Frontline plc.

Dear all, and thank you for tuning in to Frontline's first quarter earnings call. We're a bit late, but better good than earlier, whatever the expression is. We've had an unseasonally strong first quarter of the year. Russia still has an impact on the market, or there is sanctions on Russia. But I think kind of the key part of the action in Q1 was related to China. The strong Q1 has given us ability to book quite strong numbers into Q2 as well, as the frontline team relentlessly grind to create shareholder value. Before I give the word to Inger, get our TC numbers on slide three in the deck. In the third quarter, sorry, in the first quarter, Frontline achieved $52,500 per day on our VLCC fleet, $64,000 per day on our SUSEMax fleet, and $56,300 per day on our LR2s-Apramax fleet. And we are, in fact, back to a somewhat reverted earnings relationship between our segments, with the SUSEMaxes outperforming the VLCCs, and the same for LR2s. We have secured quite firm numbers as we progressed into Q2, with 78% of our VLCC days booked at $75,000 per day, 71% of our SUSEMax days booked at $65,000 per day, and 63% of our LR2 AfroMax days at a very respectable $65,700 per day. Again, all these numbers in the table are on the low to discharge basis, and they will be affected by the amount of ballast days we end up having at the end of Q2. And mind you, this is Q2, which is supposed to be the weak point in the market. With that, I'll give Ingrid a word, and she'll take you through the financial highlights.

Thanks, Lars. Good morning and good afternoon, ladies and gentlemen. Let's Then turn to slide four, the profit statement, and look at some highlights. As Lars already has stated, Q1 23 is the highest first quarter profit since 2008. Q1 23 is also the first interim financial information presented by the company on IFRS. Following the transition to IFRS, one important thing is that dry docking costs will be capitalized and subsequently depreciated over the period to the next scheduled dry docking, which is from two and a half to five years. The Q123 dry docking cost was 3.6 million that has been capitalized, and three vessels were dry docked in the quarter. I will also mention that the company has revised the estimated use for life of its vessels from 25 years to 20 years, and that was effective from January 1st, 2023, which resulted in an increase in depreciation expense of 12.7 million in Q3 compared to Q4, 22. Then let's turn to slide five and look at some balance sheet highlights. The company has no remaining new building commitments until Q1 2023, as the company took delivery of the two last B2C new buildings, Front Orkla and Front Tegn in January 2023. The company has strong liquidity of 584 million in cash and cash equivalents, including then the undrawn amount of unsecured facility, marketable securities and minimum cash requirements. Then the company lastly has a healthy leverage ratio of 52.9%. Then I would like you to turn to the next slide. And lastly, let's look at the cash flow potential of the company. We estimate industry leading cash break even rates in 300 fleet average, and that includes dry docking costs for eight Zeus Max tankers in 2023. Four of them is to be expected to be dry docked in the third quarter, and four is expected to be dry docked in the fourth quarter. The Q1-23 average OPEX excluding dry dock was $7,300 per day. The free cash flow indicates strong potential return for the company, as you can see from the table on the right hand side. Just picking the scenario where we assume VLC rates of $75,000 per day, with five year historic spread to VLC for SUSEMAX and LR2 tankers, The annual free cash flow potential is about $1.4 billion, or $6.29 per share, representing a free cash flow yield of 42%. And with this, I'll leave the word to you, Edvin Lars.

Thank you very much, Inger. Let's have a quick look back at the Q1 2023 tanking market. So I already mentioned that it wasn't typically seasonally strong. Normally, in the Q1, we'll kind of get sober after the Q4 hype, and markets will fairly quickly start to deteriorate into February. What happened this time around was that we had the second peak in the market in March, and all segments from plant operates were performing very, very strong. If you look at the chart at the bottom left here, you'll find how elevated the average weighted market earnings are. The reason for this is obviously that it's not only VLCC and Serious Max, but it's also Afromax and LR2 being very, very strong. If you compare it to the period that we like to look back on, the period from 2003 until 2009 in the most recent times, we are actually quite high up on the earnings side and the markets are performing very very well. Chinese imports moved to all-time high if you look at the chart to the bottom right. We also saw the highest number of VLCC shipments to China. As I already said, Russian sanctions continue to yield inefficient trading patterns, but it is more about China, as that situation seems to have found some sort of plateau. We did, however, have a very mild winter in the Northern Hemisphere, both in Q4 and Q1, and this muted oil demand to some extent. If we then move on to slide eight, or page eight, And we did receive an OPEC cut, or a voluntary cut. The volumes are indeed down for May, but what about ton miles? So Russia continued to export. With the current oil price scenario we're in, the G7 cap is not an obstacle to Russian oil exports. And we see Russia pump relentlessly. Quite interesting, now ahead of OPEC meeting on June 4th. Both OPEC plus and non-OPEC volumes were down in May. But this is, and we need to remember, this is the seasonal slow point of the year with high refinery turnarounds. Global oil demand is expected to rise by around 2 million barrels per day in second half of 2023. And if we look at the whole picture, the global exports overall are indeed back to pre-COVID levels, albeit a little bit slow in May. It's going to be very interesting to see what the US, Brazil, and West Africa are able to do post-summer, as those are the three candidates to have the ability to export more volume as we proceed into winter. Let's then move to slide nine. So vessel utilization is still high, but it's volatile. We'll see that on the bottom left-hand side, and this data is from SignalOcean, where they basically record every fixture done on the various asset classes and measure the amount of days the vessels are laden. And if you look at the chart at the bottom left, If you look at the VLCC, we are quite elevated compared to historical patterns. It has corrected down, yes. It might be a bit muted right now, but the VLCC is probably still affected by the rally in Q1 and the mini rally we just observed a couple of weeks ago. If you look at the Suez Maxis, they too are high relative to the previous years, but again have corrected over the last couple of months. LR2s are back to trend, I'd say, although high in the trend. But I think the key takeaway from these three charts is to look at the overall direction of the utilization and of the ton mile demand throughout the year. It's clearly that we are, firstly, at the low point in the cycle, and secondly, that the direction towards the end of the year well judging on history, could be very interesting. Let's then move to slide 10 and have a quick discussion on the order book. And I'm not going to go through all these charts in detail. I think they tell their own tale. It's quite incredible that by the end of this year we'll have 111 VOCC still operating in the market above 20 years of age. That amounts to 12.6% of the current trading fleet. The order book stands at 16 vessels yet to deliver, and that's 1.8% of the fleet. If you look at the Suez Maxis, about 14% of the fleet will be above 20 years as this year ends, and the order book stands at 18, after having grown actually quite a bit in Q1 and Q2. That amounts to 3% of the existing fleet. LHU, AFRAS, the global fleet is only 415 vessels. 25 of those are over 20 years. Here it's actually more relevant to look at 15 years, but just to be kind of conservative, let's just look at the 20 years. That amounts to 6% of the existing fleet. The order book there is growing and it's sizable. So it currently stands at 12.8% of the existing fleet. If you look at overall for the segments that Frontline are exposed to, or the asset classes that we are engaged in, close to 12% of those fleets are above 20 years of age, and the order book stands at 4.6%. It's very, very difficult to see a scenario on the supply side That will rock kind of the tanker story at least until well into 2026. And then finally to sum up, so Frontland delivered the highest Q1 profits since 2008, 193 million and a cash dividend of 70 cents per share. We continue to capture value on time chart analysis at an elevated point in the cycle. There are new orders being seen for SUSEMAX and LR2, but 2025 is now firmly sold out, and you can build in 2026 in China. In Korea, you probably need to look to 2027. And we also see only two orders rumored here today, although more are being discussed. And 12% of the tanker fleet that we are exposed to is going to be about 20 years by the end of this year. The OPEC Plus actions have had a limited impact so far in May, and it looks like it's counted by ton miles. And again, China will be the X factor as we grind through the summer low. Lastly, I'd like to explain a little bit on the chart below. I just had a presentation for a group of students from Denmark, and basically explaining the long-term picture in oil and tankers. And what you see in the blue line is oil demand, which tends to grow with population growth. And on the right-hand side, or the yellow graph, is annual fleet growth as we get into 2025.

and although this is a bit of apples and pears it just doesn't add up and with that I would like to open up for questions ladies and gentlemen we now begin the question and answer session if you wish to ask a question please press star 1 1 on your telephone We are now taking the first question. And the first question is from John Kappel from Evercollege. Please go ahead. Your line is open.

Thank you. Good morning, Lars. Good afternoon. First question's on strategy. Some interesting developments since the end of the quarter with the sale of the vessel and the two time charters on the LR2s. Are you at the point in the cycle now where you're looking at harvesting some of the older tonnage, which may not be core? I think there's 10 ships that are over eight years old, and then also are you at the point where you're looking to do more time charters maybe on the LR2s and keep the bigger crewed ships available for spot?

Yeah. First of all, when we look at the fleet and which vessels that could be potential sales candidates, we look at efficiency primarily and you know we are preparing for a tighter regulatory framework for CII and ETS and whatnot so it's basically with that in mind we look at it and obviously the values that are achievable as it's been so far it's on the time-sharded side you know we've seen elevated values on the AfraMax slash LR2 And we've seen a lot of price action on the second hand SUSEMEX side. So I think it's just natural. But yes, we will tap into the market when we see values that are you know, basically what we call it internally is, you know, when you can achieve unicorn numbers on certain asset classes for a sustained period of time, we basically just have to take it. The average cost, you know, the average cash break even on our AfriMax's LR2s, you know, we kind of need to keep that in mind, you know, when you can achieve 46 and a half thousand dollars per day against the cash break even of 16 800 you know it's basically something you can't pass on the asset side we're not you know publicly offering all our vessels that's really a good strategy but yes for the less efficient vessels we will be prone to take advantage if the opportunity is there

If I could just follow up on both of those topics with just kind of a more recent update, there seems to be a lot more skittishness, the OPEC cut, global recession, oil prices weak, et cetera, although you've laid out a framework where the next two years should remain quite robust. Have you seen any slowdown in transaction activity in the older vessels, which seem to be pretty parabolic over the last 12 months? And in the same token, have you seen any slowdown in the willingness for charters to lock in for that two to three year period.

You know I would lie if I didn't say yes and as you know you've been in this industry for a long time we tend to be more focused on the big deals when the spot market is strong rather than the opposite and right now we've had volatility we also have some weakness in the segments and that's you know basically it changes sentiment somewhat But I wouldn't say, you know, I see this as a kind of ebb and flow short-term kind of event. I don't foresee, unless we end up in a situation where global oil demand falls out of bed, I don't see that being sustainable. So it's very typical for Q2 to be quite honest.

Yeah, that makes complete sense. Thank you, Lars. Thank you.

Thank you for your question.

We are now taking the next question. Please stand by. And the next question. Please go ahead. Your line is open.

Hey, good morning and good afternoon. This is Chris Robertson on for a minute. Thank you for taking our questions. Lars, just wanted to touch on the LR2 fleet for a moment. How many of those are currently trading dirty at the frontline level? But also, do you have a general sense maybe across the fleet of how many LR2s are engaged in a dirty trade at the moment?

Well, thank you, Chris. That's a very good question because The switch between clean and dirty has become increasingly effective over the last half year. So it's actually very difficult to follow. Not obviously on our own fleet, I'm quite comfortable, but with what happens kind of out there in the world. Just to explain to you, you can turn around a dirty vessel into clean in the Middle East fairly quickly by doing a couple of short trips with the common state. and at least up till now the market has been willing to price a hefty premium for that ability so it's basically motivating the owners to do exactly that but at least you know on our own of the vessels that we still control that not that are not on time shot route so that would be 14. there's four okay

Got it. Switching gears here, just looking at shipyard capacity, you know, you mentioned the limitations, you know, the Chinese yards maybe for 2025, delivery three in 2026. But I guess, do you have a sense of how much mothballed capacity could come back online over the next few years? And is the limitation out there right now more of a labor issue or is it more of the, you know, the yards themselves, the real estate aspect of it?

I think you know we have seen not new kids on the block but we've seen and I wouldn't call them off wall but yards in China with the very very much reduced capacity that are kind of getting revitalized and willing to take orders this is obviously a risky exercise but you know if you're an owner to utilize these yards but there are a few I think it's difficult to to quantify it but if you look at some of these new kids you can't get a ship before 25 or you can't even get it before 26, and that's basically because it takes time to get these yards up and running. I think on the labor side, it doesn't seem like China has much of a problem. In Japan and Korea, that's definitively a factor. Also in Korea, what we see is that you know although a tanker is a fairly complicated ship they tend to focus on kind of more labor intensive or more technical technology intensive ship types so they're actually not really well they're offering but they're pricing themselves out of the equation to build up And that's 27. But with regards to kind of the overall potential volume there, it's very difficult to gauge. And there is not a potential volume until, well, it's starting in 2026.

Okay, yeah, that's great, Kalle. Last question for me. This just relates to, I guess, your expectations around the OPEC meeting coming up here in a few days. You know, the Brent prices are trending. well below $80 a barrel, which we kind of see as a threshold price, some market commentary out there around the speculators in oil pricing. Is your fear that there could be additional cuts on the table going into this meeting, or how are you thinking about that?

Well, I can't really do much more than reading, I think, what you guys read in the press. I must say, however, that, you know, when you do a cut with effect in May to then suddenly start an additional cut in June is, you know, kind of, it looks a bit strange because you need this. And it's also at a low point in the demand cycle. So I guess you need to have a little bit of patience when you do such a big move, you know, being an OPEC strategist. I think what's disturbing this situation is that Russia, although claiming to adhere to the voluntary cuts strategy, physically they are obviously not doing that. So it's going to be an exciting one. It's almost impossible to give a qualified kind of guess What I will say, though, that any kind of demand increase, since this is a voluntary cut, it's going to be reversed very quickly once demand kind of shows its hand.

Yeah, I think that's fair. It seems more like a compliance enforcement issue in the short term, and then they could ramp back on over time, as you said. Okay, yeah, thank you very much for taking the questions.

Thank you, Chris. Thank you for your question.

We are now taking the next question. And the next question from Homer Nocta from Jefferies. Please go ahead.

Thank you. Hi, Lars. Hi, Inger. Good afternoon. Just wanted to just check back on the new building discussion. Clearly, I think that the slide 11, the very simple chart probably just says it all in terms of oil consumption growth and the fleet growth. I remember, Lars, on the last call you had mentioned, I think it was the last one you had mentioned, new buildings weren't that interesting to Frontline. Just wanted to see kind of if you have an update there. Obviously, you just highlighted in your comments about how we're looking at firmly into 26, perhaps 27 to take delivery. But just in terms of how you're seeing the opportunity to get into the new building market, I guess, one, is that something you're perhaps revisiting? And then, two, how would you maybe compare the opportunities when it comes to maybe placing VLTC orders versus Suez Maxis and LR2s?

Yeah, it's a good question, but regretfully, or not regretfully, I think the answer is the same. There are three things that we need to consider when we look at the new building market. number one is obviously what technology we're going to go for but say you were looking for a conventional then it's the delivery time until you can actually get the cash flow from that investment and then lastly it's you know the price of the asset itself so and basically what we're seeing is you know I hear arguments that inflation has kind of yet to hit asset prices, because if you look at asset prices adjusted for inflation, kind of long-dated, a 2008-2009 VLC equivalent would be 70 million dollars today. So, but in order for that to be true, you need inflation also to hit the rates and so forth. And then we need like the long-term time shutter market to be far higher than what we've seen kind of glimpses of in the last couple of quarters. So I think kind of, you know, with that in mind, it just doesn't look very interesting to frontline. I also note that some of the orders we're seeing, it's either against long-term shutter commitments which is not something Frontline would engage to. Our proposition to our shareholders is to give spot exposure. Secondly, the ones that are not connected to a long-term charter seem, at least to me, as somewhat opportunistic. So basically, you pay a 20 or 25% down payment on a call option for a market that could be quite interesting in, say, 2026. And we are not in that business either. So this is why, you know, obviously we look at it, we observe it, but we're not there to press the button.

Makes sense, Lars. Thanks for that. I guess as we think about that, clearly you do need inflation in terms of, you know, the impact on charter rates to really induce some ordering. How do you then think about, I mean, obviously Frontline, you guys have been very acquisitive over the years, but in general, when you think about deploying capital obviously you have a capital allocation policy of paying out meaningful dividends. In terms of where maybe there's an opportunity or a value set or whatnot, is it new buildings clearly off the table? How do you then think about whether doing stuff in a sale and purchase market, is there opportunities in the younger tonnage? Are there opportunities maybe in the older tonnage where people have maybe ignored because of the transition here towards a greener future? Any kind of thoughts about where there could be an opportunity to pluck some assets on the cheap, whether it's age range or perhaps vessel class type.

Yeah, no, I think kind of vessel class side, you know, we would be kind of studying closely any LR2, AFRA, SUS, MAX, or VLCC that is below five years, but, or at five or below that. If you look at the visibility and the offering in that kind of portion of the market, it is virtually zero. So it's, you know, a lot of the modern wheels of seeds, you can say, that have been delivered over the last few years are actually on time charters and even re-let again to operators or traders or oil measures. So these guys are not really sales candidates. And so there is basically a vacuum for vessels in that kind of age group that would be interesting to us. So I think that's basically the answer. And, you know, with that in mind, we'd rather sit tight and churn out the best return we can from the assets we hold until we make kind of an investment decision.

Yeah, it makes sense. You already have that critical mass. Maybe just one, if I could, obviously very sensitive, but just wanted to check in and see, since you're having this call, any public comments that you're willing to make in terms of the situation at Urinev with the shift in management and the board? And then also, I know it's probably more sensitive and not necessarily directly related to frontline, but any comments to make about the back and forth with international seaways yesterday?

Yeah, no, I understand the question, but it's not really for me to comment to be quite honest. I'm an observer just like you are on both the Euronav situation. Well, we're shareholders, but that's basically as far as it goes. And international seaways is the same. It's, you know, I read what you read, and I have, you know, limited visibility.

That's good enough. Thanks, Lars. I figured I'd ask. I'll turn it over. Thank you.

Thank you for your question. We are now taking the next question. And the next question from Chris Chung from Webair Research.

Please go ahead. Your line is open. Hey, good afternoon, Lars. How are you? I'm good. Thank you. And yourself?

good good thanks i um wanted to just ask that in your deck you highlighted russian sanctions and velocity you know inefficient trading patterns which has obviously been a tailwind for a lot of tanker owners do you believe these inefficiencies could be worked out or are they more structural in nature and until the war is over and until sanctions are removed um

Well, what I'll say is, and I was contemplating adding that to this deck, but I wanted to do some further checking. But, you know, with basically all the whatever that's called, basically what I'm observing or what we are observing is that if you look at the SUSEMax and AfroMax fleet, and you look at how many are calling on Russia, if you do that study for the last three months, you'll find that approximately 30% of the AFRA and 30% of the Sysmac fleet is still at one point calling on Russia. So this suggests that kind of the interconnection between the grey fleet, if you call it that, and the white fleet, if we use that word, is actually very, very high. So it means that there are obviously inefficiencies, but maybe not as pronounced as one would expect, because it's not so that we've lost 30% of the ships in the non-Russian trading market. So I think it is a bit more balanced picture. What is true though is that know a vessel of less quality and you know kind of outside of the age restrictions and so forth or maybe operated by a company that has a red flag attached to it they will obviously not be able to access the compliant market but it seems like the interconnectivity is actually quite efficient, as you would expect in a tanking market. But this has actually some positives to it, because it actually means that the risk on, well, it's wrong to call it a risk, but whenever this situation reverses, maybe the negative impact on the tonne miles won't be that kind of grave as well.

I see. Thank you. And maybe just one follow-up on the arbitration. I just wanted to ask if there are any notable milestones that we should be on the lookout for from now through June 2024?

No, not at the moment.

Okay. Fair enough. I'll turn it over. Thank you, guys.

Thank you. Thank you for your question. We are now taking the next question. And the next question is from Sherif El Magribi from BTG. Please go ahead. Your line is open.

Good afternoon. Thanks for taking my question. First, I want to do a quick follow-up on an earlier question about the clean and dirty LR2s. How long does it take to switch an LR2 back to the clean trade, and what are the costs associated with doing so?

It obviously depends a bit on how you do it. But, you know, if you do three very short condensate calls across AG, say, you can be, you know, partially cleaned up within 21 days. And then you'll just do a manual clean to get the remaining whatever is left. So add a few more days. So, yeah, somewhere between, say, 25 days.

That's helpful. Thanks. And then given the limited fleet growth you highlighted on slide 10, if demand holds up, could ships over 20 years see retrofits to extend their life or maybe slip into the Russian trade? Or are there other factors that are going to push them to the scrapyard?

No, I think you're hitting the nail there. Obviously, in the more opaque tanking markets, there is life that's passed 20 years of age. But I have to say, though, that what we've seen over the last month or so is that certain, you know, kind of in China, you have the Shandong principle. province which is the home to a lot of the independent refiners in China and so it's a huge discharge port for all pieces of crude and you know the fact that they have started to clamp down on some of the older kind of less maintained vessels is actually a positive sign that that people are starting to have a proper look at this also if you you probably read about this Pablo I think it was called an aftermath sitting outside Malaysia or Singapore that blew up I think this is kind of raising the intent the attention from regulators on the risks in this market But for a well-approved tanker, and there are probably many, and well-maintained, there is no reason why it shouldn't be extended. But this again would kind of come under scrutiny with the vetting of the various kind of vetting departments on the chartering side. What we're basically assuming in our kind of fleet modeling is that a ship that passes, you know, 17 and a half years will lose about 25% of its efficiency. And if you go beyond 20 years, you lose 50% of your efficiency. So utilization wise, you know, or your ability to kind of service the oil market falls by 25 and 50%.

That's really interesting. Thank you. I'll turn it over.

Thank you for your question.

There are no further questions at the moment. But if you wish to ask a question, please press star 11 on your telephone.

There are no further questions.

I will hand back the conference over to management for closing remarks.

Well, thank you very much for dialing in. It's been a pleasure to report yet another good quarter. Hopefully we'll continue to do that and look forward to what's to come. Thank you.