Frontline plc.

gentlemen thank you for standing by welcome to today's quarter to 2020 frontline limited earnings conference call I now hand you over to your first speaker Robert McLeod please go ahead thank you thank you very much good morning and good afternoon everyone thank you very much for dialing into our second quarter earnings call

First, I would like to express gratitude towards our shore staff and crew members for their extraordinary efforts and dedication, which clearly are defining factors to our strong results. Our markets are very volatile, but the volatility seen in the last 12 months have been extreme and serves as a reminder of how little it takes for the tanking market to rally. Frontlines performance in the first half of 2020 was the strongest since 2008, and we've also made solid bookings for the third quarter. Despite the recent fall in rates, 2020 will be a very good year for FrontBank. Let's start with slide three and have a quick look at the highlights from the second quarter. Net income of $200 million, just over a dollar per share, certainly a solid quarter. Adjusted for non-cash items, the net income was 206. We declare a 50 cent dividend. The last dividend was 70 cents for Q1 2020. We opted to repay 60 million on our HEMN facility in the quarter, which is the main reason for the reduced dividend. Inga has done some great work in financing. She will take us through that later on the call. Two new buildings were delivered in the quarter, one Suez Max and one VLCC, leaving us with only four ice-classed LR2s on order, and they deliver next year. VLCCs made £75,800 in Q2, and we have booked 76% of Q3 at around £61,000. Sears Max has made $51,100 in Q2, and we've booked 77% of Q3 at $29.5. LR2 has made just shy of $37,000, and we have booked two-thirds of Q3 at $14.5. These Q3 rates do not include the long-term time charters. And then before moving on to the market, I will hand the call over to Inga to take us through the financials.

Thank you, Robert. And good morning and good afternoon, ladies and gentlemen. Then I think we should turn to slide four and look at the income statement or the highlights. Frontline achieved total operating revenues, debt of voyage expenses of $301 million and adjusted EBITDA of $259 million. in the second quarter of 2020. And we report the net income of $200 million, approximately, and $1.01 per share. And adjusted net income is $206 million, or $1.04 per share in the quarter. The adjustments this quarter was in total 6.4 million net. and they consisted of a 5.9 million loss on derivatives, a 0.9 million unrealized gain on marketable securities, a 2.7 million share of losses on associated companies, and a 1.3 million amortization of acquired time charters. The adjusted net income increased by 27 million This quarter, and it was mainly driven by an increase in our time-structured equivalent earnings due to the higher reported TCE rates on our real-to-seas and LR2 tankers in the second quarter, along with a gain of $12.4 million as a result of the sale of one real-to-sea previously reported investment in finance . Let us then take a look at the balance sheet highlights. The main happenings in the second quarter, which affects the balance sheet, were that we took delivery of the Zeus Max Anki front cruiser, and also we took delivery of front dynamic, and we drew down depth on these vessels. As Robert mentioned, we repaid our senior unsecured facility with $60 million. We entered into two new loan facilities to refinance two loan facilities with total balloon payments of $349 million, which were due in December 2020 and in March 2021 on terms in line with front lines of their loan facilities. We then also paid $138 million in dividends, and we earned net income of $199.7 million. At the end of the quarter, Trondheim has $462 million in cash and cash equivalents, including undrawn amounts under our senior unsecured loan facility, multiple securities, and minimum cash requirements. The current portion of long-term debt includes $240 million debt maturity of the $466.5 million facility during April 2021, and $80.3 million debt maturity of the $109.2 million facility in June 2021, which we both expect to refinance. Our remaining New Building CapEx requirements at the end of the quarter was $161.1 million, relates to the four Li-2 tankers, where two of them are expected to be delivered in January 2021 and in February 2021, and two are expected to be delivered in August 2021. In this connection, Frontline has obtained a financing commitment for a loan facility in an amount of up to $133.7 million from Sexim and Cynosaur to partially finance these four LRQ tankers. This facility will have a tenure of 12 years. It will carry an interest rate of LIBOR plus a margin in line with other loan facilities. And it will have an amortization profile of 17 years. And the facility is subject to final documentation. Let's then take a closer look at the next slide on cash break-even rates and effects, slide six. We estimate average cash cost break-even rates for the remainder of 2020 of $22,600 per day for VFCs, $18,900 per day for the Zeusmax tankers, and $15,700 per day for the LR2 tankers. And the fleet average estimate is about $19,100 per day. These are the rates, the all-in daily rates that our vessels must earn to cover the budgeted operating cost and prior dock, estimated interest expense, TC and bearable tire, installments on loans, and DNA expenses. In the graph on the right-hand side of this slide, we have shown, as usual, the incremental cash flow after debt service per year and per share, assuming $10,000, $20,000, $30,000, or $40,000 per day achieved in excess of our cash break-even rates, respectively. And the numbers, they include vessels on time chartered out, and we are looking at the period of 365 days from July 1, 2020. As an example, with a fleet average cash cost break-even rate of $19,100 per day, and assuming that we have $30,000 on top of the average fleet TCE rate, would be then $49,100. And sometimes we then generate the cash flow per share at the debt service of $3.49. With this, I leave the word to Robert again.

Thank you very much, Lina. Let's have a look at the Q2 tech market on slide seven. So the first six months of 2020 brought a dramatic crude oil demand correction, the likes of which we've never seen. The demand shock brought on by COVID-19 was so large and sudden that global commercial inventories quickly surged to record levels, effectively utilizing all available land-based capacity. At the same time, the crude oil market went into contango, encouraging traders to store oil on tankers and driving demand for short-term charters of our ships. This in turn resulted in exceptionally strong tanker rates, which are reflected in our results for the second quarter of 2020. The freight market has since declined to lower levels, And although the signs of recovery are evident as economies continue to reopen, the recovery in demand is unlikely to be linear and the extent and duration of the impact of COVID-19 is difficult to predict. COVID-19 related challenges have been extensive through the industry. These include logistics around crew changes, delayed discharge and diminished capacity at shipyards for dry docks and surveys. These are all factors that positively impact effective fleet supply. There is significant month-to-month volatility in the demand forecast, as shown on the chart at the bottom of the slide. Let's move to slide eight, please, and have a look at the global fleet capacity growth, which is slowing. The vessel supply side of the equation continues to improve, which is very positive. The order book as a percent of the total fleet is at the lowest level since 1997. At the same time, the average age of the VOC fleet as of the end of the second quarter of 2020 is at the highest level since September 2002. By the end of next year, there will be 65 vessels older than 20 years and an additional 85 older than 17 and a half. The effect of slowing fleet supply growth will be pushed out to 2021 or 2022, but it should be material and lead to a sustained period of higher rates. We do like the current situation where new vessels enter the market at a controlled pace. The order book continues to shrink and retirement of vessels is inevitable. Present markets and a bit of outlook. The demand shock is likely behind us, but volatility can be expected. The present trade market remains under pressure. Crude production is down almost 10% since January, and the lost volume reduces the volume that is normally shipped, meaning that the cargo counts are down by as much as 20 to 25%. On the positive side, inventories are being drawn, a short-term pain, but possibly long-term gain. Forecasts suggest that a significant portion of the OPEC cut could return in the coming months, and combined with the northern hemisphere moving toward winter, this gives grounds to believe in a stronger freight market. So, in conclusion, the large moves in tanker rates during the last 12 months illustrates the tight balance in the market and the fact that it does not take much for the tanker market to rally. Looking ahead to 2021 and beyond, recovering demand for crude oil transportation will coincide with rapidly declining fleet growth, which supports our long-term, highly constructive market outlook. So, for Frontline, we enjoy the youngest fleet and lowest break-even levels in the history of our company. Frontrun's earnings potential is substantial, $23 million annualized for every $1,000 above 18.7. So we are very well positioned. With that, let's turn over to questions, please.

Thank you, ladies and gentlemen. We'll now begin the question and answer session. As a reminder, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. If you wish to cancel your requests, please press the hash key. Once again, for questions, please press star 1. And now for your first question. It's coming from the line of Randy Givens from Jefferies. Please go ahead. Your line is now open.

Howdy, Robert Ninger. How are you? Great. Well, yeah, I guess first question is around the dividend, right? So in the fourth quarter of 19, the first quarter of 20, you pay dividends above, I guess, 70% of net income. Now for the second quarter, you reduce this to 50%. I think you mentioned part of it's because of the $60 million pay down back in April on that Hemant facility. So I guess, Is that the entire reason for it, or are you kind of bridging to a weaker dividend next quarter? And then should we expect at least 50% of net income going forward?

That is the entire reason for it. So if you add that up top, I guess you would get to $0.80 dividend, which I guess is probably what you assumed.

If you include the $60 million that I was referring to?

So that's the entire reason for that, the dividend is 50%.

Okay, and then going forward, is 50% of net income a fair assumption?

Going forward, it's the standard normal that we have in a way. It's not changed at all in a way. We just, this quarter, opted to repay the facility with 30 million, which is 60 million, I mean, which is 30 cents per share. That's what happened this quarter.

Okay. And about the Hemet facility, I believe that was done back in April, right? Do you expect to repay the remainder of that here in the third quarter?

No, we don't know yet. We haven't really decided what to do with the remaining part of it in a way. It might be that we can extend the facility. It might be that it will be paid. We will have to see.

Okay. And then I guess last question around your scrubbers. You know, what's the status of those scrubber installations? I know you postponed a few. I think it was four. Any expectations on when those will be installed or kind of your plans going forward on remaining scrubbers?

So, Andy, we've got a couple being installed as we speak, but the four that we postponed, we've not done anything further with. So what we'll do is that when these ships that were supposed to have these scrubbers installed, when they drylock over the next coming quarters, then we will prepare these ships. So all the underwater work will be done, which is a small cost. and then the actual scrubbers can be fitted or retrofitted, and then they are now stored at our production facilities in Indonesia. So we'll see here. The spread is improving a little bit, but we have the optionality, and for the time being, they will remain in storage.

Got it. All right, well, I'll turn it over. Thanks again.

Thank you.

Thank you. Your next question comes from the line of John Chappelle from Evercore. Please go ahead. Your line is now open.

Thank you. Good afternoon, Inger and Robert. A couple quick clarification questions first. I think we're always here where the quarter-to-date bookings look very elevated, basically because of the load-to-discharge accounting. I know you guys really try to flesh out the differences here, so maybe a way to ask it is, As you look at the rest of the quarter, the other 24%, let's say for the VLCCs, is there any extreme or out of the ordinary uncontracted or contracted vessels where, let's call it that stub part of the rest of the quarter, would be higher or lower than the market average is?

So it all depends, obviously, whether we fix the loading dates then end of September or early October. That's what's going to determine. But there's nothing – to answer the second part of your question, there's nothing specific. There's nothing special. But what I would say about the earnings, it's important here to look at earnings over several quarters. So if I was to – So if you ask me how is front and down on VLCCs so far this year, then my take is that we had a very good Q1. We outperformed our peers. We're giving some of that back in Q2, as you see from the numbers. And my guess is that we're on a pretty good rate level and a good percentage here for Q3. So I would say outperform what Q1 we know, slightly below in Q2, and I think we're looking quite good for Q3. Okay.

And then just another clarification, Robert. I think you said that the long-term contracts are not included in the quarter-to-date rates. In the press release, it says these short-term charters are included in the forecast. So what's between the long-term and the short-term? I guess you have two that are nine-and-a-half months and one that's 12 months, and then you have four that are just below six months. So just to be clear, the ones that are just below six months, that is included in the quarter to date, and then the longer ones are not?

Yeah, correct. So basically, the six-month charters, which are basically six months plus minus one, so it's a minimum period of five months. So those deals that we consider spot in the numbers, and anything above, which then starts in the eight-month deals, and we have a couple of one-year deals, and we've got the five-year maxes on the three-year deals. So anything above six months, that is then considered longer-term and not included.

Got it. And then also I noticed in the disclosures that you have seven chips chartered to affiliates of Hem and I'm assuming those are the seven that you did in the second quarter. Just curious, is there any options associated with those or were those kind of strict on the timing?

There are no options attached.

Okay. Final question, Robert, is I think you've laid out a very balanced second half of the year outlook for the market and clearly given the start to third quarter, you will be cash flow positive. And Inger's kind of laid out the dividend strategy. When you think about the cash going forward, do you think this period of, let's call it choppiness or uncertainty, provides you with an opportunity to add tonnage? Or do you think that you spend this next six months continuing to deliver the balance sheet to position yourself for the favorable 2021-22 outlook that you spoke of?

We're pretty happy with the size. We're very happy with the age. As I said in the intro, the company's in a very good shape. I don't think we need to do anything. If opportunities come up, for example, like something like the Trafigura deal we did, which we quite liked, then maybe. But the base case is to enjoy what we have and then harvest from that through having hopefully what is the best operation.

Great. Thanks so much, Robert.

Thanks.

Thank you. Your next question comes from the line of Chris Chung from Weber Research. Please go ahead. Your line is now open.

Good afternoon, Robert and Inger. How are you?

Good afternoon. We're fine. Thanks. What about you?

Good. Good. Thanks. I kind of wanted to just touch on the cash break-even levels again. On slide six, I know John asked this earlier too, but I guess I'm asking it from a slightly different angle. So on slide six, the cash break-even levels of like 19,000 on a fleet average. In the press release, it says that the charter coverage are not included in the break-even levels. So I was wondering, would that mean the break-even levels excluding the time charters, would show a slightly higher break-even for the fleet?

No. I mean, the cash break-even rates that we disclose are the total cost that the fleet has divided by the different number of days for each segment and then shown on a gross basis. If you have contract coverage above the break-even rates, that would obviously take down the cash break-even rates for the spot vessels. So it will not increase them.

Right, right, right. So like if the contract coverage takes it down, if we were to exclude it, would that bring it up? And you're saying that the answer is no?

Okay.

All right. I just wanted to clarify. Thanks. And I kind of wanted to ask about your investment in Clean Marine. I guess when the investment was made back in October of 19, I guess, it seemed like it would be a smart hedge for IMO 2020 and scrubbers in general. And fast forward, you know, 10, 11 months now, COVID, OPEC, and market vol. What are your plans for this investment going forward?

We'll see how this develops. We own about 17% and the company has a production facility which is owned in Indonesia. It's got its stocks and so forth. Our investment is now, we only have a very small loan to the company, so we don't really have any risk there. We don't see the need to put any money into the company necessarily. And I think there will be some positive news at some point going down the road. It's not turning out to be as lucrative as what we were hoping, of course, but the downside was so the risk was always controlled and limited.

Right, I see. Okay, it makes sense. And just last question, just given the news about the voluntary cuts from several key OPEC members, the congestion that's happening around Chinese ports and Hurricane Laura in the US Gulf. I'm just curious in terms of how are you guys choosing to position your fleet in the near term?

What we're doing now is that it's an extremely difficult market to predict. And that is the obvious thing to say here, because I've been doing this for a few years, and my sort of gut feel is that we are going towards a more normal market. We're well, well down on volumes, as we know. It looks from the last stats that we're seeing, then the world production is It's 3 to 4 million barrels lower than the consumption, which is obviously hurting freight, but it could build a better case as we move towards winter. And Q4 is normally a strong quarter. So my, with no sort of high conviction, I've got a feel that things will get better as we move towards the end of the year. And what we're doing with the fleet is that... We are trying to reposition in the Suez Maxis in the Atlantic Basin. And if we have the choice between a long voyage at current rates or a shorter one, we opt for the shorter one. There are some potential triggers out there. So we're watching it all very closely and we've got a feel that things might get better. At the same time, the volumes remain low, so it all depends on the cargo count. What we've seen in the Middle East over the summer, where basically one out of three cargoes has disappeared, has obviously dented the earnings, but hopefully the demand will steadily come back, and there could be some better times ahead. But I'm very cautious. I'm not going to put on the bullish hat just yet.

All right, makes sense. Thanks, guys. That's it for me.

Thank you. Your next question comes from the line of Greg Lewis from BTIG. Please go ahead. The line is now open.

Howdy, Greg.

Excuse me, Mr. Greg Lewis, your line is now open. Please check your line if you're on mute. Thank you. Okay, let's just take the next question. It's coming from the line of Jay Mintz-Meyer from Value Investors. Please go ahead. Your line is now open.

Thanks for taking my questions.

Hi, Jay. How are you doing?

Doing excellent. Thanks. So first of all, congrats on a good quarter. As we're looking towards the shifting interest rate environment, I know you've done a few swaps and hedges in the past on some of your debt profiles. I know you also have a new debt profile coming up with the new builds. Is there any plans to expand or extend those interest rate swaps? Is any of that into works, or are you going to maintain some floating exposure?

We do have entered into quite a lot of interest rate hedges now recently, so I guess... At the moment, we have no further plans for even further interest rate hedges, but we have $550 million of hedges now at the moment, and also an additional portion of about $100 million, which is very soon going to mature. But at the moment, I think we are happy with that.

Okay, makes sense. Yeah, I was tracking you had about one-third or so hedge. I was wondering if those plans had changed. You know, John asked earlier about kind of your cash plans and if you looked at maybe expanding or new builds or second hands or anything like that. Sort of a related question. Frontline carries a nice premium to some of your tanker peers. I think Frontline is probably one of the only tanker companies that carries what you could say is like a respectable valuation in today's market. Is there any opportunity out there for Frontline to become an equity consolidator? I know there's some peers in the Norwegian market, for example. We won't name names today, but they're trading at a significant discount to NAV. Is there some opportunity for consolidation there, or is that sort of off the table?

No, there are opportunities, and as you say, we have the pricing. We're well below where the premium we normally are at, and that premium is there for the obvious reasons. We do have a main shareholder who remains hugely supportive, and that will remain so. But in terms of consolidation, yes, we are a potential consolidator, but we are happy with what we have now. we will keep tracking opportunities. So let's see what comes up and what makes sense. But with the size we already have, then our earning potential is already there and which you can clearly see from the Q2 numbers.

Excellent, excellent. You'll have to forgive me for this one, Robert, the parting question here. But we talked back in April and you had kind of a fun bet gamble about if rates would come back down, unsurprisingly, that you'd be walking across Norway So I just wanted to check in on that and see when the trip's planned. And maybe it's after COVID we can get a group together.

I tell you what, you would probably enjoy the walk. Of course, it's a beautiful walk as long as you start from the east side and then walk towards my hometown, then you're going the right way. But, Jay, I've actually settled the bet, so it ended up being a dinner. But I must say, the confidence I had in the bet was high, and it did come very, very close. But fortunately enough, I got away with it.

Excellent to hear. Thanks again, Robert. Have a good one.

Cheers.

Thank you. Your next question comes from the line of Lewis McGiven, a private investor. Please go ahead. Your line is now open.

Hello, Robert and Inger. Hey, I'm calling from Pittsburgh, which is the home of the steel industry that a good Scotsman named Andrew Carnegie had made famous. And I was curious, what effect does scrap steel rates have on the retirement of vessels?

Sorry, did you say scrap steel price?

Well, the decision to retire vessels, I know it has to do with the five-year intervals and so forth and the market of, you know. But do high or lower scrap prices affect your decisions in the industry to retire ships? I just wondered if the rate of scrap steel would go up, if that would result in more retirements, which would be beneficial for your industry. Okay.

Interesting question. And the fact is that yes, it does. And to give you an example, so our largest ship, so by the way, our oldest ship now is 2009. So we don't have really any candidates. But if you look at the market, as I mentioned in the introduction, there are a growing number of older ships. And looking at the last 18 months, then the value, the steel value, has fluctuated between $11 million and $18 million. So now it's at the lower end of that scale. So it's part of the decision-making here, whether to scrap or not, is obviously then linked to this price. It is a good portion of the value of the contract.

Well, maybe you could talk some of these shipbuilders into offering bonuses to these scrappers to tie in a sale of a new vessel to scrapping a ship.

Yeah, that could be one way of doing it. Or combine it with making a pool of all the old ships and get the balance back quicker that way.

OK, well, thanks.

We have no further questions coming from the phone lines, but just a reminder, everyone, if you wish to ask a question, please press star one. Please continue.

Okay, now I think we'll round off. So I'd just like to thank everyone for calling in, and also to my colleagues and everyone at Frontline, thank you very much for all your efforts.

Ladies and gentlemen, did this include our conference call for today? Thank you for participating. You may all disconnect.