Frontline plc ($FRO)

Good day, and thank you for standing by. Welcome to the Q1 2026 Frontline plc Earnings Conference Call. [Operator Instructions] This 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. There all, and thank you for dialing into Frontline's quarterly earnings call. [indiscernible] times brings to mind as we report in Q1 '26 well into the first half of the year. I've been in this industry for more than 20 years, and I did not imagine us in a situation for this duration where the strength of homes has been effectively closed. With okay and volatile political narrative these days, the frontline team focused on the real cash-generating business to be done, not speculating too far into the future. We have put the most profitable quarter since 2004 behind us and are well into a potentially even more rewarding one. I'll get back to how we analyze the situation within the call. And before I give the working here, I'll run through our TCE numbers on Slide 3 in the deck. In the first quarter of 2026, from plan achieved $13,500 per day on our VLCC fleet, 72,400 per day on our Suezmax fleet and $5,700 per day on our LR2/Aframax fleet. So far in the second quarter of 2026, 82% of our VLCC days are booked at $18,700 9% of our Suezmax days are booked at $131,300 per day and 68% of our LR2/Aframax days are booked at $125,000 per day, 6 digits across the board. All numbers in this table are on a lost to discharge basis with implications of ballast days at the end of the quarter. I'll now letting take you through the finance financial highlights.

Yes. Thanks, Lars, and good morning and good afternoon, ladies and gentlemen. We can then turn to Slide 4 and look at the profit statement highlights. We report a profit of $559 million or $2.51 per share. and adjusted profit of $44.9 million or $1.55 per share in the first quarter of 2026. The adjusted profit in the first quarter increased by $114.5 million compared with the previous quarter, and that was primarily due to an increase in our time charter earnings of $112 million from $42.5 million in the previous quarter to $536.5 million in this quarter. Ship operating expenses increased by $5.9 million from previous quarter, and that was mainly due to a decrease in supplier rebates of $5.4 million in the quarter. Administrative expenses, excluding the synthetic option revaluation loss of $5.8 million in the first quarter, a gain of $0.5 million in the fourth quarter of $25 million increased by $8.5 million from the previous quarter, and that was primarily due to synthetic option exercises in the first quarter of 2026 then the adjusted interest expense decreased by $9.8 million from previous quarter, and that was due to lower debt and decrease in interest rates and margins. Also, depreciation decreased by $6.2 million from previous quarter due to sales of PCs in the period. Lastly, income tax expense decreased by $0.6 million from the previous quarter. Let's then look at the balance sheet on Slide 5. From plan has a solid balance sheet and strong liquidity of $945 million in cash and cash equivalents, including undrawn amounts of revolver capacity of $473 million marketable securities and minimum cash requirements as for the 31st of March 2026. We have no meaningful debt maturities until 2030. Remaining newbuilding commitments at the end of the first quarter was $925 million, which relates to the acquisition of the 9 newbuildings from affiliates of Hemen. The company has secured new building financing of up to [ $737 million ] as set out in the press release. Let's look at Slide 6. [indiscernible] competition cash breakeven rates and offset. Our fleet consists of 33 VLCCs, 21 Suezmax tankers and 18 LR2 tankers, has an average age of 7.5 years and consists of 100% eco vessels, where over 64% are scrubber-fitted. We estimate average cash breakeven rates for the next 12 months of approximately $24,300 per day for $24,300 per day for Suezmax tankers and 2 per day for Suezmax tankers and $2,600 per day for the LR2 tankers. That gives a fleet average estimate of about $24,000 per day. This number includes dry dock costs for 6 VLCCs, 3 usage tankers and 8 LR2 tankers. The fleet average estimate excluding trade costs is about $23,000 per day or $1,100 per day less. We recorded OpEx included dry dock in the fourth -- or in the first quarter of $11,300 per day for VLCCs, $9,100 per day for Sulige tankers and $10,900 per day for ELT tankers. This includes startup of 4 VLCCs and 3 LR2 tankers. And the Q1 26 fleet average OpEx excluding Dido was $8,090 per day. Then let's look at Slide 7 and cash generation. Following that we have been entering into 1-year time charter agreements, and we have a fleet renewal in the first quarter and also in the second quarter. Spot base for the next 12 months is about 23,700 days. Frontline had substantial cash generation potential with 2,700 earnings states annually. As you can see from this slide, the cash generation potential basis current fleet TC rates and TCE as of May 22, 2026, is $1.5 billion or approximately $7 per share. That provides a cash flow yield of 18% based is the current share price. If we look at a 30% increase from current spot market, that will increase the cash generation potential to about $2.1 billion or $9.51 per share and equal a 30% decrease from current spot markets, we decreased the cash generation potential to about $1 billion or $4.41 per share. With this, I leave the word to Lars again.

Thank you, Inger. Let's move to Slide 8 and look at some of the market highlights that we're going to go through in this deck. But first of all, I'd like to remind the audience that we've had tightening fundamentals in the tanker market ever since around this time last year prior to the Middle East conflict. We reached an unprecedented situation after the 28th of February with the trade performance effectively closed. The chart on the top hand right side kind of indicates this -- here you see the year-on-year weekly changes in flows, whereas the Middle East Gulf drops dramatically starting in week 12. The U.S., Iran on off-stock and a tightening potential easing of Iran-related sanctions together with uncertainty in Russia, Russian oil assets creates a lot of volatility the market is starting to focus on the potential long-term implications coming from the current situation in the Middle East and more so if we can imagine the situation getting sold. We're going to see restocking of inventories, increased strategic storage, especially amongst Asian importers. And we're also going to see higher focus on diversification of oil supply. Now that we've seen how vulnerable you can be being dependent on purely Middle East supply. We also see that order books continue to grow as we stretch into 2030 delivery windows now. Asset prices continue to appreciate as freight market outlook remains firm, and we see a fairly high activity on longer-term time charter contracts. Just want to give you a small little kind of hint on the bottom left-hand side chart, we're basically not only using the TD3C index, which is a Middle East Gulf loading index to China. We're also using the TD 15 index outside of the Middle East Gulf, West Africa to China although it looks quite bleak only kind of rewarding us with $100,000 per day. This is 4x our cash breakeven levels. So it's still very good money. Although we wish we could have made $400,000 per day every day. This is a very much a theoretical exercise as the market is right now. Further, if we move to Slide 9, I'm going to take you through 2 fairly complicated slides, but I think needed for this session as we are in the situation we are. So we tried to. First of all, straight of former closure is very much a VLCC event. This is a big kind of ride for the VLCCs. This is where the most volume is listed on VLCC, transporting oil both to the east and to the west. We've seen kind of prior to the closure that the daily totals in this market has been on average 491 vessels. This colon consists of laden, dry dock vessels that are doing car gaps or other stuff. We have, at any point in time, I've had stopped ballaster, east of us, and we have always had vessels waiting to load in the Red Sea. Basically, when the straight closed, we had a massive loss of 130 ships that were so-called laden dry docking or doing cargos. This is the dark blue kind of baseline in the chart in the middle here. Then we had an increase of 21 vessels waiting loading in the Red Sea. And this is like daily tied up tonnage, so it shouldn't really been looked as an absolute number. Then suddenly, we have 41 VLCCs laden loaded with oil waiting inside the Middle East Gulf. And then you have 55 VLCC equivalents stopped and in ballast East of Suez. This brought us back to 480 VLCCs after the homes closed, basically only a reduction of 11 VLCC equivalents in this extremely severe situation for the VLCC segment in special. If we move to Slide 10 and look at how the flows developed post closure. We were at 17.7 million barrels per day from various suppliers inside the Middle East Gulf. We lost 5.9 million barrels per day from Saudi, 3.2 million from Iraq almost 2 from UAE and on it goes. 1.4 from Kuwait and almost 1 million barrels from Qatar. Well, as we proceeded, UE were able to increase the throughput in the pipeline ending up in Fudara of almost 1 million barrels per day. Saudi Arabia started to utilize the Yanbu pipeline going from Middle East Gulf out to the Red Sea, increasing by 3.5 million barrels per day. And then the rest of the world has gradually towards where we are now, increased output by 3.3 million barrels per day. This has basically meaning a net loss of only 6.2 million barrels per day. What's related on a look at, and we might jump at this straight away, if we move to Slide 11, is that even with this effective closure of Hormuz, we have had so large changes in trading patterns that were actually back to oil kind of traveling over distances, oil and water, pre-Hormuz closure. The long-haul trade has kind of outgrown the loss of the relatively short haul trade from the Middle East Gulf to Far East. We've also seen export capacity that we actually didn't know existed or at least we didn't really focus on it, adding to this volume. We've seen Asia increase their sourcing from virtually all available regions, all of them further afar fueling this ton-mile and this high utilization. Despite the volume shortfall then, adjusted for distances, shipping demand is suprisingly robust. Crude on water is recovering fast. And this is important to note, when you look at a real-time picture, you will not record this until after the fact. It takes 30 to 45 days from a barrel is contracted to be freighted before the oil is actually loaded on a ship. This means that it's only in the last 3, 4 weeks, we've seen this materially happen using the data or using the kind of oil on water data. And to say though, and we might actually flip back to Slide 9 because this is important. On this chart, you'll see kind of in the middle on the top right-hand side there, there's a number plus 55%. These are vessels that are contracted or majorly contracted to players that are not necessarily having the same economical rationale that and then we, as a ship owner would have. These are vessels who do the base line of oil transportation from the Middle East up Asia, they're contracted to industrial players like refiners and oil majors. And for these guys do not have vessels available should the straight open can be an extremely costly affair. These ships are contracted out on model trades you're talking 5-year deals, 6 year or 7- or 10-year deals between $35,000 and $45,000 per day, meaning that that's the option premium they pay in order to be able to lift first oil as it comes. And for them, this is logistics. It's not necessarily profit, different from frontline. And of course, haven't we had this kind of idle fleet, I think the supply and demand picture would have looked a bit different on tankers and especially VLCC. But that's the case, and that's the way it is. And right now, we're reaping the benefits of the fact that a relatively large portion of the fleet is unutilized, waiting for something to happen in the Middle East. Let's jump forward again. I'm getting to Slide #12. So I mentioned that the order books continue to grow. It's -- we're starting to get into kind of territory where you have kind of percentage numbers that start with a 3, but still -- we have this aging of the fleet that is ongoing. If you look at the table on the top left-hand side, the vessels that are currently 15 years or currently 15 years. or younger. They are going to be 20 years within 5 years, and that amounts to 45.5% of the current fleet. If you put that in the back of your heads and you look at the order book, which for the asset classes we deploy is around 23.2%, then it doesn't look too alarming. The period that the current order book is delivering over is the next 3 to 4 years, where kind of the bulk of the vessels for, especially VLCC and Suezmax are actually coming in 2028. So with this in mind, I'm not saying that the order book is nonexistent, but I'm saying that the order book is manageable. Also, I think it's important to note when we look at these charts, that's the likely outcome or the likely kind of points on the list if there is a pace solution between U.S. and Iran is going to include sanctions on Iran and oil. This means that the current part of the fleet that is now servicing the Iranian crude is going to be obsolete and that amounts to 15% to 17% of the overall VCC pit, which overnight are going to become useless. We can move to Slide 13 and dig a little bit further into this argument. So we have very strong spot and period markets in addition to the fundamental backdrop, which I just pointed on, and this keeps ordering activity high despite the current opaque situation in the Middle East. Tanker ordinary is accelerating for 2029, and we are starting to see slots move into the 2030 window, increasing the runway. We're talking about 3 years, 3.5 years until a new hole can be added to this order book. With the absence of recycling, but the continuous aging of the fleet, the net compliance fleet growth is still manageable where we are now. And mind you, again, we do not see vessels over 20 years being deployed in any markets despite extremely constructive rates. As I mentioned, the likely end game of Middle East conflict implies reversal of our sanctions, adding to the demand for compliant tonnage and potentially triggering the very kind of sought after wave of recycling. One kind of larger fundamental piece in this picture is that a number of shipyards is still materially lower than what we saw in the 2010, 2011 peak. But the consolidation and more recently, efficiency gains put the CGE capacity closer to his I'm almost saying this, that basically to explain how even though the building capacity and the capacity to basically have new new tonnage into the market to service future oil transportation demand seems limited. We are actually in a place where we are going to be able to maintain a fleet that can service the oil markets for many years to come. The top right-hand side chart shows us basically how the kind of overall net fleet development is looking right now and it's not alarming by any means. Then let's move into Slide 14. I think I'll just start so that you can look at the bottom hand slide, bottom I'm chart because we've used that for quite a few quarters now. And mind you, the orange thing at the end there. I mentioned that we, from plan has not had a quarter like this since 2004, look at where we are now year-to-date in 2026. It's quite extraordinary. Yes, there is a certain portion of this index that is colored by the fact that we have some of the trades that cannot be performed but are being printed at extremely high levels. But still, we are in unprecedented times. Fundamentally, tight market conditions, and they were present prior to the Middle East disruptions. The disruption in trade lanes has yielded inefficiencies and new trades and longer tail ends have been developing. And we believe this can be a bit sticky basically due to the energy security part of this. We have continuous muted growth in the compliant tanker fleet. And that remains -- that is still at the core of the case of owning tanker stocks. Asset prices continue to move and both spot and period markets support investment decisions as we move forward here. The current political environment changes the game. And I repeat myself we are focused -- we will see a higher focus on energy supply security going forward. Frontline is incentive stage with our VLCC heavy efficient business model as hopefully positive outcomes nears. Thank you very much for the attention. And then I'll open up for questions.

[Operator Instructions] And this question comes from the line of Sherif Elmaghrabi from BTIG.

First, starting with the fixture count. When I look at VLCC fixtures, I see activity out of the U.S. Gulf West Africa declining slightly from April to May, even though rates have remained very strong. So I'm curious if you're seeing the same thing? And if you have an idea of what's going on with the fixture activity?

Well, it's -- this market has kind of moved into very much a self mode. So it's, of course, not everything that is seen. But I think kind of from a utilization perspective, if you are an oil trader, you always utilize your own fleet first. And this means that those are factors that will not be reported in the market, although the volume might remain the same. Secondly, we've seen that kind of the fixing happening out of the U.S. Gulf has been extremely kind of meaning cyclical it starts with kind of the short-term barrels being fixed on Aframaxes, which you've seen kind of recently. Then suddenly, it tricks into suezmaxes bringing the oil to Europe. Until suddenly, you see that being kind of confirmed for oil moving into the Far East, which brings the VLCC kind of into the game. And then suddenly, they will see fade the Suezmax phase, and we're back on the Aframaxes again, and then it just repeats itself. So the -- it seems like the U.S. Gulf fixtures on the VLCC side, happens on a kind of a monthly cycle, and it only happens within 1 week, 1.5 weeks in that month. So I think it's quite difficult to read from fixtures first of all, because it's very difficult to see all of them. And secondly, because you have this kind of a little bit untypical pattern. You don't have like kind of a continuous flow of VLCCs being fixed or a continuous flow of Suezmaxes or continuous flow of Aframaxes. It basically depends a little bit on the prices of crude and how the ARPS are kind of opening or closing. And of course, with extreme volatile narrative. Virtually every Friday, we're about to open homo and every Monday is closed again, this makes this kind of a very difficult playground for even the traders.

I definitely get whiplash from the headlines. Sticking with the idea of captive fleets, the presentation mentions 55 VLCCs on standby outside the Arabian Gulf. Do you have a thought on why the I'm assuming the NOCs might do that rather than participate in alternative trades for the time being?

No, I think it's obviously, I don't know this, but a likely theory is that in the event of an opening, say, somebody kind of tweets on the press kind of release is coming out tomorrow saying that now it's all okay. We can travel through the first vessel that goes through can potentially buy Iraqi oil with a $30 discount to Dubai or Brent. That's $60 million right there. So I think kind of that's the motivation, having the ability to be able to move quickly to take the first barrels as opposed to having to call frontline and ask us for a rate that has huge value. And the alternative is that if they went in to compete with, say, us in the Atlantic market, that vessel would be gone for 70 to 90 days -- and then they really have to call us if they need freight out of the Middle East Gulf quickly kind of. So I think I would assume that's the analysis behind this. And since the cost kind of on holding these assets is not like a current market cost. It's a time charter contract that was agreed years ago. I think the cost to kind of keeping that option is manageable. But of course, what happens tomorrow is it impossible to say?

Question comes from the line of Jon Chappell from Evercore ISI.

Lars, the slides 9 through 11 are really fantastic. A ton of detail, super interesting, Haven't seen it laid out this way before. My question is if the impact from the fleet on Slide 9 is only 11 VLCCs and then 10 and 11 kind of net themselves out, like you said, like the loss of volume is obviously negative, but the ton mile impact is almost a complete offset. It feels like the utilization then overall should be relatively balanced to before the straight close yet rates have obviously been incredibly strong. You have the theoretical ones, but then you also have the real ones as well. So what's the differentiating factor that takes what looks to be a balanced outcome versus 3 months ago? And has put rates into the stratosphere?

No, I think again, it's the biggest X factor, and we didn't kind of see this coming at all, what's the amount of vessels that seem seemingly for kind of -- it's not like obvious economical reasons sit unutilized -- so I think that kind of -- the tomato amount to a lot. I think people were surprised by the amount of volume. Saudi has been able to ramp up the Yanbu loads with -- but I don't think you can get away from the fact that we have this kind of uneconomical for different reasons, part of the fleet that remains unutilized. Is the biggest kind of factor in here. Because even we did not believe that what's happened or transpired since 28th of February, could be bullish we also see or unusual to LCC.

Okay. You spoke on Slide 13 about the likely end game, and I think that most people would agree with you that, that's most likely, certainly the stock market act that way. And Frontline has always been positioned, obviously, to maximize spot market exposure. If we were to consider the other end game, which is continued and escalated hostilities and maybe a more permanent closure of that water way. How do you think about how you manage risk in that outcome? Again, I know we have to lean towards the likely outcome. And what the market's telling you and the Friday afternoon tweets. But have you thought about managing the fleet or even the balance sheet in a different manner just in case that unlikely tail risk emerges from this unprecedented time?

Yes, we have. And I think although kind of we've done some more kind of time charter coverage, particularly so on the VLCCs kind of during Q1 and also continuing. And I think kind of the first situation of that was basically, we looked at unprecedented market prior to the homes closing. So of course, we didn't -- now that was going to happen. But what's happened in the aftermath is that we've actually continued to secure short-term covers like 1-year coverage on the VLCCs to the point where Inger has a table in there. We're closing on 30% of our voyage days for VLCC for the next 12 months or thereabouts or at least for the first couple of quarters, being covered by time charter contracts. And we've always kind of communicated this that our proposition to you as investors is to try and give you a small exposure. But of course, at certain points in the curve, we'll try to cover. And that's, of course, to try and prevent ourselves from going bankrupt -- should we be wrong -- so I think that is the answer to your question. We could kind of be all spot at this point in time, but we are actually very close to 30% of our voyage base on VLCC, which is the most exposed segment, we believe, for a long-term closure in case nothing is sold there.

[Operator Instructions] We are now going to take our next question and this comes from the line of Devin Sangoi from Tetch Investments.

Lars, I just want to ask you 2 questions. First 1 is that we have seen a lot of countries have used the reserve crude reserves, what they had because of the disruption? And if they have to go back the previous results relate to the for and growth of problems, how the demand will shape up even if the war is over?

Well, kind of this is a big -- and if I go to your question correctly, you're asking basically, how will this market look when it normalizes, right? Yes. No. So in our world, and of course, we lean on analysts have actually notice properly I don't think we'll see kind of Middle East exports resumed to levels prior to the closure anytime soon. I think that will take time. you will have an initial kind of flow of oil coming out. First of all, the vessels that are already laden. Secondly, kind of barrels at sitting inside the Gulf currently and then new production is going to be coming on. For some of the exporters, this is, of course, a liquidity thing. So they want to get as much oil into the market sold and get some cash as soon as possible. At the same time, we will also have this, what we believe, high probability of a raining crude also being a compliant crude when this happens. Remind you that that's 1.5 million to 2 million barrels there as well. Coming from Iran that needs compliant tonnage. But as we move forward here, I think if I was a refinery in in Asia or a short kind of oil entity in Asia, I would kind of the minute I feel that my inventories I would start to basically spread my risk on how I procure oil going forward. So I think that could kind of create a more long-term situation, where we see kind of this longer old-school Tomas become more and more stable as we proceed. So kind of the opening scenario, I think it's very difficult to paint a big picture for tankers. There could also be the possibility to paint a quite bullish picture for oil price basically because you need all this inventory build you will not get production back overnight, and there will be kind of a bit of a shortness of oil as well going forward. But I think the point that we cannot get away from is that this whole situation, which has now lasted for 12 weeks or whatever we're on counting, it's also a huge kind of push for energy diversification by way of looking at other kind of energy sources like nuclear, wind, gas, what have you. maybe not gas, but at least solar then. So it's kind of -- this is actually a push towards long-term energy transition. But I think kind of that's 5 years out. It's not something that we need to think about right now. But I think kind of the short-term scenario is how I described it.

And Lars, the other thing is that India contracted today from Venezuela. And after this for is over, the 20%, which is a huge dependence of lot of countries, especially India, China, which is taking it from Middle East, we would like to diversify. Does that permanently change the ton mile demand at under ton mile traveled for the ships, especially the large oil.

Yes, I believe so. And I think this is also the root cause for some of the interest we're seeing from kind of the Asian industrial players that they actually are trying to access the time charter market, taking ships for delivery in '27, '28 and '29, so I think that's kind of the long game in this that they are there to try and commit themselves for oil supply contracts from Latin America, West Africa and U.S. and then basically need to secure tonnage against those contracts.

So I think main Slide 29 calendar year '29, you're going to have a very strong or a stable high rate scenario for the ship.

I think that's impossible to say to be quite honest. We see that the freight markets and the period markets are backwardated. So kind of a year contract for a vessel delivering fairly soon is around $120,000 per day. the minute you do a 2-year contract, you talk about 90, 3-year contracts, $756 million. And then if you kind of go out and do a 5-year deal for delivery 2029, you're down in the 4s. So it's market yes.

There are no further questions for today. I will now hand the call back to Mr. Lars Barstad for closing remarks.

Yes. Again, thank you very much for listening in. It's quite hectic political landscape we're working under. But rest assured, frontline are focused on trying to to collect cash as we proceed here, and it looks pretty okay for now. Thank you.

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