This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: To raise your hand during Q&A, you can dial star 1 1. The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.
spk03: Ladies and gentlemen, thank you for standing by and welcome to KEY 2022 Frontline Limited conference call. This time all the participants are in list and holding mode. After the speaker presentation, there will be a question and answer session. To ask a question, you will need to press star 1 and 1 on your telephone. I would now like to end the conference with the CEO, Lars Pasta. Please go ahead, sir.
spk02: Thank you very much. Good morning and good afternoon to everyone. Welcome to Frontline's second quarter earnings call. As mentioned in our release, this is the quarter where the LR2s took center stage. The market tends to forget that close to a third of our vessel days come from this asset class. We started to see the displacement of Russian crude and products also affecting the sous maxis during the second quarter. And finally, the VOCC got a pulse as the second quarter came to an end. Before we get to the Q2 financials and what lays ahead, let's have a look at the highlights on slide three in the deck. So in the second quarter, Frontline achieved $16,400 per day on our VLCC fleet, $6,500 per day on our SUSEMAX fleet, and a very impressive $38,600 per day on our LR2-AFRAMAX fleet. So far, in the first quarter of 2022, we have booked 73% of our VLCC days at $28,100 per day, 73% of our SUSEMax days at a solid $45,000 per day, and 62% of our LR2-AFROMax days at even more impressive $46,200 per day. All numbers in this table are on a low to discharge basis and may be affected by the amount of ballast days we end up having at the end of Q3. This is more relevant to the VLCCs that normally tend to go on the longer voyages. It occasionally affects tourism access and to a lesser degree LR2s. With that, I'll now let Inger take you through the financial highlights.
spk01: Thanks Lars, and good morning and good afternoon ladies and gentlemen. Let's then turn to slide five and look at the income statement. This quarter Frontline achieved the total operating revenues of 159 million dollars and adjusted EBITDA of 98 million dollars. We report net income of 47.1 million or 23 cents per share and adjusted net income of 42.5 million or 21 cents per share in this quarter. On the right-hand side of the slide, we show the adjustments made this quarter, which consists of a $8.9 million gain on derivatives, a $6.1 million share results of associated companies, a $1.3 million amortization of acquired time charters, a $0.8 million gain on insurance claim, $12 million loss on marketable securities, and $0.4 million loss on termination of leases. The adjusted net income in the second quarter increased 44.1 million compared with the first quarter. And the increase in adjusted net income was driven by an increase in our time-chartered equivalent earnings due to the higher TCE rates in the quarter, but it was partly offset by an increase in ship operating expenses of 7.5 million, mainly as a result of higher dry docking costs and other movements in income and expenses. Then let's take a look at the balance sheet on slide six. Total balance sheet numbers have increased with 304 million in the second quarter compared to the first quarter. The balance sheet movements in the quarter are primarily related to taking delivery of the two new buildings VLCC's front Alta and front Tvid. together with the acquisition of the Euronav shares in exchange for Frontline shares, in addition to ordinary debt repayments and depreciation. As of June 30, Frontline had 351 million in cash and cash equivalents, including undrawn amounts under our senior unsecured loan facility, marketable securities and minimum cash requirements. Let's then take a closer look at slide seven. Keeping costs down has always been in Frontline's DNA and core values of the Frontline platform is keeping it simple and focused and maintain lean and efficient management teams. This slide shows that Frontline also performed peers on OPEX, DNA and interest expense. And this together with outperformance of peers on revenues for at least two out of three segments this quarter, explains the superior operational performance of Frontline in the second quarter of 2022. Then I think we should look at slide eight. That is the cash break-even and cash generation potential slide. We estimate average cash cost break-even rates for the remainder of 2022 of approximately $24,900 per day for the VTSCs, $20,000 per day for the SUSEX tankers, and $17,200 per day for the LRQ tankers. This gives a fleet average estimate of about $20,700 per day. The fleet average estimate includes dry dock of six vessels in the remainder of 2022, with an impact of about $530 per day. The distribution of these six vessels is two VLCCs, one SUSEMAX tanker, and three LRQ tankers. In the second quarter, we recorded uptake expenses, including dry dock of $8,100 per day for the VLCCs, $10,400 per day for the Suezmax tankers, and $8,400 per day for the LRQ tankers. And in the second quarter, we have joined up six vessels, four Suezmax tankers, and two LRQ tankers. The graph on the right hand side of this slide, this shows the free cash flow per share after debt service and free cash flow yield basis current pleat and share price August 24 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 ecovessels Frontline has a free cash flow per share of $2.34 and a free cash flow yield of 20%. Free cash flow yield potential increases with higher assumed TCE rates and on a fully delivered basis. With this, I leave the word to Lars again.
spk02: Thank you, Inger. So let's move on and have a look at slide 9 and recap the second quarter. I've basically made a title here called the pivotal point for tankers Q2 is normally a softish quarter also referred to as a shoulder quarter but as we see on the graph at the bottom left something happened as we went into Q2 this year So global oil demand came in 700,000 barrels per day lower in Q2 compared to Q1, averaging at 98.4 million barrels. Supply came in at 99.1 million barrels per day, up a modest 0.2 million barrels per day and a quarter. It's basically the volatility we've seen in the market in Q2, and first and foremost on the LR2s, is a tunnel story. And we're currently reaping the benefits of that story that started during the second quarter. We're seeing highly inefficient trading patterns developing, and this to the benefit of oil in transit and utilization, as we can see on the graph at the bottom right. Towards the end of the second quarter, we saw all front lines asset classes, including the VLCC, start to move up. Asian, and in particular Chinese demand, was still subdued during the but current level of activity paints an interesting picture for future steps to come. Let's move down to slide 10. So global exports and what we're looking at here are two charts where basically it is the tracked output of oil and products split. from basically every producing country in the world and every producing or products producing region in the world. We've seen a dramatic change in demand and trading patterns for refined products developing during Q2 this year. I think people tend to forget, and it's a bit overshadowed by the situation in Ukraine, that most of the Western world has actually fully come out of the COVID-19 pandemic, with the effects that have had on demand. And at the same time, refining capacity, particularly in Europe and to some extent in the US, was reduced quite dramatically during the pandemic, where these regions experienced horrific refining margins. And in addition to that, we've had the situation with sanctions on Russia, making Russian oil and products more difficult to move. So basically what we see is that global clean product exports are actually approaching the highest we've seen. And this takes us back to 2017. If you go further back, AIS tracking is not as efficient as it has been in this period. But we are reaching all-time high on clean products exports globally. Global crude oil exports is improving. It's lagging though on the product side. But the appreciation in the global crude oil exports is primarily caused by US SPR releases and US production and their export capabilities growing. U.S. production has increased by 1.4 million barrels year to date according to the EIA and as most of you would know the U.S. are releasing what's equivalent to almost a million barrels per day of their SPR or from their SPR. In I would say writing but in speaking we currently see very high demand for tonnage both in the Middle East and in the U.S. Gulf indicate that this positive development for freight looks to continue. Let's move then to slide 11. And the order book continues to dwindle, in particular on the crude side. There have been no orders for VLCCs or SUSEMAXs in the last 12 months. I have to correct myself there a little bit, because I saw reports this morning that there were VLCCs ordered, or rumored to be ordered, in Japan. but we'll get back to that. In order to get a significant change to this picture we need far more. On the VLCC side we have seen 27 vessels delivered year to date and there's still 21 to come. Some of those will obviously move into 23. But the total order book is at 41 vessels. We have a fleet of 861 vessels of which 81 during this year will be over 20 years old. Once this order book is finished delivered, 114 VLCCs will be above 20 years old. On the SUSE Maxis, it's even more pronounced. We've seen 25 SUSE Maxis delivered this year. There are eight more to come, six next year and two in 2024. That's a 16 total in the order book. And we have 65 SUSE maxes that will pass this 20-year threshold this year. And looking at the time the order book delivers, it's a total of 111 SUSE maxes that would effectively be disqualified from the commercial trading oil market. On the LR2s, we have in fact seen some orders placed this year. The broker reports vary, but we've landed on identifying 13 orders placed. But still, I would argue that that's not an alarming development. There are 20 LR2s, or at least vessels that are registered as LR2s, that are going to be over 20 years this year. But if you kind of heighten the threshold a little bit and put it at 15 years, which for anyone that trades clean products know is a more relevant yardstick, you have more than 70 LR2s built prior to 2008. So basically when this order book has delivered, these will come to age. So we're not really that alarmed about the development on the LR2 side either. I think if we look at the chart at the top left side here, and this has become quite repetitive over the quarterly presentations that we have, and the blue line is the absolute dead weight size of the tanker order book, and the yellow one is at the percentage of the fleet. And as we can see in absolute dead weight, we're back to 2000-2001 period, And we all know that the oil market is much larger now than it was in 2000. In a percentage of a fleet it's even more pronounced, where we need to go back to 1996 and even before. I actually don't have history prior to 1996 on this, so it's difficult for me to gauge whether if we are early 90s, mid 90s or in the 80s. But this is an alarming development I would say. And we're starting to see the early signs that tankers could become a bottleneck in the energy logistical chain. And I'd like to add though, for those of you not that familiar with freight and tankers, is that not every country in the world is blessed with oil. And there's also an asymmetrical relationship between population growth and oil resources. So this transportation need is actually real. So let's see how this develops. Let's move over to slide 12. And I find this quite exciting. The time charter market has almost erupted over the last month. The time charter or the period market is an old school bellwether for large oil transporters expectations. These are, as we refer to as the big guys, the Shells, the Equinors, the BPs, the chevrons, you know, the big boys in the game that have equity crude, have substantial transportation needs, are in the market, all of them, for up to three-year commitments on time charters. And to them, even for them, a three-year commitment is significant. We have seen earlier kind of in the reporting season, even five-year charters being concluded. And this is extremely interesting and extremely encouraging. This is obviously in line with the spot, but it's not that often that you, after a relatively short period of firm spot markets, see this kind of activity in the long-term time chart market. So this basically means that our analysis might be in line with some of these guys' analysis. Frontline will remain a spot-focused owner with the objective to offer our investors spot market returns. a certain degree of secure revenue and margin plays a part of our long-term mission. And as we have reported, we are actively looking at the time charter market for some of our asset classes. Let's move over to slide 13. We are, although it's been fairly quiet from Frontline in this respect for the last couple of months, or actually not months, last month I would say. Frontline and Euronav combination is on rails. We are moving forward. Basically the part of the process we are in now is led by legal and it's more a regulatory job towards the regulators. And we're working towards a full frontline relocation filing for the relocation of frontline from Bermuda to Cyprus. That will be followed by a tender offer. We expect that to happen in Q4 this year. There's always also been discussions around the various outcomes of this tender offer. I've left the achieving less than 50% acceptance out of this but obviously if that should happen we don't believe it will we think this is an industrial solution the market wants but you know I just left that out if we get above 75% acceptance amongst the Euronav shareholders we will go directly to a merger with Euronav should we in the case end up between 50.1 and 75% the outcome is more or less the same. Frontline gains control of Euronav and a combination of the two complementary platforms will be created, will perform basically as one company, although Euronav will be a subsidiary of Frontline. So let's with that move to slide 14. and do a summary. So Q222 was a shoulder quarter in the terms of oil demand, and in fact Q3 should have been the same. That's if you follow normal seasonal patterns. This is currently a tumult story with sanctions on Russia being a catalyst, but we may face a structural catalyst when it comes to products. I mentioned earlier in the presentation the dislocation between refining capacity and demand. Global crude oil exports are approaching pre-COVID levels and oil in transit is already there. Order books continue to dwindle and there's currently no incentive present to invest in new capacity just yet. Also there is a question of when this capacity can be ready to the market should the ordering start now. The other question then is are we starting to feel the structural bottleneck bottlenecks of oil transportation that may come. Frontline has a modern efficient spot exposed fleet and the stars are looking to align and I might add winter is coming. I'd like to draw your attention to the chart at the bottom, which is different from the last three quarters. And it's basically a seasonal chart of the average weighted earnings of all tankers. It's not frontline tankers, it's all the tankers, basically all the tanker indices. And as you might notice, it's a very unseasonal pattern evolving. And with that, I'll open up for questions.
spk03: Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question, please press star 1 and 1 on your telephone. We're going now to take our first question. Please stand by. The first question from Gennato Ciappo from Evercrazy. Please go ahead.
spk06: Thank you. Good afternoon. Lars, two quick questions on capital allocation. First of all, it's good to see the dividend renewed for the first time. If we do the math, it looks like maybe a 70% payout ratio. It's just been so long. Just wanted to get confirmation on a rough range. And then the second part to that question is, as we're going through the final steps of consummating the Euronav transaction, are there any restrictions on the amount of dividends or any other corporate actions you can take until that process is finalized?
spk02: First of all, Inger just handed me a note here. I believe it's 79%.
spk01: Yeah, because we need to calculate that the dividend basis is 222.6 million shares. And not basis, but the shares standing at the end of the quarter, second quarter I mean. But then you will come to that it's 79%.
spk02: I'm back to your other question. The combination agreement was made public in July and the exchange ratio is set. and it's within that exchange ratio that the dividend has been is being paid but for future dividends it needs to be basically adjusted either via the exchange ratio which is very unlikely and then via the amount of shareholders that Frontline will have post-merger.
spk06: My second question for you, Lars, is you mentioned in the presentation that you haven't really seen China come back to the market yet. It feels like Russia is still pretty reliant on, I'm sorry, Europe is still pretty reliant on Russian crude and the sanctions clearly haven't gone into effect yet. Is there any way to quantify or even qualify what's driven this VLCC spike before you've really seen the impact of these two potential big catalysts into the market?
spk02: Well, first I'd like to say that the European and US sanctions on Russian crude has not affected the Russian flows per se, but it's altered the trading pattern. So basically what we see right now is that Russian crude oil and Russian products is sailing past Europe and to Asia. And at the same time, Europe has had to change their purchase patterns and are importing to a much larger degree feedstock and products from Middle East, West Africa and the US. And this is what created this highly inefficient trading pattern. So the sanctions have stopped Russian crude to enter Europe, just as far as we see it. With regards to the VLCC, that's a very kind of recent development. And I think it's more related to the U.S. production and the U.S. SPR release and their export capacities. So as you know, and I think I've described this before, on previous calls that the oil market is a bit like a toothpaste tube. If you press it, the toothpaste will pop out somewhere. And basically, US crude oil has then priced itself to go far east, basically by the share volume being offered. So that, I think, is the game changer here. I also think, not to be too technical, the flatness, you know, in a very, very steep aqueducted market, it's quite expensive to hold large volumes of crude oil over a long voyage. It's basically unhedgeable. But obviously, with the flat structure in the crude oil market, you know, it's easy to hedge your exposure over the 60 days you need in order to transport crude from, say, US Gulf to China.
spk06: Okay, that's all very helpful. Thank you, Lars, and thanks, Finger.
spk03: Thank you for your question.
spk04: We are now taking our next question. The next question for Chris Strong from Web Research.
spk07: Hi, good afternoon. How are you?
spk02: Oh, thank you. We're good? We're good, yeah.
spk07: Good, good, thanks. Yeah, just to follow up on that last question, so are you saying that you'll continue, we'll continue to see VLCCs, LADs, SUISMAXs for the near term? Is that right?
spk02: So basically what we're seeing is that at least we also see, you know, when these large trade lanes open up, as we've seen US Gulf to Asia or to North Asia, you utilize the vessels for a very, very long period of time. So it takes away capacity for a long time. So we also see the activity continue. when we fix veal species now we fix them for late September lay counts so basically the oil will be lifted in September and delivered to China sometime in late October early November and this we see continue as October dates are already being addressed this does however create a bit of a hole in the SUSEMAX program because they fix closer to the loading dates But at the same time, the SUSEMax has a lot of support from the flow of crude from both Middle East, but primarily West Africa into Europe. So we basically see, you know, this seems to be maintaining or maybe even firming. Okay, great.
spk07: Yeah, thanks for that, Kalle. That was really helpful. your fleet mix. I know in the presentation, you guys are not looking at new capacity just yet, but with the Ford Vs delivering into early next year and the potential merger with Urinate Fleet, which is heavily V-weighted, I just wanted to understand, is there a desire to rebalance your fleet mix, or how should we think about that?
spk02: You're absolutely correct. It is to rebalance our fleet mix. And, you know, historically, Frontline has been a predominantly VLC company, you know, secondary having SUSE Maxis. And the LR2 additions to our fleet is actually kind of in the long term fairly new. We do see them obviously as very efficient trading vehicles. And I think this quarter tells the story of that. but no it's a simple analysis which we've repeated a few times but I'm happy to repeat it again if you look at the average cash break even frontline has per vessel cost and you also then think of the economies of scale in oil transportation you'll find that the lid on or the kind of where the VOCC peaks is so much higher than, for instance, for the VLCC, or compared to an LR2. So it means that you get, to put it very bluntly, more bang for the buck owning VLCC in a good market. And this has basically been Frontline's philosophy all along. We're also quite good at running VLCCs, have a good client base. in that segment, and so this has basically been kind of where the bread and butter over the years has been gained from Plain. So the Euronav transaction is a part of that, of continuing that story.
spk07: Got it. Great. Thank you. And just if I can squeeze one last modeling question in. Just noticing your admin costs have increased up a bit this quarter. Is this a one-time thing associated with the Plain merger with Euronav, or is this something else?
spk01: Yeah, you're right. We do have some more professional fee expenses related to professional fees and legal costs in this quarter than we usually have related to this merger.
spk07: Okay, so it wouldn't be like the run rate going forward. It's just slightly elevated this quarter and maybe into next.
spk01: Sorry, I didn't catch your question.
spk07: Okay, I was just saying that this shouldn't be looked as a new run rate for admin expenses and it's just, you know, this quarter and next, it's just going to be slightly elevated?
spk01: Well, I mean, as long as we are in the process of, let's say, combining the companies, I guess you could assume that we will also have higher professional fees and legal expenses in the next quarters to come.
spk07: Right, yeah, no, makes sense. Thank you, Ingrid. Thank you, Lars.
spk08: Thank you. Thank you for your question.
spk04: We are now taking our next question. Please stand by. The next question from Omar, not from Jeff.
spk05: Hi there. Hey, guys. I have a couple of questions for you just on the Euronav transaction. Obviously, in the second quarter, you did a few share deals that took your stake up to around 20% in Euronav. Is there anything that prohibits you from doing more, assuming the opportunity exists, to take your position higher ahead of the tender offer?
spk02: It is in fact and you know this these two kind of transactions you can call them were bilateral and they were kind of driven by by incoming to put it that way there is a regulatory kind of mechanism called the creeping tender offer if you continue to do this At least the US legislators will kind of arrest you, not like physically, but they don't deem it the correct way of going about it. So that's why we kind of stopped there. Also, there are limitations to, you know, when you become a related party and so forth. That's not necessarily a big issue for us, as we are very much related through the combination agreement already. But, you know, there is no kind of big incentive for us to continue that path. Or it isn't a path to continue those, to do more of those transactions.
spk05: Yeah, got it. No, that makes sense. I appreciate that. And I guess this is maybe sensitive, so I understand if you're not able to respond. But are you having any discussions with the UNF shareholder that has been vocal in his opposition to the deal, you know, maybe reaching an amicable solution? Or does it just simply come down to, you know, how the tender offer comes about later in the year?
spk02: In the end, it comes down to how the tender offer, you know, what happens, you know, when we count the shares at the end of the tender offer. Understood. Okay. Well, thanks, Lars.
spk03: Thank you. Thank you for your question. As a reminder, if you wish to ask a question, please press star 1 and 1 on your telephone.
spk04: There are no further questions at the moment.
spk03: I will hand back the conference for closing remarks.
spk02: Okay, thank you very much for calling in. Again, these are exciting times. You know, we're quite excited both by the market developments and our ambitions with regards to the combination of Euronav. So with that, I thank you and have a good day.
spk03: The conference will begin shortly. To raise your hand during Q&A, you can dial star 11.
Disclaimer