Frontline Plc

OSE:FRO

Earnings Call Transcript

[Operator]

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.

[Lars Barstad, executive]

Thank you very much, dear all, and thank you for dialing into Frontline's quarterly earnings call, thank you.

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 as argue. And as an example, in November 2004, the market was set to be doomed, and we corrected more than 30%. The bull rally resumed a few weeks thereafter, and we were off for these [indiscernible] again.

For the same reasons, it's difficult to predict the various sentiment, the bull runs are equally hard to call to.

So before I give the word to Inger, I'll run through our TC numbers on Slide 3 in the deck. In the third quarter of 2024, Frontline achieved $39,600 per day on our VLCC fleet. $39,600 per day on Suezmax and $36,000 per day on our LR2/Aframax. So far in the third quarter, we booked 77% of our VLCC days at $44,300 today, 70% of our Suezmax per day at $39,600 per day and 60% of LR2/Aframax at $34,600 per day.

And again, all numbers in this table are on a low to discharge basis, with the implications of balance as 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.

[Inger Klemp, executive]

Thanks, Lars, and good morning and good afternoon, ladies and gentlemen.

Let's then turn to Slide 4. 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 rates in the third quarter compared to the second quarter.

Next then, I look at the balance sheet at Slide 5. The balance sheet movement this quarter are related to refinancing debt in addition to ordinary items. Frontline has a solid balance sheet, strong liquidity of [ $567 million ] in cash and cash equivalents, which includes the undrawn amount of the senior and security boding feet facility, marketable securities and minimum cash requirements as per the September 2024. We do not have any remaining new building commitments, and we do not have any meaningful debt maturities until 2027.

If we then turn to Slide 6. Our fleet consists of 41 VLCC, 22 snacks 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 gave fleet average estimate of about $26,300 per day. This fleet average estimate includes dry dock of 5 VLCCs and 2 Suezmax in the next 12 months, where 2 businesses are drydock in the fourth quarter of '24, 1 to snacks in the first quarter of '25, 1 VLCC and 1 Suezmax in 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 the [indiscernible], $7,800 per day for LNG tankers. This includes the dry dock of 2 VLCCs. The Q3 '24 [ OpEx, excluding dry dock was $7,900 per day.

Then let's move to Slide 7. Despite current challenged spot market [Indiscernible] to generate a decent positive cash flow and with 30,000 [indiscernible] days [indiscernible] a substantial upside potential. As you can see from this graph on the right-hand side of this slide, the cash generation potential at current fleet and spot market earnings from [ Clark & 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'll leave the word to Lasala.

SPEAKER01

[Lars Barstad, executive]

Thank you very much, Inger.

So the current market narrative is somewhat mixed. Global supply is increasing, but the non growth is very much listed on Slide 8. The geopolitical risk in the 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 is hitting the market is sanctioned and 6% of global consumption includes sanction barrels. The very recent tariffs in Canada, and Mexico may increase in efficiencies in all flows. But more importantly, the order book has stopped growing for tankers. As containers are starting to take some of the stage again. If you look at the chart on the right-hand side, this is basically compared in the balance between supply and demand according to IAA, which is the orange line versus the tanker markets and how they've performed over the years. What we see, and this is notable is that although demand is disappointing somewhat to continue to grow. And when we move into 2025, we are looking to be in an oversupplied market began on tankers with kind of with effects you then have on utilization of 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 exemption of the clean market. They are at exposure, which has corrected sharply during the period.

Let's move to Slide 9 and look and the [indiscernible] flows. So as I mentioned previously, overall global demand growth is neonatal, and this is across all regions. We do see oil supply continuing to rise. And this is predominantly happening around the Atlantic basis. 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 incremental 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 into regionally. Having said that, it's a pretty stable flow of oil leaving the [indiscernible] going to Asia, but there's 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 appreciated more than the volume coming out. And actually, to some extent, produced in corporate was the compliance fleet [indiscernible]. We'll see the sanction export oil market as a share of Asian demand has reached a booking 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 specific [indiscernible] for Suzmax's and LR2/Aframax's, but also to a great degree on the [indiscernible]. But at the same time, we are seeing the fleet continuing to age as virtually 0 ships have been sold for recently. If you look at the current VLCC fleet, the order book is equating to 76% of the existing fleet, while 14.8% of the fleet is above 20 years and not trading the market that we recognize ourselves with. On the same metrics of Suezmax, the order book is now equal to the population of ships that are among 20 years. On the around the LR2s though, we see that there is a whooping amount of the ships on order. But if you take the LR2/Aframax combined after very few unquoted Aframaxes being on the order, is the [indiscernible] becomes more balanced. Where you get to bring this up for 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 B2C trade in the market, which formally wouldn't be qualified to trade. Similar numbers is Suezmax 108 about 20 years, as we [indiscernible] come to an end. And if you look at the Afra-luxury market combined, you got more than close to 200 vessels traded 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 [indiscernible] markets 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 asset bites in exclamation mark. Basically, the sanctions is forcing the own ton-miles on to 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 growth has stopped and modern asset values remain firm on a small note map with the order book now kind of moving into 2028. No shipyards are in any urgency of discounting tackers as they are or they continue to be busy contracting or getting interest or contracts on container ships and other asset cases. And also some fun fact at the end of the presentation. Gross 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 the tightening kind of scrutiny around the world were observed.

So with that, I'll open up for questions.

[Operator]

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

[Jonathan Chappell, analyst]

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?

[Inger Klemp, executive]

To my thinking is that the [ only ] value that we have currently is just below 50%. And we don't really see any biggest that golden fleet will decrease in value. So we don't see that this is high leverage that you probably are. We are comfortable with that debt level.

[Jonathan Chappell, analyst]

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 2 -- well, 1 thing that people are really focused on and 1 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 2 things happening somewhat simultaneously?

[Lars Barstad, executive]

Well, if -- kind of let me do the Russia-Ukraine first. The sanctions that are opposed on Russia are -- I would argue somewhat flakey. So Europe is buying record amounts of gas from Russia, whilst they're highness price cap on oil and products. We're also, just as a coincidence, finding 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 nation from Russia, Ukraine, I think these actions 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 belongs to Europe back into Europe. And that will push a lot of the Latin Basin barrels to find another home, and that's more likely to be priced into Asia, incurring longer-term models. If you talk of that do something about Russia, sorry, mentioned it numerous tons that I run are having a very, very great success in exporting a huge amount of oil despite reduction. And if one is able to limit that, that oil also needs to replace. And there, the [indiscernible] replacement is from OpEx. It's quite surprising me that [Indiscernible] happy kind of cutting the model [indiscernible] they are, watching around 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 closes helps sufficient on tonnage there [indiscernible] due to 300 vessels 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 [Indiscernible] 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 the restrictions.

[Operator]

Question come from the line of Omar Nokta from Jefferies.

[Omar Nokta, analyst]

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.

[Lars Barstad, executive]

As you know, Omar, that's a very difficult question to answer. I think kind of the fact that we are actually in fact [indiscernible] 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 would 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 blunting basin that needs to price the market. This [indiscernible], 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 that active basin to price because the mechanism then is that the vessel will just shown, I mean [indiscernible] to U.S. copies or West Africa. Yes, because that [indiscernible] return. And for that, we basically lacked the expansion in [indiscernible] from the country 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 as basically to force [indiscernible] Basin barrels, not force them, but attract them to Asia to a great degree than we've had. So I'd say, if you ask me right now, it seems like we are in this range bound kind of promotion. But again, the balances are still tight. We're actually making black numbers on the fixtures we make here. So it's some on absolute [indiscernible]. but it's very difficult to get beyond this 50,000 per day as you described.

[Omar Nokta, analyst]

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?

[Lars Barstad, executive]

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 [indiscernible] state of the market can extend I think it's anybody we will have 7% of the package will be above that year. So 6%, 7% of the overall free auction and so forth, and everybody will be happy with the trading. I would say that that's impossible. But apparently, it's March. I think partly that the incoming kind of government and the U.S. arguing for a very hard stance on actions anything 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 the carbonization return. So I'm very hopeful. I'm also -- I think kind of we are extending ourselves there, not by way of frontline, we're very happy, but the market itself is extending itself here. So any adverse events market, say, I was asking as we discussed if something happens with Russia, Ukraine that shifts the balances. If something happens to Iran and we miss their ability to export we're extremely sensitive to these changes, which obviously put the tanker market in all of a sudden and in a very, very, very strong position.

[Operator]

Question comes from the line of Sherif Elmaghrabi from BTIG.

[Sherif Elmaghrabi, analyst]

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 2. 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.

[Lars Barstad, executive]

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 the [indiscernible] and 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 basically because you've seen that gap, you could say, our overperformance on asset values on the more older 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 only be to kind of recycling parity feet.

[Sherif Elmaghrabi, analyst]

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?

[Lars Barstad, executive]

Well, it's -- this is just pure mathematics for 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 the year is that the efficiency between asset losses has increased. We were ourselves surprised to see how quickly kind of these e-com 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 [indiscernible].

[Operator]

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

[Unknown Analyst]

I have a couple of questions, 1 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?

[Lars Barstad, executive]

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 with [indiscernible] was the 16 million vehicles or something to get them to go into -- for ease of, call it, gas propulsion, its LNG and LPG. We're 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 of 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 -- we're actually in a very good position to having observed this kind of developments ourselves, particularly from Norway because Norway has had the highest penetration of -- for the highest new sales of [indiscernible] 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 fall as expected, which basically leads us more on 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 get to fairly soon in China. You still have that existing fleet that is also driving and on increased economical activity this tends to drive longer, at least for further. This is at least what we've experienced here. On the EV side, there's a huge population of cards in China. I think we are still some years away from that market getting to a tipping point where actually perpetual demand starts to decrease materially. But I think kind of we have to expect that in most markets around the world, except the 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 amount of is on petrochemicals. So if you look at the various agencies and how 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 market. 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 [Indiscernible].

[Unknown Analyst]

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?

[Lars Barstad, executive]

That's the 10 -- or the consumption isn't it? We read the same narrative as you do 1 month, we said that OPEC will look or particularly to 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 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 on 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 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 whole [ way ] of Vienna, well, actually online now someday that when they discuss these matters.

[Unknown Analyst]

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?

[Lars Barstad, executive]

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

[Unknown Analyst]

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.

[Lars Barstad, executive]

Well, it's all 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 [indiscernible]. It's impossible to call. There are many factors that affects this. But I think kind of as was the point in our presentation here, I think this kind of maximum pressure to owe on Iran is far more interesting coming into next year than the potential seasonal slip where actually we see incremental demand coming in -- as we start to move into the new year. So I think 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 a kind of increased degree of refinery turnarounds, so basically to do more oil available for trade.

[Unknown Analyst]

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?

[Lars Barstad, executive]

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.

[Operator]

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

[Lars Barstad, executive]

Well, thank you very much for listening in. And please don't forget [indiscernible] [ 2004, ] we also focused was [ dreaming room ]. And then only a month after we were willing for the [Indiscernible]. So hopefully will -- this market will develop a bit more excitingly than we expected for this quarter, and have a good Christmas presentations. Thank you.

[Operator]

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