Frontline Ltd. (NYSE:FRO) Q4 2023 Earnings Call Transcript

Frontline Ltd. (NYSE:FRO) Q4 2023 Earnings Call Transcript February 29, 2024

Frontline Ltd. misses on earnings expectations. Reported EPS is $0.46 EPS, expectations were $0.52. Frontline Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the Q4 2023 Frontline plc Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. [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 sir.

Lars Barstad: Thank you very much dear all, and thank you for dialing in to Frontline’s fourth quarter earnings call. The last quarter of 2023 did not deliver the full on crazy off the hinges bull market we all wished for, but still gave us decent returns. We also started to take delivery of VLCCs from Euronav in December. And we are very happy it’s all been smooth sailing as they have come under the Frontline flag. I would especially like to praise our project, technical and operations team that effortlessly and professionally have incorporated these vessels into our fleet proving our company’s very scalable business model. Before I give the word to Inger, let’s look at our TCE numbers from Slide 3 in the deck. In the fourth quarter from plan achieved ph $42,300 per day on our VLCC fleet, $45,700 per day on our Suezmax and $42,900 per day on our LR2/Aframax fleet.

Both Suezmax and LR2 markets performing well above the previous quarters as they came to an end — as the [indiscernible]. As our press release shows, the full year 2023 came in firmly as we earned $50,000, $362,600 and $46,800 per day on our VLCCs, Suezmax and Aframax/LR2 fleet, respectively. [Indiscernible] we made over $650 million in full year [technical difficulty] and this is deemed respectable in some circles. In fact, the best year we’ve had in 15 years. So far in the first quarter of 2024, 81% of our VLCC days are booked at $55,100 per day, 72% of our Suezmax days are $52,800 per day, and 69% of our LR2/Aframax days at a whopping $67,800 per day. Again, all this numbers in this table are on a load-to-discharge basis and they will be affected by the amount of ballast days we ended up having at the end of [technical difficulty].

I’ll now let, Inger, you can take us through the financial highlights.

Inger Klemp: Thanks, Lars, and good morning and good afternoon ladies and gentlemen. Let’s turn to Slide 4, profit statement and look at some highlights, Frontline achieved total operating revenues in the fourth quarter of — sorry, operating revenues net of voyage expenses of $207 million and adjusted EBITDA of $198 million in the fourth quarter. We reported a profit of $118.4 million or $0.53 per share and adjusted profit of $102.2 million or $0.46 per share in this quarter. Adjusted profit in the fourth quarter increased by $21.4 million compared with the third quarter, and that was primarily due to an increase in our TCE earnings due to higher TCE rates, partially offset by fluctuations [ph] in other income and expenses.

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Q&A Session

Then I think we should turn to Slide 5 and look at some balance sheet highlights. Frontline has strong liquidity of $416 million in cash and cash equivalents including undrawn amount of the senior unsecured revolving credit facility, marketable securities and minimum cash requirements as per December 31, 2023. We have no remaining newbuilding commitments and no meaningful debt maturities until 2027. Then, let’s turn to Slide 6 and look at fleet competition, cash breakeven or OpEx. Following the delivery of all the 24 VLCCs acquired from Euronav and expected sale of the 6 older vessels in the first quarter of 2024, the fleet will consist of 41 VLCCs, 24 Suezmax tankers and 18 LR2 tankers, will have an average age of 5.8 years and consists of 99% ECO vessels, bear [ph] 57% will be scrubber fitted.

We then look at the graph at the right hand side, we estimate average cash breakeven rates for 2024 of approximately $28,800 per day for VLCCs, $23,700 per day for Suezmax tankers and $21,200 per day for LR2 tankers with a fleet average estimate of about $25,700 per day. This takes into account the expected sale of the 6 older VLCC — older vessels sorry, and also the 24 VLCCs acquired from Euronav in the first quarter of 2024. The fleet average estimate includes drydock of 4 Suezmax tankers and 5 VLCCs in 2024. [Indiscernible] two Suezmax tankers will drydock in the first quarter of ’24, 2 Suezmax tankers and 1 VLCC in the second quarter; 2 VLCCs in the third quarter and then 2 VLCCs in the fourth quarter. We reported OpEx expenses including drydock in the fourth quarter of $9,400 per day per VLCCs, $12,500 per day for Suezmax tankers, and $7,100 per day for LR2 tankers.

This includes drydock of six Suezmax tankers and two VLCCs. The Q4 ’23 fleet average OpEx, excluding drydock was $7,300 per day. Then, let’s turn to Slide 7 and look at the financing of the acquisition of the 24 VLCCs. When we entered into the agreements with Euronav to acquire the fleet of the 24 ECO vessels and also in our Q3 ’23 presentation. We said that our ambition was to minimize the need for cash from the Hemen shareholder loan through transplant capacity to releverage the existing fleet due to the historically low loan-to-value and/or sale of all the non-ECO vessels. In January and in February 2024, we executed on this with the agreement to sell 6 older non-ECO vessels and the ongoing process of refinancing 24 vessels on what we believe are attractive terms, expecting them to generate net cash proceeds of approximately $646 million.

This will enable us to fully repay the Hemen shareholder loan and the amount drawn under the $275 million senior unsecured revolving credit facility with an affiliate Hemen in relation to the acquisition and also to maintain our competitive cash breakeven rates. With this, I leave the word to Lars again.

Lars Barstad: Thank you very much, Inger. So let’s move to Slide 8 and look at the current market narrative. So, as you all know, the headlines are covered by the Middle East tension. The situation in Israel and Palestine. Following that the Red Sea/Aden situation and its ton miles implications, looking at it from a tanking perspective. We’re also seeing that U.S are increasing the pressure on what’s referred to either as the Dark Fleet or the Grey Fleet, and also increasing their focus on potential Russian price cap evasions. It was quite interesting to read earlier in the week [technical difficulty] that they’ve analyst — analyzed the tanker fleet and found that according to them, the Grey Fleet now consists of 135 VLCCs, 92 Suezmaxes, and 150 Aframaxes.

These are vessels [technical difficulty] on dark trading in Iranian barrels, trading to North Korea and doing all sorts of stuff, and including the Russian fleet. That’s a 375 vessels in total in the segments that we worked in. As a total, all [indiscernible] to 700 vessels involved in some sort of shady activity, that amounts to 8% of the total tanker fleet. So these numbers are quite shocking. Another thing that’s kind of played a part in the last few months has been the high activity in the contracting market. Well, especially so for Suezmaxes and VLCCs, actually to the extent where [indiscernible] now is that 2027 is starting to become somewhat tight. Also another kind of important thing to notice, we’ve been through a long period of OPEC voluntary cuts, particularly sold by Saudi Arabia.

This has maybe or potentially lead to non-OPEC production being allowed to grow quite remarkably. Year-on-year, according to EIA [technical difficulty] has grown by 2.9 million barrels per day. And as you listeners would know, most of this OPEC production is not in the Middle East, of course, it’s further far. And I’m connected to that [indiscernible] basin. And this continues to kind of confirm our ID that trading lanes are gradually extending U.S., Brazil, [indiscernible] and other countries are able to increase their production going forward. And China and Asia, still is where the [indiscernible] growth is happening. Looking at the shots on this slide, so global oil trade has kind of paused a little bit. Also, global oil in transit has paused a little bit.

But on kind of a more frequent indicators, we do see that in oil in transit is on the rise. What we — and we expect it to be due to the longer ton miles around Cape of Good Hope, avoiding Suez Canal. On the bottom three shots, you’ll see how kind of the market has been, the volatility has increased in this market. I like to look at this by drawing a line at the bottom and I think we are or hope we are in what looks like a rising territory. Kind of real time, what we’re experiencing right now, particularly so in the VLCCs is that we seem to kind of find a bottom at marginally higher place that we were before. And also there are indications that volatility is increasing. And particularly so we’ve seen on the [indiscernible] markets, where the volatility has been violent so far in Q1.

Let’s move to Slide 9 and dig a little bit further into the Red Sea situation. So the straits between Yemen and Djibouti, Djibouti is very unsafe for passage. With — at the start of this kind of conflict, or unrest, the ships that were targeted were predominantly Israel-linked. But attacks are now randomly targeting anyone, even Russian-linked fleer, which we thought were kind of safe for disruption, due to kind of Russia’s support for some of the — to some of these groups have also been targeted. So I think kind of we should categorize this as random attacks. I’m not a political analyst, but obviously learned a lot over the last month around this conflict and the Houthi movement is also very fragmented. It’s just — it’s not one uniform group.

What we’re understanding from the region is that they’re also getting support from Somali pirates. So this is like a proper mess, I would say and creates extremely unsafe condition for seafarers and also for our assets. So Frontline is not [technical difficulty] and we’ll continue on that position as long as the security situation remains as it is. Traffic through Suez Canal is now down 40% to 50%. Some might kind of expected to be far more than that. But you need to remember also an export region. So it means that actually oil coming out of Saudi, for instance, still pass through the Suez Canal because they invoice them. This above el Mandeb straits into the Gulf of Aden. We also see now the trade patterns are adjusting to Cape of Good Hope routing.

This takes time because basically ARBs [ph] and kind of oil price differentials have been based on Suezmax. Going through the Suez Canal will need to be readjusted to basically account for VLCC volumes coming going around Cape of Good Hope. So when we see more barrels already move on the VLCC, and the product side is now kind of to a greater degree favoring the big lifters being a [indiscernible]. And for those listeners that don’t know what [indiscernible] Suezmax. They’re not that many of them in this world, about 19, according to Clarkson, but you can also clean up a Suezmax in order to get into this market. Just visiting the graphs, as you look at the right hand side of this slide, you basically see on top you see oil tankers that are going around.

And you see it’s been a [indiscernible] rapid increase since December 2023. And you see the oil tankers in the year many, so basically, not Suez, but more specifically, the barbell among them, straits have fallen sharply since December 2023. And what this creates for the tanker industry is widening trade lanes. So basically, more oil is going around the Cape, and less oil is going to shortcut via Suez Canal. So let’s move to Slide 10, and look at the order books. I mentioned in my introduction that this has been one of the big themes, kind of over the last few months is that ordering is picking up. These — new orders are not reflected in this slide, because we use a very cautious and conservative approach to new orders. Because in the shipping market, there are rumors on their LOI, and their options and their all sorts of kind of discussion points around new orders.

So we’ve chose to listen to firmly to register a kind of new builds when the IMO number is issued. So that’s basically what is regarded a confirmed order. So you should expect going forward that particularly on the VLCC and to some extent on the Suezmax, these orange columns to increase. But we need to keep in mind that currently on the — in the VLCC fleet 15% of the existing fleet is about 20 years old. We have 133 VLCCs that either are or will pass 20 years in 2024. If you also look at the generations, we’re kind of moving into here, the 29 VLCCs were built in 2004, i.e. becoming 20 years. So this year, 31 VLCCs , [technical difficulty] 2005, becoming 20 years next year. The total of 60 vessels just this year, next year, are passing this 20-year threshold.

If you add 2007 deliveries as well, you get to 79, or close to 80 vessels that will increase this pink negative columns in the [indiscernible] how we portray it. Suezmax more or less the same picture, we’re hitting these generations, where you have deliveries of 25, 23, 25 vessels respectively in 2004, 2005 and 2006. So you’re basically up to the same numbers as the VLCCs, 73 vessels that over the next 3 years will pass this magical threshold of 20 years. For the LR2s, that’s where we kind of potentially could be worried about the order books, and actually quite a significant amount of [technical difficulty] looking to be delivered in 2025. Well, again, have a look at the left hand side of that graph, and look at — and also consider the fact that when LR2 becomes less effective as a product carrier when it reaches the age of 15, and look at the generations we’re hitting now in 2000 — from 2008, 2009 and 2010 builds, there’s actually more than 92 LR2s that will pass the 15-year threshold over the next 3 years.

Let’s dig a little bit further into this because this is after all what I kind of regard a supply story rather than a demand story. [Technical difficulty] more in the period from 2004 until 2008. This kind of what we hope to be a prolonged bull market is more related to supply. So let’s move to Slide 11. And here at the top we’re highlighting — putting the highlight on the VLCC [ph]. So if you basically look at the VLCC fleet development as is expected with the current deliveries that are confirmed in the order book, we see a gradual kind of increase of the fleet up to 900 vessels or above 900 vessels. If you adjust for the vessels that are turning 20 years, you get a completely different curve. Some of you might have seen us using this chart before, here is just updated.

And then what implications does this have. So if you look at the shot on the top right hand side, you’ll see average VLCC utilization. VLCC [technical difficulty] half the time, and then the others think — the other half of the time, but then you need to deduct some more utilization for positioning, doing bunkering operations. So doing all the other stuff that you do that is not really related to the voyage and also some waiting time to load cargoes. So you get kind of close to 50-50 laden ballast ratio. But when you look at this for the various generations of ships, you see that already from 17-year olds, the utilization of the VLCC start to diminish. Some [indiscernible] have a hard stop at 15 years. This is namely the Chinese, for instance.

Others are starting to be hesitant or would rather prefer a modern ship, when they’re facing a ship that’s 17, 18 or 19 years. And obviously from 20 years, you’re taking away most of your clients. And this — so even though the ships actually survive longer than 20 years, the utilization is falling. Another interesting shot, which is more general overall for tank is looking at the left hand side and it’s kind of an observation we wanted to show this time is that if you plot kind of all the orders that’s been placed, look at the time from ordering until delivery, you’ll see that there is a linear lucky [ph] growing trend or high — the trend is kind of the lead times are getting longer. And specifically so from the tankers, which is the blue dotted line, in December 2020, it was on average, 1.8 years from the order was placed and when the ship was delivered.

Now, we’re actually closing in on three, this is a big change. And also you need to keep that in the back of your head considering the orders being placed now. There are large order backlogs, but not so much for tankers, which the bottom right hand slide — sorry, is showing. So basically most of the deliveries that are coming in 2024 and 2025 are related to bulkers and containers. And crude tankers is just a very small portion of the overall deliveries coming in. It’s only in 2026 we can expect to see some kind of deliveries of some magnitude, looking at the crude oil tankers. So with that, let me wrap it up before we open up for questions on Slide 12. So I think one of the highlights of our presentation for Q4 is that we delivered on the long-term financing of the $2.4 billion after the transaction we did in Q4.

And mind you guys, this is probably the largest single pure tanker deal ever concluded. We’ve sold 5 non-ECO VLCCs and one non-ECO Suezmax as we indicated in the last quarter and [indiscernible] to refinance significant part of our fleet very competitive terms. And without really moving the needle too much on our LTVs, we’re obviously being helped a little bit by the prices rising during the period as well. And I think more importantly to you who are listening in here, we have not printed one single share. So all vessels are delivered and this doubles our VLCC footprint and increases our earning days by more than 30%. And I’d like to remind you earlier in the presentation where, Inger explained our average cash breakeven of fleet wide is $25,700 per day, every dollar above that number hits the bottom line.

We have obviously a grave security situation in the Red Sea Gulf of Aden. And this seems to be adding to ton miles and [indiscernible] the larger carriers that are offering greater economies of scale basically, because they can lift higher — larger volumes. We are seeing increased activity in contracting for especially for Suezmax and VLCC. But it’s actually so that the fleet age composition in the tanker fleet is the [indiscernible]. Otherwise [technical difficulty] short and medium term oil demand remains [indiscernible] () and non-OPEC supply is growing. And then again, Frontline scalable operational platform has digested this fleet expansion quite easily as the markets positive growing continues. And I also think it’s important to put your eyes on the bottom shot here at this summary.

These are kind of the earning averages, weighted earnings averages for oil tankers quite far back. And we do expect that we are nearing or potentially already in something that resembles the 2004 to 2008 period. And at least in the numbers, although, you get kind of [indiscernible] a bit by the fact that the VLCCs underperforming, or at least not performing as prominently as they normally would do. We have actually had both 2022 and 2023 has given remarkable returns to the tanker industry. And we’re looking quite okay coming in to January this year. And with that, I will open up or ask the operator to open up for questions.

Q – Ben Mohr: Hi, yes. Thanks for taking our question and good morning. This has Ben Mohr on for Amit here at Deutsche Bank. Can you talk about your conviction levels around the FLCC segment now that we’re 2 months into 2022? How do you see the segment for the tanker market shaping up so far? And what’s your current thinking about the rest of the year?

Lars Barstad: Well, we’re quite confident. But pretty short trade events is going to have a field day on this observation. But what we’re observing is kind of the market is tight, it is very tight. But owners are potentially competing against each other, which we shouldn’t really do in this kind of [technical difficulty]. So — and the shockers are playing their cards extremely well. Basically just feeding the market with cargoes, and pinpointing the owner and the schedule for that ship in order to make it appear quiet. Whilst we have a significant position in this market, so we always could pick up more information on most, and we see that activity is actually very, very good. So we — the activity is good, but for the owners to translate that into significantly higher earnings have been very, very hard.