Frontline plc.

Good day and thank you for standing by. Welcome to the Q3 2021 Frontline Limited Earnings Conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Lars Barstad, please go ahead.

Thank you very much. And good morning and good afternoon to everyone. Welcome to Frontline's third quarter earnings call. These are indeed volatile times, although maybe not as volatile as we hoped for in freight. Q3 2021 marked the bottom of tankers post-COVID-19. This is seasonally a low point in the market. but everything seems to have been amplified in these times we currently live in. Towards the end of the quarter, we actually started to see a recovery in demand for freight as export volumes grew, which has continued into the fourth quarter. Right now, we are, as the rest of the world, worried about the implication of this new Omicron variant of the COVID-19 virus. What will OPEC Plus do in that respect, and will something come out of the ongoing Iranian nuclear talks in Vienna? Well, let's start with the facts on frontline third quarter and look at the highlights on slide three. Q3 2021 performance reflects the challenges the tanking market faced this quarter. It is, however, a proof that our business model our efficient operations, our modern fleet, and very hard-working team managed to outperform most of our peers. In the third quarter, Frontline achieved $10,500 per day on our BLCC fleet, $7,900 per day on our SUSEMAC fleet, and $10,700 per day on our LR2-SUSEMAC fleet. So far in the fourth quarter, we have booked 79% of our BLCC days at $21,600 per day, 72% of our SUSE max days at $17,900 per day, and 64% of our LR2-AFR max days at $16,000 per day. All numbers in this table are on a low-to-discharge basis, but I do think they show that the markets have indeed recovered from the third quarter, although we have yet to see rates reaching for the skies. I'll now let Inge take you through the financial highlights.

Thanks, Lars, and good morning and good afternoon, ladies and gentlemen. Following the acquisition that we did of the A3C in the first half of the year, we have been busy on the financing side, and in the third and the fourth quarter, we have entered into term-run facilities and obtained financing commitments for a total amount of up to $507 million to partially finance the acquisition of the two 2019 built VCCs and also the six VCC new building contracts. These facilities will finance 65% of market value. They will carry an interest rate of about a margin of 170 basis points. And they will have an amortization profile of mostly 20 years, but also 18, and a single delivery date from yard. When we factor in 33.4 million available under the term facility entered into in November 2020 to partially finance the delivery of the last LR2 tanker, we have established bank debts of up to $540.4 million. The company has also raised gross proceeds of 51.2 million under the equity distribution agreement, and also net cash proceeds of approximately 67 million through sale of four LIQ tankers. And following this, remaining commitments as per September 30th for Frontline's new building program, consisting of one LIQ tanker and the six VCCs, and for the acquisition of the two 2019 built VCCs, is fully funded. Through these new financings, we reduce our borrowing costs and we also reduce our industry-leading cash-back-even rates, providing significant operating leverage and sizable returns during periods of market strength and help protecting our cash flows during periods of market weakness. Trondheim has also extended the terms of the Senior Unsecured Revolving Credit Facility of up to $275 million by 12 months, to May 2023, leaving Frontline with no loan maturities until 2023. Then let's turn to slide four and look at the income statement. Frontline achieved total operating revenues, net of wage expenses of $69 million and adjusted EBITDA of $17 million in the third quarter of 2021. We reported net loss of 33.2 million, or 17 cents per share, and adjusted net loss of 35.9 million, or 18 cents per share, in the third quarter. The adjustments consist of a 1.2 million gain on derivatives, a 0.2 million gain on marketable securities, and a 1.3 million amortization of acquired time charters. Yet just a net loss in the third quarter increased by 12.7 million compared with the second quarter. And this increase in loss was driven by a decrease in our time charter equivalent earnings due to lower TCE rates and the recognition of a gain on the marketable securities sold in the second quarter of 4 million. This was partly offset by a decrease in ship operating expenses of 3.2 million, primarily as a result of lower dry docking costs. Then let us take a look at the balance sheet on slide five. The total balance sheet numbers have increased with 6 million in the third quarter. And the balance sheet movements in the quarter are primarily related to taking delivery of the LRQ tanker from favor. in addition to ordinary debt repayments and depreciation. As of September 30, 2021, Frontline has $190 million in cash and cash equivalents, including undrawn amounts under our Senior Unsecured Loan Facility, multiple securities and minimum cash requirements. Frontline's remaining new building and vessel acquisition capex of $659.4 million as per September 30, 2021, is fully funded by 540.4 million in estimated debt capacity and also the 118.2 million in cash raised through the ATM and the sale of the four LIQ tankers which I mentioned. The company has also no debt maturities until 2023, as I also mentioned. Then, let's take a closer look at cash break-even rates and effects on slide 6. We estimate average cash cost per given rate for the remainder of 2021 of approximately $21,400 per day for the VCCs, $17,800 per day for the suitback tankers, and $14,100 per day for the LFU tankers. And the fleet average estimate is about $17,600 per day. These rates are the all-in daily rates that our vessels must earn to cover the budgeted operating costs and dry dock, estimated interest expenses, TC and bearable fire, installments on loans, and G&A expenses. We recorded OPEC expenses in the third quarter of $8,200 per day for the VCCs, $7,200 per day for the SUSEPAX tankers, and $8,800 per day for the LRQ tankers. They dry docked two LR2 tankers in the third quarter, and they expect to dry dock one VCC and one suspect tanker in the fourth quarter. Then, the graph on the right-hand side of the slide shows free cash flow per share, and free cash flow yield basis current fleet and share price of November 26, as alternative TCE rates. Let's take an example. If we assume historic Clarkson TCE rates for non-ecovessels in the period 2000 to November 2021, adjusted then for frontline fleet scrubber and ecovessels, frontline will have a free cash flow yield of 38%. Free cash flow yield potential increases with higher assumed TCE rates and also on a fully delivered basis. With this, I leave the word to Lars again.

Thank you very much, Inger. Let's move over to slide 7 and look at the third quarter tacky market. So tacky rates bottomed during Q3, and this is seasonally. kind of the normal weakest moment of the year. But I think it's safe to say that this is not a normal year. We actually haven't had any normal year since 2019. So global oil consumption averaged 98.6 million barrels per day, and that's up 1.9 million barrels from the second quarter. Supply averaged 96.8 million, also increasing by close to 2 million barrels per day. But we continued to grow them kind of very close to 1.8 million barrels per day of inventories. OPEC Plus supply rose an average of 1.4 million barrels per day. And I think it's important here to note that a lot of the key OPEC suppliers came out of their peak demand period, which is when they burn fuel for electricity generation and basically for cooling. and this normally happens in September, so towards the end of the quarter. We saw strong demand growth in North America and in Europe, whilst the Asian demand recovery was muted also in the third quarter, like we saw in the second quarter. What was special about the quarter that we went through was that oil and energy prices were extremely volatile. We saw natural gas prices, coal prices, also other commodities that are affected by energy prices rise rapidly during the quarter. And all the markets kind of perform strongly as we came to the end of the quarter. I think it's important to note here, if you look at the graph on the left-hand side at the bottom of the slide, so total world consumption is now actually not that far off from where we started in January 2019. sorry, in January 2020 before the pandemic hit us. And in December, we're actually, some market commentators are actually arguing for us to end up in or at 100 million barrels per day. What we have seen, which is on the slide on the, sorry, the chart on the right at the bottom of the slide, is that oil in transit has developed quite well during the last couple of months. We saw that during Q3, you know, we remained at these kind of depressed levels where kind of oil in transit increased and then decreased again and increased, and you had kind of this choppy movement. But now, as we went into November, we started to see that this oil on water, which is basically a picture of demand or utilization in the tanker fleets, increased rapidly to where we are now. So let's move to slide eight and have a look at the order books. So tanker ordering was obviously muted during a third quarter. We saw one SUSE max order and eight LR2 AfraMax orders. No VLCCs were reported orders as far as we could see in the quarter. What did happen though was that the delivery window for ordering you know, any kind of useful number of tankers is now starting to get limited for 24 even. 2023 is destined to show very few VLCC and SUSE nice deliveries. New building prices are indicated at very high levels. There hasn't been much price discovery in this market, particularly for the VLCCs, as no kind of new builds are has been ordered really during the last four to five months. But it's obviously governed by a combination of high deal prices and low availability. And basically the considerations that ship owners need to make now, if you are to go into the market and order a VLCC, say at $110 or $115 or $120 million, depending on who you speak to, you're actually making a bet on steel prices come 2023. So this is obviously a bet that a lot of people are hesitant to take at this point in the curve. The VLCC order book is now at 71 units. That's a little bit north of 8% of the existing fleet. But we still have this situation where 130 in VLCCs will be above or past the 20-year mark during that period. That's the current order book delivers. For Suezmax, there are 41 units in the order book, and 116 will be passing 20 years using the same metrics. One thing that kind of changed a little bit during the third quarter is that recycling has started to show some promise. And let's move to slide nine. So with record high recycled steel prices, activity is finally accelerating. As you see on the chart at the top there, so 2017 and 2018 were the last big periods for vessel retirement. And now in Q3 alone, we saw close to 0.76% of the global tanker fleet sold for recycling. We are in a situation now where alternative use for tankers is extremely limited. As most of you may know, in earlier markets you've had the opportunity to either convert a ship for storage, or even it could be converted into an FBSO, so basically an oil producing unit. Obviously these markets are closed as it is right now. And we also see that... During the pandemic, it's becoming evident that the capacity for recycling was seriously contracted. So basically, there has been a COVID pandemic in countries like India, Pakistan, and Bangladesh. So basically, year-to-date, we've seen 15 VOCs, 11 Zeus Maxis, 18 Afres, and 8 LR2s that are reported sold for demolition. And broadly speaking, this amounts to actually close to 2% of the existing fleet. So basically, we believe that this might accelerate going forward, as the recycling values are still extremely strong. Then let's move to slide 10. So there's a lot of noise in the market currently, and parts of this presentation could be on the potential impact from the Omicron virus. But I believe we'll need a few weeks to learn more about this variant to even know where we're heading. What we do know is that in the recent weeks, we've had kind of a message of US releasing oil from their strategic petroleum reserves. There are obviously other exogain factors playing up as well, but let's focus on this one. So US has released volumes from their SBR on a few occasions over the last 18 months. And despite US inventories being below five-year averages, this country is actually not particularly short of crude oil. And after the recent releases, we have actually observed slightly higher exports, with a significant part of the volume going to Asia, and particularly so in October and November this year. And it's obviously not the SPR volume itself that is directly kind of heading into Gulf Coast and being exported, but it's basically there is an ample kind of supply of oil in the U.S., and the What an SBR release creates is that you depress the local prices for crude, and this basically makes that crude attractive to Chinese or Asian buyers. China, India, South Korea, and Japan have pledged to join the U.S. effort and release from their SBRs. But apart from India, none have been very specific on volumes. And we have to remember that these Asian countries are far more sensitive to severe supply disruptions because they have very limited domestic production capacity. And the northern Asian region is facing record high energy prices as they now head into winter. So whether if oil will be released at all from the SPR now after having a $10 drop in oil prices is obviously a question. But if it should happen, it could actually trigger a ton mile increase. So let's move to the summary and let's go through a couple of the things that are at play right now. So demand and supply of oil continues to rise. But the latest virus version is obviously now clouding the outlook. Tanker markets have recovered since Q3 2021. but it's still challenged by oil supply not fully at pre-pandemic levels. Tanker recycling, and I think this is a very important thing to note, that tanker recycling has finally started to make an impact on whistle supply. And then we have all this exogen practice that we really don't know much of at this point. So the US SPR release, OPEC strategy going forward. They just postponed their meeting for a couple of days in order to find out more on the virus outbreak. And they resumed the Iranian nuclear talks in Vienna. So there's a lot of stuff that is going to happen over the next couple of weeks. Oil in transit continues to rise, and energy prices are at record highs as the northern hemisphere is heading into winter. I think the most important part here is that Frontline's financial commitments are now fully funded with reduced overall funding costs, and we are indeed well positioned as the story of this market unfolds. Finally, I've used this graph below before, and it shows year on year basically various segments and how their trades are performing. And we do see that for tankers, it's actually showing a growth of 3.8% year-on-year in October compared to October 2020. So tankers have been lagging all the other asset classes in shipping for a while, but now we're actually starting to perform with. So with that, I'd like to open up for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound hash key. Your first question today comes from the line of Chris Sung from Weber Research. Please go ahead. Your line is open. Hi.

Good afternoon, Lars and Inger. How are you?

How are you? Good. Thank you. Thanks.

Thanks. I wanted to just ask about the four LR2s that were sold Were they clean prior to the sale or were they still relatively dirty?

No, they were trading clean.

Okay. And then I think last quarter there was seven dirty and then 13 clean. What's the composition of your fleet now?

It's actually quite 35% trading dirty and 65% trading clean.

Okay. And thanks for that. And to dry docking, I think, Ingrid, you said one VLCC and one 2S9 in Q4. How many days would you actually make for these two?

How many days? Oh, around 20 days. That's the kind of standard.

20 days for each. Okay, so 40 in total? All right. Thanks. And lastly, a quick one for me, how much is remaining under the equity distribution agreement?

The equity distribution agreement is a total of 100 million. So when we now have raised 451.2 million, the difference is 48.8 million remaining.

All right. Great. That's it for me. I'll turn it over. Thanks, guys.

Thank you.

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

Yeah, hey, thank you, and good afternoon, everybody. You know, I guess I wanted to discuss a little bit more about the decision to sell the LR2s. What was it about those vessels maybe that made them more attractive than some of the other vessels in the fleet? Is it more of, you know, realizing, you know, the acquisition – what was that, last year – on the Suez Max, was the function of those vessels being in the San Luis Bay transaction really the fact that those were product vessels versus crude? Or really what I'm wondering is, you know, I think we're all optimistic that we're going to see a recovery in tanker rates in 2022, hopefully. But I guess what I'm wondering is, could we see more of those similar types of transactions maybe with some of your crude vessels?

Yeah, thank you. That's a fair question. So, you know, over the last year, we've obviously grown tremendously in our exposure to the VOC market. This is something we've communicated for a long period of time, that this has been our ambition. Historically, we have seen that kind of the return we are able to give our shareholders is kind of the best return we're able to give is from the larger vessels. So kind of in that process, we've obviously reached far in order to increase that fleet quite a lot. And then during the year, and this is kind of a weird one, you know, the assets class that has appreciated the most is in fact LR2s. So whilst, you know, all the prices have risen, but the LR2s have been tremendously strong. So, basically, we saw this as an opportunity to capture value at the point in a curve. You know, there could be that we'll kind of divest in other vessels as well. But, you know, it's kind of our focus is to grow and maintain our VLCC position. That's where we believe we'll get the best kind of bang for the buck. And then, you know, the LR2 segment is... It's a very interesting one. You know, we believe in that market. But, you know, we found it kind of prudent to capture this value as we felt kind of the price we could achieve on these four units, the oldest four we have in the fleet, Chinese built. You know, our ability to capture value there, so we basically took it.

Okay, great. And then in going, thank you for the presentation and in talking about the VLCC market, your reference to historical prices, really what I'm trying to understand is as I look at the VLCC fleet today, let's just put those 100 vessels that are the 20-year-old vessels, your reference 115 or whatever, then over 100, let's say. Do we have any sense for how much of the, call it the modern VLCC fleet, is scrubber fitted?

Actually, on the modern, you know, I don't have that number in front of me, but what I've looked at is that at this point in time, about half of the VLCC fleet is scrubber fitted. So... and I would assume that, you know, the most modern vessels are, basically, as they come from the yard. But then most of the scrubber investments have probably happened on the kind of, you know, non-eco, more thirsty units, because that's where it makes most economical sense. But I don't have that fleet kind of in front of me. But about half of the fleet is sailing with the scrubber.

Okay, and then just... One more for me. As I think about... Hold on a sec. As I think about... You know, I'll cue in if it comes to me, but it just escaped my mind. Thanks for the time, everybody.

Okay, thank you.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star and one on your telephone keypad. Your next question comes from the line of John Chappell from Evercore. Please go ahead. Your line is open.

Thank you. Good afternoon, everybody.

Good afternoon.

Inger, I'll ask Greg's question for him. So you got a lot done on the financing side in 3Q and it seems like you're all squared away now, which checks a big box as far as meeting the new build commitments. I'm just curious on the equity distribution. Why did you feel necessary to issue equity at that size given all the financing you had lined up and the fact that you're basically covered now even without the more expensive equity?

Well, it's... The movement we did there was secretive to the company in a way because the energy of the frontline share was far below the share price at the point in time we printed those shares. So refresh was a good, wise thing to do for the company.

Okay. And on the macro side, Lars, clearly there's a lot of things we can't. identify right now, and this question was probably more fitting two weeks ago before there's more things thrown out there, but everyone's put out this very optimistic view, you know, ourselves included, on why things should get better. It's just, you know, the spring is coiling, inventories are really low, production's increasing, demand's increasing, the fleet's shrinking, yet we're still at these very low levels where every once in a while you get a little bit of an increase and you think, here we go, here's the start of the cycle, and then it pulls back again. Other than OPAC just being a little bit stingy with their releases, what has been kind of the limiting factor in letting this recovery from the third quarter trough really gain momentum? And other than the things you've addressed already, Are there any other concerns you have about the sustainability going into early 2022?

I think, you know, obviously there is probably not one correct answer to that question, but our experience is that, you know, in some segments you are suddenly in a position to push, so you can kind of push rates northbound, but then other segments, kind of parts of the pie or of the spec set is experiencing kind of issues. So basically what we've had now for the last couple of weeks is that we've had really, really good demand in the VLC space. We see Middle East exporting finally kind of according to the OPEC program. Whilst prior we We suspect that the open countries have actually consumed or kept a lot of the oil domestically. But then you get West Africa with production issues. So suddenly that volume kind of tapers off. There's also been, over the last couple of months, a situation where for the long haul oil, you need the ARBs to be open. So basically for... Atlantic Basin oil to be priced in a manner where it's attractive to Asian refiners and that has not really been the case and this is basically as demand recovery has happened relatively quickly during the second half of this year at least in Europe and in the US so basically the local oils around the Atlantic Basin have been relatively good priced basically meaning that they're, you know, the Asian refiners can't really compete. So you've had a couple of these factors, you know, during this fall. And, you know, we're still shy of a couple of million barrels of production until we are at pre-COVID levels. So obviously, there are new ships that have been delivered throughout the year. So I think it's a mixture of those three reasons. With regards to pricing and how crude is priced, whether if it's going to go into Asia or stay local, that could rapidly change. With regards to the production increase, I think that's more risky now, whether OPEC actually will increase volumes into Q1. One thing that's for certain is that we are very close to a balance, but we have yet to have kind of I think I mentioned this before that the market has like three or four cylinders. And, you know, we need to fire on all cylinders in order for it to get some traction. And regretfully, we have one cylinder fail when all the other cylinders go.

Okay. No, that all makes sense. And if I could just follow up with one point there. I mean, all eyes are going to be on OPEC this week. Obviously, they tend to be really driving the sentiment in the tanker markets right now. Given what you noted about the ARBs and the SPR release in the U.S. leads to lower domestic prices here, which could lead to more exports, which are longer haul, does OPEC carry the same amount of sway in the tanker markets that it once did, or is it more of a sentiment driver than an actual fundamental driver?

I think it's more of a sentiment driver than an actual fundamental driver, to be quite honest. I think the proof is that throughout this year we've had OPEC, you know, kind of both adding, then suddenly not adding, then kind of delaying meetings, and also, you know, kind of relatively small portion of production increases has kind of been reflected in the exports. We have OPEC producers that are actually in overcompliance, basically because they have production issues. So I think it's more the headline. What we see in our little pond of global transportation of crude oil, we just see volumes gradually increase. And obviously if OPEC suddenly finds that they don't want to increase in January, I think you'll have price action and suddenly Atlantic barrels will then be attracted or be moved out to Asia again. So for us on the tanking side, that's far more important than kind of what OPEC may decide for one month kind of.

Got it. All right. Very helpful, Lars. Thank you. Thanks, Inger.

Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star and one on your telephone keypad. Your next question comes from the line of Randy Givens from Jefferies. Please go ahead. Your line is open.

Good morning, everyone. This is Chris Robertson on for Randy. Thanks for taking our call.

Hi.

Just to follow up on the ATM issuance there. Can you just talk about how you decided upon the amount that was issued in October? And let's say rates stay weak in 2022. Would you look to utilize that again with a further issuance?

But based on the current share price, we will not consider to utilize the ATM program.

Okay. I'd like to add to that. Frontline has had ATM programs before, and we've always been extremely disciplined and only acted when it's aggressive and when the conditions are there for it. So... that should also kind of further answer that question.

Yes, definitely. Thanks for the additional color. That's it for us. Thank you very much. Thank you.

Thank you. There are currently no further questions. I will hand back for any remarks.

Yes. Thank you very much for calling in. And thank you for the time. Also, obviously, thank you to the entire frontline team who's done a fantastic job again this quarter. Stay safe.

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