Frontline Plc (FRO) 2023 Q1 法說會逐字稿

Good day, and thank you for standing by. And welcome to the Q1 2023 Frontline Plc Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to CEO, Mr. Lars Barstad. Please go ahead.

Thank you very much, [Dero]. And thank you for tuning in to Frontline's first quarter earnings call. We're a bit late. But better -- good than earlier, whatever that expression is.

We've had an unseasonably strong first quarter of the year. Russia still has an impact on the market, while there are sanctions on Russia. But I think kind of the key part of the action in Q1 was related to China. The strong Q1 has given us ability to book quite strong numbers into Q2 as well after the Frontline team relentlessly growing to create shareholder value.

Before I give the word to Inger, (technical difficulty) key numbers on Slide 3 in the deck. In the third quarter -- sorry, in the first quarter Frontline achieved $52,500 per day on our VLCC fleet. $64,000 per day on our Suezmax fleet and $56,300 per day on our LR2/Aframax feet.

And we are, in fact, back to a somewhat reverted earnings relationship between our segments with the Suezmaxes outperforming the VLCCs and the same for LR2s.

We have secured quite firm numbers as we progressed into Q2, with 78% of our VLCC days booked at $75,000 per day. 71% of our Suezmax days booked at $65,000 per day and 63% of our LR2/Aframax days at a very respectable $65,700 per day.

Again, all these numbers in the table are on the load to discharge basis, and they will be affected by the amount of balance days we end up having at the end of Q2. And mind you, this is Q2, which is supposed to be the weak point in the market.

With that, give Inger the word, and she will take you through the financial highlights.

Thanks, Lars. And good morning, and good afternoon, ladies and gentlemen. Then let's then turn to Slide 4, the profit statement and look at some highlights. As Lars already have stated, Q1 '23 is the highest first quarter profit since 2008.

Q1 '23 is also the first interim financial information presented by the company on IFRS. And following the transition to IFRS, one important thing is that dry-docking costs will be capitalized and subsequently depreciated over the period to the next scheduled dry-docking, which is from 2 to 5 -- 2.5 to 5 years. Q1 '23 dry-docking costs was $3.6 million that has been capitalized and 3 vessels were dry-docked in the quarter.

I will also mentioned that the company has revised the estimated useful life of its vessels from 25 years to 20 years, and that was effective from January 1, 2023, which resulted in an increase in depreciation expense of $12.7 million in Q3 compared to Q4 '22.

Then let's turn to Slide 5 and look at some balance sheet highlights. The company has no remaining newbuilding commitments in Q1 '23 as the company took delivery of the 2 last VLCC newbuildings, Front Orkla and Front Tyne in January 2023.

The company has strong liquidity of $584 million in cash and cash equivalents, including the undrawn amount of unsecured facility, marketable securities and minimum cash requirements. Then the company lastly, has a healthy leverage ratio of 52.9%.

Then I would like you to turn to next slide. And lastly, let's look at the cash flow potential of the company. We estimate industry-leading cash break even rates (technical difficulty) 300 fleet average, and that includes dry-docking costs for 8 Suezmax tankers in 2023. 4 of them is to be -- expected to be dry-docked in the third quarter and 4 is expected to be dry-docked in the fourth quarter. The Q1 '23 average OpEx, excluding dry-dock was $7,300 per day.

The free cash flow indicates strong potential return for the company, as you can see from the table on the right-hand side. Just picking in the scenario where we assume VLCC rates of $75,000 per day, with 5-year historic spread to VLCC for Suezmax and LR2 tankers, the annual free cash flow potential is about $1.4 billion or $6.29 per share, representing a free cash flow yield of 42%.

And with this, I leave over to you, again, Lars.

Thank you very much, Inger. Let's have a quick kind of look back at the Q1 '23 tanker market. So I already mentioned that it was typically seasonally strong. Normally, in the Q1 we'll kind of get sober after the Q4 hype and markets will fairly quickly start to deteriorate into February. What happened this time around was that we had the second peak in the market in March. And all segments from plan Frontline operates were performing very, very strong.

If you look at the chart at the bottom left here, you would find how elevated the average weighted market earnings are. The reason for this is, obviously, that it's not only VLCC and Suezmax, but it's also Aframax and LR2 being very, very strong. If you compare it to the period that we like to look back on, the period from 2003 until 2009 in the most recent times, we are actually quite high up on the earnings side and the markets are performing very, very well.

Chinese imports moved to all-time high, if you look at the chart at the bottom right. We also saw the highest number of VLCC shipments to China.

As I already said, Russian sanctions continue to yield inefficient trading patterns, but it is more about China as that situation seems to have found some sort of plateau. We did, however, have a very mild winter in the Northern Hemisphere, both in Q4 and Q1, and this muted oil demand to some extent.

If we then move on to Slide 8 or Page 8, and we did receive an OPEC cut or a voluntary cut. The volumes are indeed down for May. But what about ton miles? So Russia continued to export with the current oil price scenario -- oil price scenario we're in, the G7-Cap is not an obstacle to Russian oil exports. And we see Russia pump relentlessly. This is quite interesting now ahead of OPEC meeting on June 4.

Both OPEC+ plus and non-OPEC volumes were down in May. And -- but this is -- and we need to remember this is the seasonal slow point of the year with high refinery turnarounds.

Global oil demand is expected to rise by around 2 million barrels per day in the second half of 2023. And if we look at the whole picture, the global exports overall are indeed back to pre-COVID levels, albeit a little bit slow in May.

It's going to be very interesting to see what the U.S., Brazil and West Africa are able to do post summer, and those are the 3 candidates to have the ability to export more volume as we proceed into winter.

Let's then move to Slide 9. So vessel utilization is still high, but it's volatile. We'll see that on the bottom left-hand side, and this data is from Signal Ocean, where they basically record every fixture done on the various asset classes and measure the amount of days the vessels are laden.

And if you look at the chart at the bottom left, if you look at the VLCC, we are quite elevated compared to historical patterns. It has corrected down yes. It might be a bit muted right now. But the VLCC is probably still affected by the rally in Q1 and the mini rally we just observed a couple of weeks ago.

If you look at the Suezmaxes, they too are high relative to the previous years, but again, have corrected over the last couple of months. LR2s are back to trend, I'd say, although high in the trend. But I think the key takeaway from these 3 charts is to look at the overall direction of the utilization and also the ton-mile demand throughout the year. It's clearly that we are, firstly, at a low point in the cycle, and secondly, that the direction towards the end of the year, well, judging on history, should be very interesting.

Let's then move to Slide 10 and have a quick discussion on the orderbook. And I'm not going to go through all these charts in detail. I think they tell their own tale. It's quite incredible that by the end of this year, we'll have 111 VLCCs still operating in the market above 20 years of age. That amounts to 12.6% of the current trading fleet. The orderbook stands at 16 vessels yet to deliver, and that's 1.8% of the fleet.

If you look at the Suezmaxes, about 14% of the fleet will be above 20 years at this year-end and the order book stands at 18% after having grown actually quite a bit in Q1 and Q2. That amounts to 3% of the existing fleet.

LR2/Aframax, the global fleet is only 415 vessels, 25 of those are over 20 years. Here, it's actually more relevant to look at 15 years, but just to be kind of conservative, let's just look at the 20 years. That amounts to 6% of the existing fleet. The order book there is growing and its sizable. So it currently stands at 12.8% of the existing fleet.

If you look at overall for the segments that Frontline are exposed to and the asset classes that we are engaged in, about -- well, close to 12% of those fleets are above 20 years of age, and the order book stands at 4.6%. It's very, very difficult to see a scenario on the supply side that will rock kind of the tanker story, at least until well into 2026.

And then finally, to sum up. So Frontline delivered the highest Q1 profit since 2008, $193 million and a cash dividend of $0.70 per share. We continue to capture value on time charter and assets at a elevated point in the cycle. There are new orders being seen for Suezmax and LR2. The 2025 is now firmly sold out, and you can build in 2026 in China. In Korea, you probably need to look to 2027.

On VLCC only 2 orders rumored year-to-date, although more are being discussed. And 12% of the tanker fleet that we are exposed to is going to be above 20 years by the end of this year. The OPEC+ transactions have had a limited impact so far in May, and it looks like it's countered by ton-miles. And again, China will be the x-factor as we grind through the summer lull.

Lastly, I'd like to explain a little bit on the chart below. I just had a presentation for a group of students from Denmark, and basically explaining the long-term picture in oil and tankers.

And what you see in the blue line is oil demand, which tends to grow with population growth. And on the right-hand side, the yellow graph is annual fleet growth as we get into 2025. And although this is a bit of apples and pears, it just doesn't add up.

And with that, I would like to open up for questions.

(Operator Instructions) We are now taking the first question. And the first question is from Jon Chappell from Evercore ISI.

My first question is on strategy. The -- some interesting developments since the end of the quarter with the sale of the vessel and the 2 time charters on the LR2s. Are you at the point in the cycle now where you're looking at harvesting some of the older tonnage, which may not be core. I think there's 10 ships that are over 8 years old. And then also, are you at the point where you're looking to do more time charters maybe on the LR2s and keep the bigger crude ships available for spot?

Yes. kind of, first of all, when we look at the fleet and which vessels that could be a potential sales candidates, we look at efficiency primarily. And we are preparing for regulatory framework for CII and ETFs and whatnot. So it's basically with that in mind, we look at it. And obviously, the values that are achievable. As it's been so far, it's on the time charter side, we've seen elevated values on the Aframax/LR2. And we've seen a lot of kind of price action on the secondhand Suezmax side. So I think it's just natural.

But yes, we will kind of tap into the market when we see values that are kind of basically what we call it internally is when you can achieve unicorn numbers on certain asset classes for a sustained period of time, we basically just have to take it. The average cost -- the average cash breakeven on our Aframaxes/LR2s, we've kind of have to keep that in mind, when you can achieve $46,500 per day against a cash breakeven of $16,800, it's basically something you can't pass.

On the asset side, we're not publicly offering all our vessels. That's rarely a good strategy. But yes, for the less efficient vessels, we will be prone to take advantage if the opportunity is there.

If I could just follow up on both of those topics, which is kind of a more recent update. There seems to be a lot more skittishness on the OPEC cut, global recession, oil prices weak, et cetera. Although, you've laid out a framework where the next 2 years should remain quite robust. Have you seen any slowdown in transaction activity in the older vessels, which seem to be pretty parabolic over the last 12 months? And in the same token, have you seen any slowdown in the willingness for charters to lock in for that 2 to 3-year period?

I would lie if I didn't say yes. And as you know, you've been in this industry for a long time, we tend to be more focused on big deals when the stock market is strong rather than the opposite. And right now, we've had volatility. We also had some weakness in the segments. And that's basically it changes sentiment somewhat. So -- but I wouldn't say -- I see this as a kind of ebb and flow short-term kind of event. I don't foresee, unless we end up in a situation where global oil demand falls out of bed, I don't see that being sustainable. So it's very typical call for Q2 to be quite honest.

And the next question is from Amit Mehrotra from Deutsche Bank.

This is Chris Robertson on for Amit. Lars, I just wanted to touch on the LR2 fleet for a moment. How many of those are currently trading dirty at the Frontline level? But also do you have a general sense maybe across the fleet of how many LR2s are engaged in a dirty trade at the moment?

Well, thank you, Chris. That's a very good question, because the switch between clean and dirt has become increasingly effective over the last half year. So it's actually very difficult to follow. Not -- obviously, not on our own fleet, I'm quite comfortable, but with what happens kind of out there in the world. Just to explain to you, you can turn around a dirty vessel into clean in the Middle East fairly quickly by doing a couple of short trips with condensate.

And at least up till now, the market has been willing to pay -- price hefty premium for that ability, so basically motivating the owners to do exactly that. But at least on our own of the vessels that we still control, that are not on time charter out, so that would be 14. There are 4.

Okay. Got it. Switching gears here. Just looking at shipyard capacity, you mentioned the limitations, the Chinese yards maybe for 2025, while Korean 2026. But I guess, do you have a sense of how much mothball capacity could come back online over the next few years? And is the limitation out there right now more of a labor issue? Or is it more of the yards themselves, the real estate aspect of it?

I think we have seen new kids on the block that we've seen. I wouldn't call them mothballed, but yards in China with a very, very much reduced capacity that are kind of getting revitalized and willing to take orders. This is, obviously, a risky exercise. But if you're an owner to utilize these yards, but there are a few.

I think it's difficult to quantify it. But if you look at some of these new kids, you can't get a ship before '25 or you can't even get it before '26 and that's basically because it takes time to get these yards up and running.

I think on the labor side, I don't -- it doesn't seem like China has much of a problem. In Japan and Korea, that's definitively a factor. Also in Korea, what we see is that, although a tanker is a fairly complicated ship, they tend to focus on kind of more labor intensive or more technical -- technology intensive ship types. So they're actually not really -- well, they're offering, but they are pricing themselves out of the equation to (inaudible). And that's '27. But with regards to kind of the overall potential volume there, it's very difficult to gauge, and there is not a potential volume until -- well, it's starting in 2026.

Okay. Yes, that's great color. Last question for me. This just relates to, I guess, your expectations around the OPEC meeting coming up here in a few days. The Brent prices are trending well below $80 a barrel, which we kind of see as a threshold price. Some market commentary out there around the speculators in oil pricing. Is your fear that there could be additional cuts on the table going into this meeting? Or how are you thinking about that?

Well, I can't really do much more than reading basically what you guys read in the press. I must say, however, that when you do a cut with effect in May, to then suddenly start an additional cuts in June, is kind of -- it looks to be strange. Because you need this -- and it's also at a low point in the demand cycle, so I guess you need to have a little bit of patience when you do such a big move coming -- being an OPEC strategist.

I think what's disturbing the situation is that Russia, although claiming to adhere to the voluntary cuts strategy, physically, they are obviously not doing that. So it's -- yes, it's going to be an exciting one. It's -- I mean, it's almost impossible to -- yes, to give a qualified kind of guess. What I have to -- what I will say, though, that any kind of demand increase since this is a voluntary cut, it's going to be reversed very quickly once demand kind of shows its hump.

Yes. I think that's fair. It seems more like a compliance enforcement issue in the short term and then they can ramp back on over time, as you said.

And the next question from Omar Nokta from Jefferies.

I just wanted to just check back on the newbuilding discussion. Clearly, I think that Slide 11, very simple chart, but probably just says it all in terms of oil consumption growth and the fleet growth. I remember, Lars, on the last call, you had mentioned -- I think it was the last one you had mentioned newbuildings weren't that interesting to Frontline. Just wanted to see kind of if you have an update there. Obviously, you just highlighted in your comments about how we're looking at firmly into '26 perhaps '27 to take delivery.

But just in terms of how you're seeing the opportunity to get into the newbuilding market, I guess, one, is that something you're perhaps revisiting? And then 2, how would you maybe compare the opportunities when it comes to maybe placing VLCC orders versus Suezmaxes and LR2s?

Yes. Omar, it's a good question, but regretfully -- not regretfully, I think the answer is the same. There are 3 things that we need to consider when we look at the newbuilding market. Number one is, obviously, what technology we're going to go for, but say you were looking for a conventional then it's the delivery time until we can actually get the cash flow from that investment.

And then lastly, it's the price of the asset itself. So -- and basically, what we're seeing is, I hear arguments that inflation has kind of yet to hit asset prices. Because if you look at asset prices adjusted for inflation kind of long dated, a 2008-2009 VLCC equivalent would be $70 million today.

So -- but in order for that to be true, you need inflation also to hit the rates and so forth. And then we need like the long-term time charter market to be far higher than what we've seen in kind of glimpses of in the last couple of quarters. So I think kind of with that in mind, it just doesn't look very interesting to Frontline.

I also note that some of the orders we're seeing is either against long-term charter commitments, which is not something from plan with the gauge to our proposition to our shareholders is to give spot exposure.

Secondly, the ones that are not connected to a long-term charter team, at least to me, are somewhat opportunistic. So basically, you pay a 20% or 25% down payment on a call option for a market. That could be quite interesting in, say, 2026. So -- and we are not in that business either. So this is why we -- obviously, we look at it, we observe it, but we're not there to press the button.

Makes sense, Lars. I guess as we think about that, clearly, you do need inflation in terms of the impact on charter rates to really induce some ordering. How do you then think about -- I mean, obviously, Frontline, you guys have been very acquisitive over the years. But in general, when you think about deploying capital, obviously, you have a capital allocation policy of paying out meaningful dividend.

But in terms of where maybe there's an opportunity or the value set or whatnot. Is it newbuildings clearly off the table, how do you then think about whether doing stuff in the sale and purchase market? Is there opportunities in the younger tonnage? Are there opportunities maybe in the older tonnage where people have maybe ignored because of the transition here towards the greener future. Any kind of thoughts about where there could be an opportunity to plug some assets on the cheap, whether age range or perhaps vessel class type?

Yes. No, I think kind of vessel class side, we would be kind of studying closely any LR2, Afra, Suezmax or VLCC that is below 5 years, but -- or at 5 or below. But if you look at the visibility on the offering in that kind of portion of the market, it is virtually zero. So it's -- a lot of them have done VLCCs, you can say that have been delivered over the last few years are actually on time charters and even relet again to operators or traders or oil majors.

So these guys are not really sale candidates. And so there is basically a vacuum for vessels in that kind of age group that would be interesting to us. So I think that's basically the answer. And with that in mind, we'd rather sit tight and churn out the best return we can from the assets we hold until we make kind of an investment decision.

Sure. Yes, it makes sense. You already have that critical mass. Maybe just one, if I could, obviously very sensitive. But just wanted to check in and see, since you're -- since you're having this call. Any public comments that you're make -- you're willing to make in terms of the situation at Euronav with the shift in management and the Board.

And then also, I know it's probably more sensitive and not necessarily directly related to the Frontline, but any comments to make about the back and forth with International Seaways yesterday?

Yes. No, I understand the question, but it's not really for me to comment to be quite honest. I'm an observer just like you are on both Euronav situation, while we are shareholders, but that's basically as far as it goes. And International Seaways is the same. It's -- I read what you read, and I have limited visibility.

Good. That's good enough.

And the next question is from Chris Tsung from Webber Research.

I wanted to just ask, like in your deck you highlighted Russian sanctions led to the inefficient trading patterns, which has obviously been a tailwind for a lot of tanker owners. Do you believe these inefficiencies could be worked out? Or are they more structural in nature until the war is over and until sanctions are removed?

Well, what I'll say is -- and I was contemplating adding that to this deck, but I wanted to do this further checking. But with basically all the -- whatever that's called. Basically, what I'm observing or what we are observing is that if you look at the Suezmax and Aframax fleet and you look at how many are calling on Russia, if you do that study for the last 3 months. You'll find that approximately 30% of the Afra and 30% of the Suezmax fleet is still at one point calling on Russia.

So this suggests that kind of the interconnection between the grey fleet, if you call it that, and the white fleet, if we use that word, is actually very, very high. So it means that they are obviously inefficiencies, but maybe not as pronounced as one would expect. Because it's not so that we've lost 30% of the ships in the -- well, non-Russian trading market.

So I think it is a bit more balanced picture. What is true, though, is that a vessel of less quality and kind of outside of the age restrictions and so forth or may be operated by a company that has a red flag attached to it, they will obviously not be able to access the compliant market. But it seems like the interconnectivity is actually quite efficient, as you would expect in the tanker market. But this has actually some positives to it, because it actually means that the risk on -- well, it's wrong to call the risk. But whenever this situation reverses, maybe the negative impact on the ton miles won't be that kind of grave.

I see. And maybe just one follow-up on the arbitration. I just wanted to ask, are there any notable milestones that we should be on the lookout for from now to January 2024?

No, not at the moment.

And the next question is from Sherif Elmaghrabi from BTIG.

First, I want to do a quick follow-up on an earlier question about the clean and dirty LR2s. How long does it take to switch an LR2 back to the clean trade? And what are the costs associated with doing so?

It obviously depends a bit on how you do it. But if you do 3 very short condensate calls across AG-East, you can be partially cleaned up within 21 days. And then you will just do a manual clean to get the remaining whatever is left. So add a few more days. So yes, somewhere between -- so say, 25 days.

And then given the limited fleet growth you highlighted on Slide 10, if demand holds up, could ships over 20 years see retrofits to extend their life or maybe slip into the Russian trade? Or are there other factors that are going to push them to the scrapyard.

No. I think you're hitting the nail there. Obviously, in the more OPEC tanker market, there is a life that's more or less past 20 years of age. But I have to say, though, that what we've seen over the last month or so is that certain -- kind of in China, you have the Shandong province, which is home to a lot of independent refiners in China. And so it's a huge discharge port for all qualities of crude. And the fact that they have started to clamp down on some of the older kind of less maintained vessels is actually a positive sign that people are starting to have a proper look at this.

Also, if you probably read about this Pablo, I think it was called an Aframax sitting outside Malaysia or Singapore that blew up. I think this is kind of raising the attention from regulators on the risks in this market. So -- but for a well-approved tanker and there are probably many and well maintained, there is no reason why it shouldn't be extended.

But this, again, would kind of common scrutiny with the vetting of the various kind of -- vetting departments in the charter -- on the charter side. What we basically start assuming in our kind of fleet modeling is that a ship that passes 17.5 years, will lose about 25% of its efficiency. And if you go beyond 20 years, you lose 50% of your efficiency. So utilization-wise, or your ability to kind of service the oil market falls by 25% and 50%.

There are no further questions at the moment. (Operator Instructions) There are no further questions. I will hand back the conference over to management for closing remarks. Please.

Well, thank you very much for dialing in. It's been a pleasure to report yet another good quarter. Hopefully, we'll continue to do that and look forward to what's to come. Thank you.

And that concludes the conference for today. Thank you for participating. You can all disconnect.