Frontline plc (FRO) Q4 FY2025 Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Fourth Quarter 2025 Frontline plc Earnings Conference Call and Webcast. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Lars Barstad. CEO. Please go ahead.

Thank you very much. In discussions with the market factors in recent weeks, a recurring phrase has been heard. People basically saying, what a time to be alive. Frontline has been around through many cycles, but the tanker markets do actually evolve over time. We will argue that we've never been in a cycle like this, where indices and freight derivatives weigh so heavily in the freight pricing mechanism. This fuels almost violent moves as we proceed. For every 200,000 per day per day fixture done physically, there is an exponential number of contractual obligations that are triggered, giving this market a new dimension and very exciting dynamics. Before I give the word to Inger, I'll run through the TC numbers. So let's move to Slide 3 in the deck. In the fourth quarter of 2025, Frontline achieved 74,200 per day on our VLCC fleet, $53,800 per day on our Suezmax fleet and $33,500 per day on our LRG/Aframax fleet. So far, in the first quarter '26, 92% of our VLCC days are booked at 107,100 per day. 83% of our Suezmax days is booked at $76,700 per day and 67% of our LR2/Aframax days are booked at 62,400 per day. Again, all numbers in this table are on a low to discharge basis with the implications of Ballast at the end of the quarter, this incurs. However, for the VLCCs, there's little mystery left with such a high percentage in the book. I'll now 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. We report profit of $228 million or $1.02 per share and adjusted profit of $230 million or $1.03 per share in the fourth quarter of 2025. The adjusted profit in this quarter increased by $188 million compared with the previous quarter, and that was primarily due to an increase in our TCE earnings from $248 million in the previous quarter to $424.5 million in this quarter. And that again was a consequence of higher TCE rates. We also had some decrease in finance and ship operating expenses and also some potation in other income and expenses. Ship operating expenses, in particular, decreased $7.1 million from previous quarter, mainly due to an increase in supplier rebates of $7.1 million. Let's then look at the balance sheet on Slide 5. The balance sheet movements this quarter are mainly related to ordinary items and also prepayment of debt under revolving reducing credit facilities. Frontline has a solid balance sheet and strong liquidity of $705 million in cash and cash equivalents and that includes undrawn amounts of revolver capacity, marketable securities and also minimum cash requirements as in the bag as per December 31, '25. We have no meaningful debt maturities until 2030. In January 2026, we sold 8 of our oldest first-generation equals per total sales price of $831.5 million and asset commissions and repayment of existing debt on the vessels, the transaction is expected to generate net cash proceeds of approximately $477 million million. In parallel, we acquired 9 latest generation scrubber-fitted eco-VLCC newbuildings from affiliate of MM for an aggregate purchase price of $1.224 billion. We will pay approximately 25% of the purchase price in the first quarter of 2026. And and 75% is due upon delivery of each vessel. The company intends to finance this acquisition with cash and then 60% long-term debt financings. Let's look at Slide 6. That's complete composition and cash breakeven rates and OpEx. Our fleet consists of 41 VLCCs, 21 Suezmax tankers and 18 LR2 tankers, has an average age of 7.5 years and consists of 100% eco vessels, so where 57% are scrubber-fitted. We estimate average cash breakeven rates for the next 12 months of approximately $25,000 per day for businesses. $23 700 per day for suzmax tankers and $23,800 per day for LR2 tankers. That gives a fleet average estimate of about $24,300 per day. This number includes dry dock costs for 5 VLCCs, 2 Suezmax tankers and 8 LR2 tankers. And the fleet average estimate, excluding dry dock cost is about $23,300 per day or $1,000 less. We record OpEx, including dry dock in the fourth quarter, up $9,600 per day for VLCCs, $7,600 per day for Suezmax tankers and $12,400 per day for LR2 tankers. This number includes dry dock of 3 VLCCs and 3 LR2 tankers. The Q4 25 fleet average OpEx excluding dry dock, was $7,600 per day. Lastly, let's look at Slide 7 cash generation. Following as we entered into 1 year time charter agreements, and we also had fleet renewal in the first quarter, the spot base for the next 12 months is about 24,400 days. Frontline has substantial cash generation potential with 27,700 earnings days annually. As you can see from this slide, the cash generation potential basis current fleet, TCE rates and TCE as of February 27 is $2.8 billion or $12.51 per share, which provides a cash flow yield of 34% basis current share price. And a 30% increase from this current spot market will increase cash generation potential to $3.7 billion or $16.84 per share. Likewise, a 30% decrease from current spot market, we decreased the cash generation potential to $1.8 billion or $8.19 per share. With this, I leave the word to Lars again.

Thank you very much, Inger. So let's move to Slide 8 and look at the current market highlights. So oil demand seems to be growing healthily outright, but with key focus on nonsanctioned molecules, creating a substantial year-on-year changes in trade as shown on the illustration of the graph on the right-hand side of the slide. We have a very clear a market environment. We talk about U.S. India trade, U.S. Iran, Israel discussions and U.S. EU Ukraine Russia talks. Business liberation and further pressure on Russia in addition to around tension creates strong tailwinds on for us operating in the compliant market of oil transportation. We're also in an environment where weakening U.S. dollar is supportive of global oil demand. and the inflationary economic environment is supportive of the commodities in general. Asset prices for ships is appreciating firmly order books are building materially in 2029 and onwards. But with the 20-year age cap observed, future supply remains manageable. Let's move to Slide 9 and look at the flow. Global crude oil in transit continues to be at elevated levels. On the graph on the right, we've added the TD3C Baltic index by some refer to as the Dow Jones of the freight markets. And there, you can see how sensitive this index seemingly is to the oil trading on the 7 Cs. In this picture, we see sanction crudes moving slower, particularly for the Russian barrels or being stored, particularly for the Iranian barrels. This creates an increased dark fleet utilization and the dark fleet then needs new capacity or attract new capacity into the dark vessel pool. These vessels are pulled out of the compliance fleet. OPEC Middle East exports is growing firmly. But also adds to this increased demand for compliant and approved tonnage. But despite the watering freight levels we're facing right now, we see very few charters, in fact, non-breaking this 20-year age cap, which supports the case that we have been arguing for years. Strong import growth to Far East and India contradicting the energy transition narrative and especially for China. I think people are starting to get familiarized with the energy addition, not transition term. Long haul ARPS are challenged and just to explain what an orbit, that's basically the price difference between 1 continent to another in respect of oil, which basically, if it's at a wide enough point a trader or an oil major can make a profit, moving the oil over long distances and selling it in a different market. Freight is, of course, a key component in this and by example, if the freight from -- for a VLCC from U.S. Gulf to China is $18 million, the charter is actually exposed to $9 per barrel freight. And basically, this spread between the 2 oil markets need to accommodate that. This has put some pressure on these ARPS, and we've seen fairly little volume moving from the U.S. to the Far East. But again, if oil needs to move or when it needs to move these differentials will just have to price to accommodate this spread. The incremental marginal barrel is now compliant. We've also discussed this in previous calls is that we don't see any kind of fantastic production growth in Iran. We don't see any kind of fantastic production growth coming out of Russia. But we do see compliant oil production and exports growing. The big factor is, of course, OPEC, reversing cuts, but then in how countries like Brazil, Guyana performing extremely well. And these are the new molecules coming to market and they need compliant ships. Let's move to Slide 9 and look a little bit at the fleet development. So the order book continues to grow.We're basically in a market where decades high prices for modern tonnage if tonnage is even there for sale. That is on the water, meaning that the vessel can trade straight away is so high that it pushes actors into the yards. Other asset classes as LNG containers brokers continue to populate the Arts order books but we do see tanker ordering accelerating for 2029, especially in China. As the chart on the top right hand in the case, it shows basically the efficiency loss of a vessel as it ages. And the curve starts to dip around 10 years of age. And then further deteriorates into almost ignorable when it gets to 20 years. With this in mind, -- as we move forward and move into 2029, we're going to meet the generations of ships that were delivered around 2010 and onwards. And this is a large population of ships that then again will be 20 years of age and exposed to this deteriorating efficiency curve. With that in mind, although ordering is accelerating, and we have a kind of high amount of ships expected to come in 2029, and it's basically being added for every day. It's not alarming with this in mind considering the feet age or the age of the fleet and the fleet profile. We see it as we have 2 to 3 years of a very good runway before the supply could become a worry. We also expect going forward that the yard capacity will grow and especially in China. And it's not necessarily new yards, but it's yards that haven't built tankers or at least not been specialized in tankers, but they're now adding worth in order to cater for this industry. We believe there is another trend that will evolve as we proceed here, considering or assuming this rate environment is sustainable, that Korea and Japan will increase its focus on building tankers in general, and we also see in special as the margins on these contracts start to compete with what they can achieve for containers or LNGC. Let's move into Slide 11, where we have the familiar tables. I'm not going to spend too much time on this slide, only to say that in our methodology and we try to be consistent, we use data that's based on when an IMO number is registered. This means that these statistics will always be a little bit slow to react. The general assumption in the market is that the order book-to-fleet ratio for VLCC is probably already at 20%. But this will become more and more evident as these contracts are being registered and the IMO numbers are being created. With that, I think we move on to the summary. And I've changed the headline here. So we also see take the center stage, Suezmax and Aframax to follow question mark. It's actually not much of a question mark because the Suezmaxes are already on the way. and the Aframaxes is boiling. We are in a fundamentally tight market condition that yields extreme volatility. Oil demand and supply is developing positively, but especially for compliant molecules. The global tanker fleet age profile and efficiency loss tighten the supply-demand balances Asset prices are on the move at both spot and period markets support the investment decisions. The volatile political landscape fuels, energy and security conditions where tankers tend to thrive. And Frontline's efficient business models tend to produce material shareholder returns as we proceed. Thank you very much. And with that, I will open up for questions.

[Operator Instructions] And it comes the line of John Chappell from Evercore ISI.

Lars, so many things to ask you, but I'm not going to be greedy. I'll keep it to 2. So the first thing is, obviously, we're in a parabolic situation right now. We've seen this once or twice before. But as you said, what's the underlying factors seem to be very different this time. But rates don't go to the moon, there's a certain point where there's a ceiling. So what's the catalyst to provide a plateau and maybe a little bit of an easing from here? Is that a geopolitical event? Is it a seasonal event? Is it a Synacor event? What takes a little bit of the froth out of the market, which would still be very fantastic rates, but maybe lower than where they're moving this week.

No, it's an extremely good question. I think the answer is kind of seasonality. There is also kind of normal seasonality. We're actually not unused to having fairly kind of poised markets during this time of the year, many times due to U.S. refineries going into turnaround, allowing for more barrels to be exported. And so we're kind of -- we're actually going into that phase now. So there will be potentially a few more months where we actually can't sustain these rates depending on how the flows work -- but then there is going to be a summer lull, and it's based almost inevitable. But whether if it's a summer lull that moves from $200,000 a day to 100 or that is almost impossible to gauge. Also I think 1 needs to note that there is 1 major importer in these markets being China, and they have built an enormous amount of inventory over the years. They could, for any reason, choose to basically turn down the speed a little bit for a period of time. And this will also create volatility. But this is -- and I expect this to occur. But it's, of course, extremely impossible or extremely difficult to say when something like that might happen.

Yes, definitely. The other 1 is also may be a bit difficult, but it's just something I've been wondering about. Nobody has done what your Korean friends are doing right now for like seemingly 50 years. And that includes your shareholder who many people probably would have anticipated would have been the 1 to try this. Why hasn't anyone tried to corner the VLCC market in the past? And where could it go spectacularly wrong for them, just what are the risks, I guess? And I guess the final thing is how do you position Frontline so that you're not affected by if it does go spectacularly wrong for the supplier?

Yes. No, it's a good question. It's -- and you're right, it hasn't really been done in a material manner in the tanker market for at least longer than I can remember. Well, there is a parallel story from the mid-2000s involving a certain person from Taiwan, but this was in the dry bulk space. And -- but the key to his success in dry and the potential key to the success that the Korean actor may might have is actually that you go in a market that is already fundamentally tight. And then you don't need much to weigh it kind of or to slow the supply side of tanker capacity before you get these wireless moves. And also, as most people are familiar with, if you look at how freight prices just empirically -- the minute you go from 90% utilization to 95%, how freight prices -- the moves are exponential. So that would kind of be my explanation to why this is possible. I'm not going to comment on why Mr. Frederickson hasn't looked at this. But the thing is we are a stock listed public company. This is, of course, easier to do if you are a private entrepreneur in this market and, of course, willing to risk a substantial amount of money in such a game, where it can go wrong. In these situations, and we've seen them before potentially to a smaller scale. It ends up being -- it's almost like a game of chicken, who can hold the longest. So this is what makes me extremely excited over the months to come and the summer and so forth because we'll see some very interesting dynamics kind of come to play. But 1 thing I'm 100% certain of is that there will be volatility.

We're going to take our next question. And the next question comes from the line of Sherif Elmaghrabi from BTIG.

It seems like charters are seeing what you're seeing and willing to take more ships on term. Would you say that's the case and the TCE market is more active? Or is it just that rates have risen to a level that shipoders are more comfortable with?

No, I think as I kind of touched upon in the introduction today is that this market has evolved quite a lot in the last 20, 25 years. And if you -- by example, if you look at the Middle East market, for instance, for VLCC, transport from pain tail from Middle East to Asia. This market used to have a lot of physical liquidity, what happened over the years is that more and more actors are using the index itself to price the freight. So basically during contracts, floating contracts that prices of the Baltic index quote to the point where actually very little liquidity is actually transacted in the market. So price visibility has been quite difficult actually sometimes do a parallel for every barrel -- physical barrel of rent oil that is produced, it tends, it trades tenfold on paper. And we've seen a little bit of the same kind of tendency or trend in freight. And this becomes a problem then if everybody are kind of pricing their freight of an index, that runs out of control. And then suddenly, you need to hedge and then you need to access the paper market or you need to buy back hedges for the guys who have taken ships on time charter and basically hedge the part of the curve in that exposure and so forth. And you end up with a very vibrant FFA market, which every broker today with testify to. And you get these kind of ebb and flows out on the curve from panic to some sort of quiet until the panel kicks in again. So because over the last couple of weeks, we've seen -- you see the index. It's just relentlessly printing what is physically actually being done. But it's not like 10 cargoes are fixed today. It's 2 to 3 cargoes may be fixed today. But the amount of pricing exposure around that quote is enormous and this triggers kind of is almost like self-propelled move going forward. But I think it's important to note, this is not a manipulation the market is fundamentally extremely tight. But of course, you could argue that maybe freight rates are moving ahead basically due to this tightness as the panic ebbs and flows.

Well, that's very interesting. Something else that I thought was interesting. And was your comments specifically about new tanker yard capacity coming online. And so I apologize if you mentioned this and I missed it, but do you have a sense of what the turnaround time on these projects might be and when first ships might hit the water?

No, it's 2029. So a yard that is now marketing kind of a new birth that they're going to build, but it's not like a greenfield because the artist is there. but they're just kind of introducing a new birth, I can say, accommodative we also see build. That is 2029, so 3 years.

[Operator Instructions] And it comes line of Devin Sano from Tech Investments.

I just want to ask you, what will be your strategy on spot versus time charter as you go through these interesting times. And -- that's my first question.

Yes. No, and it's a good question. As we said before, we kind of our proposition to our investors is, of course, to give you spot returns. So basically, you don't have to buy a ship, you can just buy frontline. But at times, we will choose to use elevated markets to try and secure revenues. We've also kind of -- we don't have a fixed policy or anything, but we have like a golden rule of 1/3. So in theory, our Board will be comfortable under certain conditions that we get up to time charter coverage of 30%. We're, of course, in -- as you've seen from the stuff we did, we reported the 71 year time charters. In the report today, we also reported another 1 that was done like a week later. So we are in these models of Brandi to try and secure some longer-term income. But we are so constructive about this market that we are not really engaging yet, at least in the longer term because we actually do believe that there is still some to go for the longer-term contracts, but they are also appreciating quickly. So I'm not going to exclude anything. But you will not find frontline in a situation where we've put 50% of our exposure out on time charter because that's not really what our investors are after, we believe.

Sure. And I see the dark fleet, which we've been struggling and finally, it's coming with sanctions and whatever was needed to be done has been done now. In this -- though the probability is 50%, if Russian crude oil and if the bar stops and the sanctions are lifted, is also going to get into a compliance fleet, do you see in foreseeing such scenario what will happen to the market?

Yes. So if you'd ask me this in like September 2022, I would have said it would be like an immediate kind of bearish kind of proposition. But so much time has passed. And if the Russian barrel becomes a compliant barrel kind of you'll probably get half of the capacity back into the compliance on the shipping side. into the compliant fold. But the other half will either be -- or will actually be disqualified basically due to age. And this is the same for the Iranian or the fleet servicing the Iranian oil with a lot of ships, yes, but these are ships that were supposed to be recycled years ago, basically due to age. So very few of them are actually going to come back into kind of compliant trade. And also the scrutiny in the compliance market on ship's history is extremely kind of tough. So it's not very easy kind of whitewash a tanker that's been involved in elicit trades. But 1 point I need to make, we've actually seen this before when sanctions were eased towards Iran in 2016. They have a national fleet, national tanker company ITC and of course, any part of a sanctions lifting kind of solution will also involve nationally controlled shipping companies. So for Russia, that will be so conflated potentially others. But again, just analyzing those fleets age is a problem. So actually, we would welcome these molecules into the compliance fold.

Sure. And the last 1 is that if this sustains and obviously -- and you do the best to get make out of the cash becomes a cash pile. Obviously, you're paying out a large part of it, but do you think at what point in time you will start deleveraging balance sheet or you will stay levered?

No, our intention is to stay levered because for every share you buy in frontline, you get like a 1.4% ship exposure equivalent, basically due to our leverage. So we still believe that the model and obviously, I can't rule anything out, but we have no inclination to delever apart from what actually happens when you pay down debt. So the point of cash is actually going to you guys.

[Operator Instructions] There are no further questions for today. I would now like to hand the conference over to speaker Lars Barstad for any closing remarks.

Thank you very much for listening in, and I hope you are as excited as I am to what the future is going to bring. I think it's the tanker markets turn now. So let's enjoy the ride. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.