation here is the economics. And obviously, now the clean market is not offering the economics to compete with crude. And basically, that you rather than switch back, but I think what this has showed us that we saw kind of in May, June this year is that the efficiency between asset losses has increased. We were ourselves surprised to see how quickly kind of these [ Econs ] put the crude tankers into the clean trade but that was obviously also due to the fact that the crude market was challenged at the time. So this will -- it's all -- in a scenario, say, the key market suddenly rallies now you would get crude vessels to clean up. But in a case where both rallies, you won't have that kind of interconnectivity between the asset classes.

Question comes from the line of Devin [indiscernible] Investment.

I have a couple of questions, one on the China demand, which I asked you last time. So there's been a massive shift and a significant downgrade in the consumption pattern due to shift to LNG and to more dealer EV. How do you see the demand going back into '25? And how much difference does it make to overall tanker demand?

No, you're absolutely right. There is -- particularly on the heavy-duty trucks, there is heavy subsidizing going on in China in order to kind of get that fleet cost checks close to 16 million vehicles or something to get them to go into -- for east, let's call it, gas propulsion, it's LNG and LPG with staggering sales numbers where 50% of new sales are actually on alternative fuels. That is being reported to have reduced diesel demand in China by somewhere between 500,000 and 700,000 barrels per day. This is out close to 3.5 million barrels per day with kind of the current population of alternative fuel kind of heavy-duty trucks. Having said that, what we -- and we are actually at a very good position to having observed these kind of developments ourselves, particularly from Norway, because Norway has had the highest penetration of -- or the highest new sales of EVs in the world. For a long period of time, there were more Teslas sold in Norway than in the U.S. and due to heavy subsidizing. And basically, surprisingly, we've seen that fuel demand has not fallen as expected, which basically leads us more to the point that it's more activity and consumer-driven than actually the penetration. Even though you have 2 million or 3 million alternative fuel trucks or maybe more 6 million, I guess, you could get to fairly soon in China, you still have that existing fleet that is also driving. And on increased economical activity, these tend to drive longer, at least or further. This is at least what we've experienced here. On the EV side, there's a huge population of cars in China. I think we are still some years away from that market getting to a tipping point where actually petrol demand starts to decrease materially. But I think kind of we have to expect that in most markets around the world, except U.S. we are actually getting to stages where at least for personal cars, demand is not expected to grow materially. And it's actually -- we've reached peak gasoline demand in many countries already. But kind of on that note, what we haven't seen peak demand of is on petrochemicals. So if you look at the various agencies somehow they report on petrochemicals, there is a tremendous growth. So this means that although transportation is a huge part of the demand picture, we're also seeing quite sustainable growth on demand coming from the petchem markets. So I think kind of it's a little bit too early to call the doom to oil demand basically due to high numbers of sold EVs in Asia or in China...

The second question is on the OPEC. OPEC has kept on pushing back the production increase. What's your view going back going to the 2025 year, how do you see the production. Will they focus on market share? Or will they focus on price stability?

That's the [indiscernible] isn't it? We read the same narrative as you do, one month, we said that OPEC will look or particularly Saudi will focus on market share rather than, than absolute price. And kind of a month after, it's -- the narrative is completely the opposite. What surprises me is that we are actually in this territory for such a long period of time. And it's quite impressive to see OPEC so disciplined as they see production numbers increased to -- and taking market share to this extent. So it's logically for me, I can't really understand why they're so disciplined. But that's only kind of how I see it. But I think kind of it's very difficult to understand what's happening in the hallways of Vienna, well, actually online on Sunday, but when they discuss these matters.

And how do you see the current season, current quarter, which typically are very strong. We haven't seen that. But as we go in December and January, how do you see the season going forward?

Sorry, I missed what we're seeing what? The...

How do you see the -- typically, this quarter is the strongest quarter for the rates, but we haven't seen that. So how you see the rates going forward in December and January peak winter.

Well, it's actually been noted by a couple of kind of market analysts that maybe Q1 will be the new Q4. We've seen that on a couple of occasions that on the events of Q4 failing, Q1 has come back with the vengeance. It's impossible to call. There are many factors that affects this. But I think kind of as was a point in our presentation here, I think this kind of maximum pressure on Iran is far more interesting coming into next year than a potential kind of seasonal slip where actually we see incremental demand coming in -- as we start to move into the new year. So I think kind of -- I'm more excited about political events coming into the new year or in the near term than whether if the seasons have shifted. But it is a fact. We have actually seen seasonal demand increase into Q1. There is kind of increased degree of refinery turnarounds, basically putting more oil available for trade.

Lars, what makes you so confident about the Iran. Is it the change in the political scene in the U.S. with the Trump administration coming in, that Iran sanction will become much more tougher or is something else?

No, no. So we're completely apolitical, but it is a fact that Iranian barrels are sanctioned by most of the countries in the Western world. The way they're able to evade these sanctions is by engaging in ships that are not kind of regulated by or adhering to any of the IMO kind of principles. So -- and I don't think -- or I hope that's on the long-term situation. So something has to give here at some point. Actually, the most bullish scenario campaigns is that all sanctions are lifted on Iran. That would be a fantastic scenario.

We have no further questions at this time. I hand back to you for closing remarks.

Well, thank you very much for listening in. And please don't forget that in 2004, we also thought it was a boom and groom. And then only months after we were rallying for the skies. So hopefully, we'll -- this market will develop a bit more excitingly than we expected for this quarter and have a good Christmas presentation. Thank you.

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