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spk03: Good morning and good afternoon, everyone. Welcome to Frontline's first quarter's earnings call. I think I'll start off with saying it's safe to say that this has been a busy quarter in many respects. The conflict in Ukraine has been demanding on our organization, first of all, in order to support our crew, both Ukrainian and Russian nationals, in some instances working together on our ships. Our legal and compliance team have worked relentlessly in an ever-changing sanctions environment, making sure we are staying compliant. But it's also very satisfactory to see Frontline has managed to maneuver all these challenges and traded our ships very competitively at the same time. To top it all, we announced the proposed combination with Euronav early April. And we've since then been working diligently together to finalize an appropriate transaction structure for this combination. So let's move to slide three and look at the highlights. In the fourth quarter, Frontline achieved $15,700 per day on our VLCC fleet. We achieved $16,900 per day on our SUSEMAX fleet and $19,000 per day on our LR2-AFROMAX fleet. So far in the first quarter of 2022, we booked 74% of our VLCC days at $22,600 per day. We booked 70% of our SUSEMAX days at $32,700 per day. and 58% of our LR2 slash AfraMax days at $46,300 per day. All numbers in this table are on the low-to-discharge basis, as usual for Frontline. Also, this quarter, I would like to draw your attention to slide four to explain the differences in returns depending on the vessel characteristics. You can clearly see on the figures on the right-hand side on this slide that the earnings differentiate a lot in respect of what type of ship we're trading. As you can see on the left-hand side, Frontline has a young fleet. 88% of our fleet is regarded ecovessels, and we have 53% scrubber penetration. And as you also can see, all the scrubbers are focused on the VLCC and SUSEMAX assets that have the highest consumption. But we're up now to $17,100 per day premium for a VLCC between an eco with scrubber compared to a traditional non-eco VLCC or vessel. For the SUSEMAXs, the premium is $9,500 compared to a non-eco. And for the LR2s, it's $8,500 a day premium compared to a non-eco. So basically, this high oil price environment is affecting us a lot. This does not tell the full story, though. As the technical, operational, and commercial performance we managed to achieve is also very much dependent on our talented team. And we work more like asset managers, optimizing a portfolio of multi-million dollar investments than traditional ship owners. With that, I'll let Inger take you through the financial highlights.
spk00: Thanks, Lars. And good morning and good afternoon, ladies and gentlemen. Let's then turn to slide number five and look at the income statements. If you want to achieve total operating revenues, of $104 million and adjusted EBITDA of $53 million in the first quarter of 2022. We reported net income of $31.1 million, or $0.15 per share, and the adjusted net loss was $1.6 million, or $0.01 per share, in the first quarter. The adjustments that we have made this quarter consist of a $24.9 million gain on derivatives a 0.3 million gain on marketable securities, a 6.1 million gain on sale of vessels, a 0.4 million gain on insurance claim, and a 1.3 million amortization of acquired time charters, partially offset by a 0.1 million share of losses of associated companies. The adjusted net loss in this quarter decreased then 3.1 million compared with the fourth quarter of 21. And the decrease in adjusted net loss was driven by an increase in our time charge equivalent earnings due to the higher GCE rates in the quarter, partly offset by other movements in operating gains and expenses. Then let's take a look at the balance sheet at slide six. Total balance sheet numbers. have decreased with $56 million in the first quarter compared with the fourth quarter of 2021. The balance sheet movements in this quarter are primarily related to the sale of the LR2 tankers, Front Lion and Front Panther, in addition to ordinary deficit repayments and depreciation. As of March 31, 2022, Front Lion has $179 million in cash and cash equivalents, including under amounts under our senior unsecured loans facility, multiple securities, and minimum cash requirements. Short-term debt includes total balloon payments of 251.1 million for two existing loan facilities with maturity in the first quarter of 2023, which is expected to be refinanced prior to maturity. Let's then take a closer look at slide seven. Keeping costs down has always been in Frontline's DNA, and the core values of the Frontline platform is keeping it simple and focused and maintain lean and efficient management teams. This slide shows that Frontline outperforms Paris in the first quarter of 22 on OPEX, GNA, and interest expense. This, together with outperformance of peers on revenues this quarter, explains the superior operational performance of Frontline in the first quarter of 2022. Then I think we should take a look at slide 8. We estimate average cash cost break-even rates for the remainder of 2022 of approximately $23,700 per day for the VCC segment, $19,800 per day for the ZeusMax tankers, and $16,600 per day for the LR2 tankers. The fleet average estimate is about $20,100 per day and includes dry dock of 13 vessels in the period from the second quarter to the fourth quarter of 2022, with an impact of $750 per day. The distribution of the 30 vessels is three VLCCs, five SUSEMAX tankers, and five LR2 tankers. We recorded OPEC expenses including dry dock in the first quarter of $8,200 per day for VLCCs, $7,000 per day for the SUSEMAX tankers, and $7,900 per day for the LR2 tankers. In the first quarter, we dry docked one VLCC, which was completed in the second quarter, and two LR2 tankers where one was completed in the second quarter. The graph on the right-hand side of the slide shows the free cash flow per share after debt service and free cash flow yield basis current fleet and share price the 23rd of May at alternative TCE rates. Based on historic Clarkson TCE rates for non-Ecovessels in the period 2000 to 2021, adjusted for premiums on scrubber and eco-vessels, Frontline has a free cash flow per share of $2.43 and a free cash flow yield of 27%. Free cash flow yield potential increases with higher assumed TCE rates and on a fully delivered basis. With that, I leave the word to Lars again.
spk03: Thank you, Inger. So, the headline for My Q1 tanking market report is basically volatility is back. And if you look at the graph on the bottom left side on slide nine, you'll see that after coming through a period, almost 18 months, where we've been hovering between 10 and 30,000 on a good day, we're suddenly rocketing up. The quarter was fairly quiet as global oil demand was estimated to have averaged around 98.8 million barrels. Q1 is historically or seasonally a shoulder quarter, and the demand was down 1.7 million barrels compared to Q4. Supply came in at the same number, in fact. So this is the first quarter for a long time we've not drawn significantly on inventories. But if you compare it to Q1 last year, we start to see some significant changes. Demand was, in fact, up 4.5 million barrels per day compared to last year, and supply had increased by a whopping 6.3 million barrels per day. As we enter the year, oil in transit stabilized around 1 billion barrels, and as I mentioned, inventory draws dwindles. The invasion of Ukraine sparked volatility as trade lanes started to change. And what we saw towards the end of the quarter and into Q2 is high product demand growth in both US and Europe starting to open arms from Asia. COVID-19 continues to affect in particular Chinese demand, more so due to their zero tolerance policy and full lockdowns. This is predominantly what's affecting VOCC utilization. Let's move to slide 10 and I'll try to do some explanations to what's going on with regards to the Russian flows. So new trading patterns are evolving and Russian and oil and product export from Black Sea and the Baltic was in fact knocked down more than 360,000 barrels per day since Feb 22 compared to May. European imports from Russia are down 1.4 million barrels per day in the same period. This has been replaced by imports from Asia, Africa and America to Europe. Asia has increased their imports from Russia by about 850,000 barrels per day And unknown, which is seen on the top right corner on the graph at the top here, adds another 1.1 million barrels. Unknown is basically because this is tracking, and the vessels have yet to reach their destination port. So as we move forward, this will become more and more known, to put it that way. So in essence, 2 million barrels of oil per day is diverted. Compared to what's regarded the global trade of oil, or seaborne oil, which is around 38 million barrels per day, this amounts to 6%. And 6% of oil is now traveling at least 50% longer, if not twice the distance, and some even argue 2.5 times the oldest So geographically, Europe is obviously close to Russia. And now, significant amounts of crude oil and products are sailing past Europe to clients in predominantly Asia, whilst Europe needs to replace those same barrels from either Middle East, West Africa, or US. The only way to kind of stop this trend would be a blockade of Russian exports or direct sanctions on oil itself. How likely that is I'll leave to you to discuss, but in addition we have an element of US now arguing to or indicating to lift sanctions on Venezuelan crude for exports to US and Europe. So basically this whole kind of change, or diversion, or disruption, is now causing both, in particular Afromaxis, but also, to a large extent, Seuss Maxis, to basically have much tighter market conditions than we had prior to the Ukrainian invasion. If we move to slide 11, because there is another thing going on in our markets as well, and look at the products market. We are, in fact, in what's regarded, or you can read the headlines coming out more and more on diesel shortages. And this is causing record refining margins and ARBs to open up. The jury's still out whether if it's all due to disrupted diesel flows or middle-desolate flows from Russia, because there's also an element of quite strong demand, particularly in Europe as well. So basically what's happened is that refining margins have literally exploded. As you can see on the graph on the left hand side there, this is Northwest Europe spot refinery margins coming back from May 2020 until now. These margins are some due to lack of feedstock, but also some due to the high demand. And this is basically opened up for the first time in quite a while, wide arbitrages from Middle East and from Asia. The longevity of the current situation is very hard to call, but this is a structural challenge. Refining capacity in both US and Europe was reduced during COVID-19 pandemic when they were suffering disastrous refining margins. There is ample refining capacity in Middle East and Asia and this is growing as well. Then let's move to slide 12 and the tanker order books. This is the first time since 2018 that we've seen fleet growth turning negative. What we've done in this top left chart is basically to look at the net fleet growth in deadweight terms, year-on-year change, and the net recycling of tankers during the same period. And as we can see, started this development late in Q4, and throughout Q1, the net tanker fleet growth has actually turned negative. The last few times we've experienced this, so first in 2013, 2014, and secondly towards the end of 2018, it was followed by a period of high volatility and fairly good market rates. We expect this to continue, just looking at the various order books. We continue to be in the same situation, if you look at the VLCCs first, where there is a large portion of that fleet that should have been retired and still is floating on the seven seas. So 82 VLCCs will come to age, either they are already above 20 years or they will become above 20 years in 2022. For the SUSEMax, the same number is 67. And for the LR2s, it's a whopping 22. And the order book, as the audience would know, is dwindling. There are no new orders being placed. In fact, for the VLC and SUSEMax segment, we haven't seen one single order placed since September last year. For the LR2s, there is a bit of activity. And six LR2s have been ordered so far this year, but it's still not putting a dent into basically the outlook for that sector either. With regards to when you can expect to receive a vessel, should you go out and order now? I think 2024 is more or less out of the question, and you need to look into 2025. And it's still the case that For the main yards that build tankers, they're far more interested in building other asset classes, as that yields them better margins. So, to sum it all up, oil demand continues to rise, but global oil supply issues are swelling with the Russian exports curtail. We got volatility in tankers back in Q1 2022. As I've said a few times through media and with analysts now, it's too early to call the big cyclical upswing, but we have hopes. Tanker fleet growth is now in negative territory, and that's expected to continue at an accelerating pace as long as no new orders are being placed. Tonn miles are expanding significantly, and in particular for Susomax and Afromax as Russian flows are diverted. There is high product demand and record refinery margins in Europe, and this is very supportive of our LR2s, which we refer to as the VLCCs of the product market. It is expected, though, that with these refinery margins, one should see increased refinery runs, which in the end would support the VLCC. We're very happy that Frontline is able to quickly capture volatility with what we regard efficient diversified fleet, low cost base and agile approach to the market. Lastly, before Q&A, let me do a few points on the frontline and urinal combination. As I mentioned initially, since we went public with this in April, we have been working diligently together and what we want to achieve is is a combined company with a $4.2 billion market cap. This would incur a wider index inclusion. We believe it will attract share liquidity and, of course, broker coverage. We also believe it could improve access to cap-restricted finance resources. Frontline and Euronav alone are actually regarded small cap or borderline small cap. Now we're moving firmly into the mid-cap. if you look at the New York Stock Exchange. We believe the combination would give enhanced commercial offering. The significant size, well, we would have significant size in all relevant trading areas, and this would yield efficiency and utilization. There's also significant synergies discovered between the two companies, both on OPEX, G&A, and financing. And finally, Both companies regard themselves as leading on the ESG, and this will obviously form force in that respect in the industry. With that, I'd like to open up for questions.
spk02: Thank you. As a reminder, if you would like to ask a question over the phones, please press star and 1 on your keypad. If you want to cancel that request, you can press the hash key. So please press star and 1 for any questions. Your first question today is from the line of John Chappell from Evercore. Please go ahead.
spk06: Thank you. Good afternoon. I just want to start where you left off, and I understand that there's probably some limitations around what you can say regarding the potential transaction, but Frontline's obviously historically been a very active company, sale and purchase, etc., Also, based on your quarter-to-date rates, it looks like you would return to a dividend per your formulaic policy as soon as the next quarter. I just wanted to know, as you're finalizing the terms of this transaction and you're waiting for more clarity or a potential close, are there any restrictions on your normal strategic activity, whether that's operational or financial, as it relates to capital return to shareholders?
spk03: not at this point. It's not in fact.
spk06: Okay. And then I guess we'll have to wait to see the terms to see if it changes, not at this point. I wanted to ask a market question. You did a very thorough job explaining all the different pros and cons of the market. The VLCCs have obviously been a pretty big laggard, and I just wanted your view on what may have the Vs catch up to the rest of the segments? And is it just a function of China opening up from its lockdowns and renewing the import growth of that nation? Is it that combined with kind of the secondary and tertiary fallout of redrawing the crude map because of what's going on in Russia or Ukraine? Or is there a chance that it's just a much stronger market given the geopolitical backdrop for mid-size and product carriers, and the Vs, although they'll do well, may not return to their top of the leaderboard across the asset classes.
spk03: I think, John, that history has thrown a lot at us throughout the years, if you go back long enough. There is one truth that all these asset classes are highly inter-correlated. I find it hard to believe that this time will be different, that we'll have a prolonged period of time where you almost have an inverted relationship on earnings, where the LR2 is top performer, the SUSEMAX in the middle, and the VLCC at the bottom. But I think the biggest question here, and I alluded to it in my summary as well, is that the global oil supply situation is a challenge. Oil price is telling us that we're not able to produce or at least not able to export enough oil. So this, together with the China situation, is what's holding back the vilcices as far as I can see it. There are a few sources of incremental crude, one being U.S. if production comes up. They are doing the SPR releases now. I'm not sure if we've seen the full effect of that yet in the markets. potentially with China back. That could become more apparent. Secondly, we still have Iran on the sideline. Well, you know, I'm not too optimistic. I've been more optimistic earlier quarters than I am this quarter on the closure there. But I'm quite optimistic on Venezuela. And there are actually movements in Venezuela that could kind of change the situation. And that would be kind of, you know, that could... Even though Venezuela end up in a situation where they're limited to export to Europe, it will basically shift the balance, meaning that more West African can go to China, for instance, and that would be VLCC business. So I don't think this is a long-term situation. I think kind of you will find, you know, we're already seeing VLCC digging into SUSEMAX cargoes. We've seen SUSEMAX dig into AFROMAX cargoes and so forth. So this tends to kind of even out. But right now, you know, what would be the trigger here? I think it will be very interesting to see if Beijing avoids big lockdowns in China and we see China come back kind of full force. I think we'll see more of what this market has to give us.
spk06: Okay. Thank you very much, Lars.
spk02: Thank you. The next question comes from the line of Chris Sung from Webber Research. Please go ahead.
spk04: Hi, good afternoon. How are you?
spk02: Hi, good afternoon. Good afternoon.
spk04: Hi. I noticed in the report, I wanted to ask a little bit more if you can elaborate on the decision to end the time charters with SFL and if that loss in termination of $600,000 is on top of the 4.5 million.
spk03: That's basically the adjustment to the balance when we cancel it.
spk00: That's something we have had every quarter for how many years? It's actually an adjustment we have to make in order to adjust to what happened back in 2015. when the merger between Frontline and Frontline 2012 happened. At that point in time, Frontline 2012 was the accounting acquirer, and Frontline Limited was acquired and needed to be fair valued. And at that point in time, we took on the balance sheet then a valuation in relation to this SHIB finance leases. This is a kind of adjustment we need to do compared to what we thought at that point in time was the profit share that we should pay in connection with these leases. So this means in a way that we took too much profit share on the balance sheet compared to what we actually paid them. So that's why we had to do this. Sorry about the long explanation, but... Okay.
spk04: Okay, yes, thanks. And it's kind of related to the earlier question on if there's any restrictions regarding the merger. I know there are about four vessels under commercial management, and I just want to know if that will continue if the merger goes through. Yeah, that's the question. Thanks.
spk03: Yeah, no, sure, Chris. That's a fair question. And the answer is yes. You know, we would, you know, because the merger wouldn't change any of our kind of commercial arrangements.
spk04: All right. That's it. Thanks, Lars. Thanks, Inger.
spk02: You're welcome. Thank you. Thank you. Your next question is from the line of Chris Robertson from Jefferies. Please go ahead.
spk01: Hey, good morning, and thanks for taking my questions.
spk03: Good morning. Good morning.
spk01: So, on the 12% of the fleet that's non-ECO, I guess, how are you thinking about these vessels in context of, of course, IMO 2023 and beyond, but then in context of the merger with Euronav that's pending? Are these sales candidates in your minds, or are they more likely to be incrementally upgraded to comply with the new regulations?
spk03: That's a good question. They're not regarded as sales candidates, but that's more related to where we think we are in the curve. We firmly believe that we're entering a period now where actually global tanker capacity or carrying capacity will be slipping. at the same time as we believe oil will flow and demand will be, if not fantastic, at least maintained. So basically having kind of assets on water has a value going forward. That's kind of our main thesis. These vessels that are non-eco would, you know, kind of we've looked at the extent of capex needed in order for these vessels to be challenged by energy efficiency come 2023, and it's extremely little. I don't know if you're familiar with the term of derating, and basically it's limiting the engine's power capacity, and then you actually fall in line. And you can do other adjustments as well, which is low capex investments. So as I've kind of covered earlier, On earlier quarters, the frontline fleet is, in fact, in quite good shape to face EEXCI and the following CII over the next years. Our average rating is A when it comes to design, and we're quite confident we'll be able to maintain that for a prolonged period of time. And this has to do with the simple fact that these vessels have the capabilities of reducing power and output.
spk01: Okay, yeah, thanks for the color on that. That was really in-depth. My second question is related to the strong quarter-to-date rates that Frontline has booked here. So it seems that you have come in above some of your peers. So I was wondering if you could talk about is that just due to the way Frontline accounts for these, or is there an operational or maybe positional advantage that you had during the quarter that allowed you to outperform?
spk03: Well, we report according to US Cup and on the load-to-discharge basis. Over time, this basically makes no difference from... reporting on a discharge-to-discharge basis, but when we guide, one should assume a certain portion of open days at the end of the quarter where no income can be accounted for. But I think what we've seen over the last few quarters post-guiding, yes, the earnings have reduced, but maybe more so on the bigger vessel classes that have longer voyages than on the smaller vessel classes. So, you know, I would expect, or we can at least fingers crossed, that the LR2 sensors maxes will fall more in line with kind of the guidance. On the VLCCs, there is room for a potential adjustment, depending on what the market does from here in.
spk05: Okay, thank you very much for your time.
spk03: Also on your question, you'll find that amongst our peers, most are reporting on a discharge-to-discharge basis, but there are also at least one that reports in a similar manner.
spk00: I mean, load-to-discharge is actually the US GAAP standard, so they should in a way report on that basis, but we know probably that at least one, as you say, do on a discharge-to-discharge basis.
spk01: All right, fair enough. Thank you very much.
spk02: Thank you. There are no other questions at the moment. As a reminder, if you do have questions, you can press star and one on your keypad. Now we have a question from the line of Nick Lanine from Cespin Place. Please go ahead.
spk07: Sorry, I think I was on mute. Thanks for taking my questions. Can you give me some color or maybe concrete examples on where you draw the line between crude that you will transport that has or might have Russian content versus what you won't do? So I'm assuming you won't do anything in the Black Sea, but would you load any crude in the Baltic? Would you carry crude to Asia that maybe has been sort of loaded in the Black Sea or Baltic on smaller ships and then wants to STS onto a VLCC? Would you load crude in Fujairah that may or may not have Russian crude blended into it in part? Kind of where do you draw the line and do you think you're drawing the line in exactly the same place as all the other kind of publicly listed companies or not? I'm basically trying to understand... how much of the Russian crude will effectively move to grey market ships, or whatever you call them, similar to the way Iranian Venezuelan crude is carried currently?
spk03: It's a very good question, and it's a difficult question to answer, because this has basically been the theme here in our company ever since this situation started. So basically what we have decided to do is basically to follow the sanctions. So basically what EU, what US, what UK, what they decide, we follow. So basically we're not taking a moral high ground to put it that way, but we're following what the politicians want us to do. And I think one has to keep this in mind. that ever since this war started, EU have been importing large amounts of gas and oil from Russia. These are actually molecules that the world needs. So basically, this is Frontline's position. So basically, we work within the framework that is kind of given to us. But with that, effectively... due to the web of sanctions, this is prohibiting us from doing a lot of business with Russia. And there's also something called breaking sanctions or risking breaking sanctions. And basically what has happened then is that most of the publicly listed owners that obviously have a lot to lose should they fall into like a sanctions issue with either US, UK or EU, they've basically refrained from taking the risk. And this is where we have landed as well. But you mentioned like a grey market. Still, Russian crude is allowed to trade. You're allowed to load and you're allowed to transport it. So What's happened is that owners that don't feel they risk kind of that much, and this is then independent owners that kind of, you know, they measure the risk and they feel they can live with it against kind of the premium they can make. They have moved into this trade. So, you know, I'm obviously not going to criticize or do anything for, you know, how owners decide to conduct their business. But the matter of fact is that we've seen them... You know, this is a highly inefficient trade because you're actually then sailing long distances and obviously passing the nearby ports. So this is then pulling tonnage out of the normal kind of bread-and-butter non-Russian trade, meaning that for us, on our Suez Maxis, we're experiencing then tighter markets in West Africa, in U.S. Gulf, and so forth. So you get basically... you have the same effect on the tank market, almost as if you were going to Russia and lifting the barrels yourself. How this is going to evolve is very difficult to say. As it is right now, and we're already seeing it, Russian crude is actually able to flow pretty freely into the market, and predominantly then to Asia, both with oil and products. We've, to a fairly small degree, seen STS and activity like that. It's more or less the ships are just sailing direct. I think in order to, and if this is what the political world wants, if you want to stop Russian exports, one needs to do something with the way the sanctions are structured. And that seems to be, well, it's not off the table, of course, and I'm not a politician, but they seem to refrain from that, at least until now. So I mentioned in my presentation that Russian exports out of Baltic and Black Sea have fallen only 360,000 barrels per day since February. So that tells you that this oil is moving still.
spk07: Have you picked up any cargoes in the Baltic in the last month?
spk03: We have on one occasion, yes. But that's been under contract. So basically when the ship is commercially contracted to a third party, that has happened, yes. But obviously we have a very tight policy on looking at all the implications. We would For instance, never ever send a Ukrainian national to a Russian port, and making sure that the crew matrix and so forth is okay. But this has been a challenge for all owners throughout this period, is that due to the way the sanctions are put up, you are sometimes not even in a good legal position to refrain from calling. It's a contractual obligation.
spk07: Yeah, yeah. Okay, thanks for taking my question.
spk02: Thank you. We have no further questions from the phone line, so I'll hand back to the speakers.
spk03: Thank you. Thank you so much for listening in, and obviously I would like to thank my organization for doing a fantastic job this quarter.
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