Frontline plc.

Thank you all for coming by and welcome to today's Q2 2021 Frontline Limited Earnings Conference Call. Our presentation for today will be followed by a question and answer session. To ask a question, offer the audio kindly for a star one on your telephone keypad. Use the advice calls being recorded and I would now like to hand the call over to your speaker, Lars Warstad, thank you.

Thank you, good morning and good afternoon. Welcome to Frontline's second quarter earnings call. Different from the first quarter this year, second quarter ended up being quite a busy one. As many of you have asked quite a few times now, will Frontline try and exploit the weakness in this market to grow further? And I guess we have answered that now during Q2. We are in some way a three-legged shipping platform with VLCCs, Truesmax and LR2s. Our VLCC leg has been a bit shorter than the others. Now we're mending that somewhat. Parts of the challenges in the market this quarter have been the continuous flare-ups of COVID infections in various locations around the world. Vaccination has come far in the western parts, but other parts of the globe are not so fortunate. We remain vigilant towards our seafarers' well-being and are happy to share that our efforts to arrange vaccines for them is going well. In addition, I'd like to mention, we're very grateful certain port states are being extremely generous, offering vaccines to seafarers literally for free. So let's move on and have a look at the highlights on slide three. Q221 performance reflects the challenges the market faced this quarter. It is, however, a further proof that our business model, efficient operations, modern fleet, and a very hard-working chartering team manages to outperform the key benchmarks. To put this in perspective, an average weighted earnings index I checked recently for all tankers came in just over $6,000 per day in Q221, the lowest print in more than 20 years. In order to outperform this, the owner, and in particular the owner's charters, must fight for every cent and know their position well to be able to play their hands best possible. Regretfully, this is not always the case as far as we can observe. Anyway, at Frontline, we do the hard work, and managed to achieve $15,000 per day on our VLC-C fleet, $11,000 per day on our SUSEMAX fleet, and $10,600 per day on our LR2 slash APROMAX fleet in the second quarter of this year. So far in Q3, we have booked 70% of our VLC-C dates at $14,000 per day, 64% of our SUSEMAX dates at $9,800 per day, and 63% of our LR2 slash Afromax days at $11,800 per day. All numbers in this table are on the low to discharge basis. Before Inger takes you through the financial highlights, let me quickly comment on the acquisitions in the quarter. During Q2, we acquired through resale. six latest generation EcoType VLCs currently under construction at Hyundai in Korea. In addition, we acquired two modern EcoType VLCs built in 2019 at the same shipyard. We have for a period of time followed the VLC asset market closely to look for opportunities. As we didn't expect an imminent recovery in tanker markets, delivery was a key bargaining chip. They're rallying steel prices and high activity around us for non-tanker assets, pushing potentially delivery slots way forward, added to our conviction in making these investments. I'll now let Inger take you through the financial highlights.

Okay. Thanks, Lars, and good morning and good afternoon, ladies and gentlemen. Following the acquisition of the VFC, as Lars mentioned, we have progressed on the loan financing. And in August this year, we obtained financing commitments subject to fund documentation for three senior secure terminal facilities. They are in a total amount of just $247 million, and they will partially finance the acquisition of the two VSCs built in 2019, and two of the six will see new building contracts. All facilities will finance 65% of market value. They will carry an interest rate of Leiber plus a margin of 170 basis points. And they will have an amortization profile of 20 years, counting from delivery date from the ARC. We intend to establish long-term financing for the remaining four resale EV2C new building contracts closer to the delivery of the vessels. And then I think we should move to slide four and look at the income statement. Trondheim achieved a total operating revenues debt of various expenses of $18 million and adjusted EBITDA of $28 million in this quarter. And we report a net loss of $26.76 million. or 13 cents per share, and adjusted net loss of 23.2 million, or 12 cents per share. The adjustments this quarter consist of a 4.7 million loss on derivatives, a 0.8 million gain on marketable securities, and a 1.3 million amortization of acquired time charters, and lastly, a 0.8 million share of losses of associated companies. The adjusted net loss in the second quarter decreased 32 million compared with the first quarter. And the decrease was driven by a decrease in our time-sharded equivalent earnings due to the lower TCE rates, as Lars mentioned, an increase in ship operating expenses of 9.3 million, mainly as a result of higher drive docking costs, offset by gain on flexible securities sold in the quarter of $4 million. Let us then look at balance sheets on slide 5. The total balance sheet numbers have increased with 54 million in this quarter. The balance sheet movements in the quarter are primarily related to taking delivery of the LR2 tanker from future and the acquisition of 65 new building contracts in addition to all their debt repayments and depreciation. As of June 30. Frontline has $257 million in cash and cash equivalents, including amounts under our senior unsecured close facility, multiple securities and minimum cash requirements. Then let us take a closer look at cash breakeven rates on slide six. We estimate average cash cost breakeven rates for the remainder of 2021. of approximately $2,800 per day for the VCCs, $7,500 per day for the Zeus tankers, and $15,400 per day for the LR2 tankers. And the fleet average estimate is about $18,000 per day. These rates are the all-in daily rates that our vessels must earn to cover the budgeted operating costs and dry drops. estimated interest expenses , installments on loans, and G&A expenses. The highly attractive terms on the octade financing commitment on four of the acquired user seats, which I mentioned earlier, decreases the daily cashback even rates with approximately 1,400 vessels per day compared to existing financing terms of similar vessels. In the quarter, we recorded OPEX expenses of $7,600 per day for VCCs, $8,500 per day for SUSMACs, and $9,000 per day for LR2. We dried up three SUSMAC tankers in this quarter, sorry, and four LR2 tankers, and we expect to dry up one VCC and two LR2 tankers in the third quarter, and none in the fourth quarter. The graph on the right-hand side of this slide shows that if we assume $30,000 on top of the daily fleet average cash cost within rate of $18,000, Frontline will generate a cash flow per share at the debt service cost of $3.51 per year. And the cash generation potential will increase after acquisition of the ATC. With this, I leave the word to Lars again.

Thank you, Inger. So let's look at slide 7 and recap the second quarter tanking market. So global oil consumption averaged 96.7 million barrels per day in Q221. That's up 2.1 million barrels per day from Q121. Production averaged 94.9 million barrels per day. Hence, the world continued to draw about 1.8 million barrels per day. from inventories. Just to put that in perspective, when you draw from inventories, you're not really using that much transportation. And as a rule of thumb on tanker utilization, you need about 30 LCC equivalents in order to transport one million barrels of oil per day. So this kind of draw represents a loss of 30 to 35 LCC equivalents in demand. The tanker rate gradually slipped throughout the quarter, and volatility faded. OPEC Plus did increase supply by more than 1 million barrels per day during Q2 2021, but key OPEC producers also went into higher demand periods, typically in the Middle East, where summer hits, and you start to basically burn oil or fuel for electricity generation. U.S. and Brazil added another 900,000 barrels per day. Most of the Brazilian additions came out as exports, but for U.S., they're also seeing a very strong growth in demand, hence less barrels were exported out of the U.S. Gulf. Demand rose sharply in North America and Greater Europe, whilst Asia, that led the recovery, saw far more muted development in the second quarter of the year. As I illustrate in the two charts below, where I basically isolated North America, Europe and Eurasia, we see that during Q2, demand there rose sharply, whilst the rest of the world, and in particular Asia, and as I mentioned that led the recovery towards 2021, have performed less first half this year. So let's move over to slide eight and look at the tanker order books. The new ordering has naturally been muted during the second quarter of 21. We've observed that the delivery window for ordering a significant number of VLCCs or SUSE boxes is now firmly into 2024. This obviously due to all the ordering activity for asset classes kind of outside of the tanker space. The overall tanker order book for VLC-2 has shrunk 10% year-to-date. The overall order book for tankers above 10,000 deadweight tons stands at 8% of the existing fleet, and this is in fact comparable to levels seen in Q1 1997. In absolute deadweight terms, we are at 20 years low. I'd also like to put this in some perspective. 20 years ago, the global oil consumption was around or at 76 million barrels per day. A normalized market now is closer to 100, if not above. So it means that the oil market is 30% larger now than in early 2000, and the order book is just about the same size. The VLCC order book is now at 81 units, give or take. At the same time, 124 VLCCs will be above or past 20 years in the same period. For SUSEMax, we are at 41 units and 123 passing 20 years on the same metrics. Let's move to slide nine and look at oil in transit. This is a very important indicator to us. We monitor this basically on a monthly basis to see where we are. Oil in transit is basically oil being transported. So in essence, excluding whatever is on storage. And as you can see, I've circled in 2020 in a red rectangle here. And as you can see, 2020 was a very noisy year for oil transportation. We started off the year with the Saudi-Russian price war, which disordered Q1 and Q2, and we had a massive production increase and transportation increase. Then the COVID-19 pandemic hit, and we saw demand shock that suddenly kind of took away a lot of production and also then transportation needs. And Q3 and Q4, the transportation needs diminished almost back to 2017 levels. Floating storage did save tank utilization at the time. First half of 21, the tanking markets have, well, basically volume has increased and transportation has grown. We've been facing increased fleet supply by vessels released from storage and delivery of new builds, together with seeing deep inventory draws. Now, where we are now, this is obviously July and August of Q3. We're back to Q4 2019 levels. OECD commercial inventories are now down to 2019 levels, and I believe, or we believe, that's a fair proxy for global inventories. There's also another thing to note. When inventories are no longer drawn, transported oil will come into play. As an example of this, EIA are currently estimating us to build a million barrels of oil per day for September, but then come October, we're supposed to draw half a million barrels per day from inventories. That gives you a delta of 1.5 million barrels, which then needs to be transported. That's the equivalent to the demand for 45 to 48 VLCC equivalents. And I think this gives you kind of a notion of how quickly this can turn. Then let's move to slide 10. I focused a bit on this in our press release, and I call it the VLCC Fleet Parallox. This is almost the same for SUSE Maxis, but I decided to point out this for the VLCCs. We may all speculate in what the older generation of VLCCs are doing, but it is undisputable that a 20-year-old vessel will struggle as a very limited number of charters accept them, and this is purely on age. With the challenging trading environment we've had during first half this year, earnings achieved on non-eco, high-consuming vessels have been zero or negative. And mind you, 51 vessels are above 20 years, as we speak. Year-to-date, eight VOCs are reported sold for recycling. The average recycling price in Asia has risen 70% in the same period, and it's now close to 25.5 million for a VOC. Well, one of the typical exits for an older vessel in the tanker world is crude oil storage. Well, crude oil curves turned into backwardation in Q4 last year and are not at all supporting floating storage. So far this year, we've seen three VLCC spot fixtures reported on a vessel that's either 20 years or older than that. And this is out of the 660 VLCC fixtures we recorded. So again, I want to highlight this because it is important, and it's very important looking at the previous slide where we are in the cycle on oil being transported. If it is so that the effective tonnage actually hasn't grown over the last couple of years, then we're closer to balance than we might think we are. And this is, as I mentioned in the press release, you know, it distorts the picture to such an extent that, you know, it needs to be basically addressed. So let me sum up on slide 11. Demand and supply of oil continues to rise. But we have to admit that delta-type infections cloud the outlook, in particular in Asia. We see asset prices remain firm, steel prices continue to rise, and the activity is very good on the yards, but for non-tanker assets. At the same time, the tanker feed continues to age, the overall order book shrinks, and the potential delivery window moves further out, should demand for tankers pick up. OPEC Plus plans to add about 400,000 barrels per day each month to the end of the year. This means in total 2 million barrels per day of increased supply. And go back to the math, we then would need 60 to 65 VLC equivalents by the end of the year. Oil in transit continues to rise, and the big question mark is obviously when do we reach the inflection point? I would like to draw your attention to the chart below, or at the bottom of the slide. I showed you this last quarter as well, and as the orange dot indicates, this is where we were in March this year. So we're basically gradually digging ourselves in from negative year-on-year growth in global oil trade into positive territory. And since last Frontland has increased its position significantly, we have secured attractive financing and are ready to capitalize as we sail on towards the expected recovery. Thank you very much. And I would then like to open for questions.

Thank you. We'll now begin the question and answer session. To ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. To cancel your request, kindly press the hash key. Once again, star one if you have any questions. The question is from the line of Randy Gibbons from Jefferies. Your line is now open.

Howdy, Randy.

Mr. Gibbons, your line is now open. You may ask your question. Okay, once again, if you have any questions, please press star and one. The question is from the line of Magnus here from HS Wingright. Thank you.

Yeah, good afternoon. Looking at the performance and the fleet in the third quarter, I mean, compared to some of the peers, It looked like you had a little bit better performance. I know it's hard to compare quarter to quarter, but you've been consistently outperforming the peers. So was there anything else in the quarter, or is there any other flavor you can give on the performance in the third quarter?

Well, it's a good question. This is one of the things that we obviously try to analyze. Well, obviously, when you compare two peers, there is an aspect of fleet composition and the age of your feet, and that does play a part. But it doesn't account for all the kind of outperformance. It's also kind of staying true to the fact that we are ship owners. We have assets we need to protect, and we need to – kind of try as hard as we can to get our clients to understand that and not kind of give in. And it's also about, you know, a modern fleet, you know, in addition to economics, it also gives you, you know, more opportunities to trade around. You know, you basically have all options. So that's an important factor as well as you try to triangulate your vessels in order to achieve kind of higher utilization and better returns. I hope that's a good answer to your question. Yeah, yeah. No, thank you for that, Collar.

Also, I mean, you're painting a – you know, we're staring into the abyss here. Rates are very weak. You know, we're in the weakest part of the year here. you mentioned, you know, that the fleet growth may not be as high, you know, if you adjust for the age composition of the fleet. But do you have any visibility into the winter market? I mean, we're still in August. I know it's a little bit early, but this is curious, you know, your outlook here for recovery in the fourth quarter.

Well, we, you know, it's, The sheer volatility of the freight market tells you that we know very little, to be quite honest. But on the other hand, you know, we fix not far ahead. So we actually do see the demand quite early. And in that perspective, what we see is that, you know, what we – Basically, now we're doing September dates in the Middle East and West Africa, and it looks quite good as to volumes. We've seen rates in Sue's Max actually try to hedge up a little bit. We're also fixing early October dates out of US Gulf, and that looks relatively busy in the beginning as well. So, you know, I won't kind of give you any guarantees, but the picture looks at least better than it did two weeks ago.

Okay. Well, that's good. Just one last question then. You know, in the S&P market, you know, you've been active buying some resales. Just curious if you see any opportunities in the second-hand market. There was a vessel, I guess there was a non-ECO 2012 vessel reported last week at a pretty big discount. I don't know if that was just a one-off transaction or indication of a potential weakness here in the second-hand market. I don't know if you can give any color on that.

I think if there is a curve on values, I think the soft spot is the middle-aged generation, and particularly if it doesn't have a scrubber. Because the older wrestlers like the really old ones, they've been held up by this artificial demand from undisclosed accounts that want to use the vessels for whatnot. And then the modern vessels are obviously the ones everyone wants to own as we go into a tightening regulatory framework and face all sorts of efficiency kind of demands going forward. And that keeps these these vessels in the middle a little bit kind of out of fashion. So, you know, I'm not too worried about that transaction because, you know, basically from what I see on, you know, you can argue that a very modern vessel or a resale or a new build is more correlated to the prices themselves and eventually to the steel prices. And as long as that is holding up, I'm not too worried for the modern part of the street.

Okay. Thank you very much for answering my questions.

Thank you.

Thank you. Next question, it's from the line of John Chabot from Evergore.

Thank you. Good afternoon. Hi. Hi. Anger, so you've lined up $130 million for two of the six. VLCC new build, should we assume that you're looking for similar percent? It's about, by my math, around 70% financing, so another $260 million to be taken down for the remaining four?

Yeah, I would be looking for that. Okay.

So if we take that $390 plus the drawdown on the HEMIN facility, that's the majority of the payment on this. I think that would only leave like $74 million in cash outlay for the six new builds. Is that the type of financing in total you're looking for, or when you get the bank facilities for the remaining four shifts, would you have to pay that back to the Hammond facility immediately?

We will use this Hammond facility as a bridge financing at the moment, and then we will consider in a way a bit further down the road. our options on the long-term financing for the equity portion of these vessels.

Okay. And then in addition to the Hammond facility expiring in May of 22, which obviously you've pushed that back several times, and it's probably a safe bet to assume you could push it back further if you'd like, are there any other big bullet payments or amortization profiles coming up in the next, let's call it 12 to 18 months as we kind of bridge to the recovery that Lars talked about?

No, there is nothing until 2023.

Okay, great. So generally speaking, you feel good about the liquidity profile. It's now just finalizing the debt on the last four new builds and kind of holding on until the market recovers. Is that correct?

Yes, that is correct.

All right, great. Well, that's all I had. I think liquidity is important to getting you there, and thanks for laying that out for me, Inger.

Thank you. Our next question is from Randy Gibbons from Jeffers. Thank you.

Howdy, Lars and Inger. Can you hear me now?

Yeah, we can.

Howdy. Excellent. I could hear you earlier. You just couldn't hear me. That's all right. Congrats, obviously, Lars, on the official promotion to CEO. So exciting times for that. Two questions. Clearly, Frontline's been pretty active in acquiring tonnage. Is this strategy to continue to grow the fleet that way, or will you now maybe look to sell some older assets?

Well, after almost every time we speak, it's difficult to kind of give you the playbook kind of here on the air, if at all. But, you know, we... we obviously keep all options open. So, you know, I'm not going to dismiss it nor kind of confirm it, but, you know, we will always look at our fleet composition and, you know, we favor the more modern units. So that could be a part of our strategy going forward, yes.

Okay, that's fair. And then looking at your quarter-to-date rates, they are pretty good relative, right? Do those include... any recently signed time chargers? Have you signed any of those this summer? And then we start to see some rates ticking up on the product side. Is that maybe the start of a recovery or still too early to tell?

The first question, so we haven't done any time chargers. And it's a very good question because, you know, short-term time chargers we record as spots and we haven't done any of those. Okay. Secondly, on the LR2 market you're referring to, yes, it's firming out in Asia, and it's actually quite strong. We like to think it has legs, but we've been kind of disappointed a few times now when it's had a run for it. It had one back in April as well. So let's say the jury is out. What we have done in the meantime is actually cleaning up one of our LR2s, so we're kind of the balance is more tilted towards the clean now, with seven of the 20 vessels trading dirty, and then obviously 13 clean and ready to rumble in that market.

Perfect. Dirty and 13 clean. All right. Well, hey, sorry for the difficulties earlier, but thanks for getting me back on.

Oh, thank you. Thank you.

And there are no further questions at this time. Please continue. Magnus wishes to ask a question again. Would you like to take it?

Yeah, of course. On the cleanup of the LR2. Yeah, hi, thanks. Just a follow-up question on the cleanup of that LR2. Can you just tell me a little bit about the process and the length of time and when you'll be ready to clean, you know, just the process of getting it to trade cleaner products?

Well, there are different avenues. And obviously, in this case, we found an opportunity to actually wash the tanks and, you know, at a reasonable cost. and had a following voyage lined up already. But that's more luck than kind of skill, I must admit. But normally, the way you do it is, you know, you start kind of, you need, in order to trade properly as a clean ship, you need to have the last three cargoes kind of clean. So the first cleaning cargo could be condensate and then you might move into another product and then finally you're actually able to transport like a gas oil or a gasoline even. And then by that you basically clean up the vessel. But that kind of experience means that you sometimes need to discount freight in order to get to that point. So basically what we look at is if there is a you know, $750 to a million dollar spread between the two markets, and we can line something up, we will basically start a process of cleaning a dirty LR2. Obviously, switching the other way you can do instantly. But in this case, we actually decided to invest some money in doing the physical clean. And that meant that we could, you know, depending obviously on the charter and its requirements, we managed to, within a relatively short time, in one voyage, we managed to become a proper clean vessel.

So from the time you washed the tanks to carrying gasoline, what's the timing of that?

In this case, it was probably approximately 25 to 30 days.

So that three carbos didn't apply because you washed the tanks?

No, yeah. Yeah. Okay.

Thank you.

Yeah.

Thanks for that caller.

You're welcome.

And there are no further questions now. Please continue.

Okay. If that was all, thank you very much for listening in on a busy day kind of on reporting. and we will soldier on at Frontline, and hopefully next quarter we can report a completely different situation in the market. Thank you.

That concludes our conference for today. You may all disconnect. Thank you all for participating.