Frontline plc.

Good day and thank you for standing by. Welcome to the Q1 2024 Frontline PLC Earnings Conference Call and Webcast. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. Please note that today's conference is being recorded. I would now like to give the conference over to your CEO, Mr. Lars Fastad. Please go ahead.

Thank you very much, they're all. Thank you for dialing in to compliance quarter earnings call.

The first quarter of 2024 was to a large degree tainted by the security situation for the passage between the Red Sea and the Gulf of Yemen. Sorry, the Gulf of Aden, in fact. There are still charters insisting and owners willing to collect region, ignoring the security for the seafarers. But we, as frontline, we simply don't. The highlights of Q1 of 2024 was that all the Euronav vessels are now sailing under the frontline flag. And as we progress into 2024, we will take the full advantage of having a fleet of 41 modern, low-consuming, VLCCs in addition to our efficient SUSE MAX and LR2 fleets. Utilization seems to be edging higher on all asset classes, but again, the LR2s are the ones to shine. Before I give the word to Inge, here are TC numbers on slide three in the deck. So in the first quarter of 2024, Frontline achieved $41,100 per day on our VLCC fleet, $5,800 per day on our SUSEMax fleet, and $54,300 per day on our LR2 slash AFMAX fleet. LR2s have been yielding VLCC numbers in the quarter, as this segment has been affected the most by the disruptions in the SUSE canal passages. The SUSEMax is actually called that for a reason. Hence, the change in flows has forced that is set to new trading patterns during the quarter. So far in the second quarter of 2024, 78% of our VLCC days are booked at $60,400 per day. 73% of our SUSE max days are booked at $46,400 per day, and 72% of our LO2 slash Afra max days are at the very firm $64,700 per day. Again, all these numbers in the table are on a low-to-discharge basis, and they will be affected by the amount of ballast days we end up having at the end of Q2. I'll now let Inge give the financial highlights.

Thank you, Lars, and good morning and good afternoon, ladies and gentlemen. Let's then turn to slide four and look at the profit statement. In the first quarter, we report profit of $180.8 million, or $0.81 per share, and we also report an adjusted profit of $137.9 million, or $0.62 per share. Adjusted profit in this quarter increased by $35.8 million compared with the previous quarter, and that was primarily due to an increase in our TC earnings. That was also, again, due to the delivery of the 24 VCs from Euronav in the previous quarter and also in this quarter, and also to higher TCE rates. Again, this is partially offset by an increased ship operating expenses, depreciation, and finance expense as a result of the delivery of the 24 VCs from Euronav. Let's then look at some balance sheet highlights in slide 5. The balance sheet movements this quarter are related to taking delivery of the remaining 13 of the 24 VCCs acquired from Euronav last year. Frontline has a strong liquidity of 404 million in cash and cash equivalents, including undrawn amounts of the senior unsecured revolving credit facility, and also the marketable securities and minimum cash requirements to the bank as per March 31st, 2024. We have no remaining new building commitments and no meaningful debt maturities until 2027.

If we then look at slide six, let's move to that one.

Following the delivery of all the 24 wheel to seas that we acquired from Euronav and also the sale of the seven older vessels in the first and second quarter of 2024, our fleet consists of 41 wheel to seas, 23 Suez Maxis and 18 LR2 tankers. The fleet has an average age of 5.9 years and consists of 99% Ecovessels, where all 56% is scrubber fitted. We estimate average cash cost for the break-even rates for the remainder of 2024 were approximately $31,200 per day for VLCCs, $23,500 per day for Suezmax tankers, and $22,200 per day for LR2 tankers. And the fleet average estimate is about $27,100 per day. This is slightly up from the previous quarter as a result of the financings and refinancings done. The fleet average estimate includes dry dock of two SUSEMAX tankers and five VCCs in 2024, whereover two SUSEMAXs and two VCCs will be docked in the second quarter, one VCC in the third quarter and two VCCs in the fourth quarter. We recorded OPEC expenses including dry dock in the first quarter of $8,100 per day for VLCs, $8,800 per day for Suezmax tankers, and $7,400 per day for LR2 tankers. And this includes dry dock of two Suezmax tankers. The first quarter fleet average of OPEC excluding dry dock was $7,700. Then we can move to slide seven. Frontline has about 30,000 earnings days annually, where about 28,000 are spot days. The cash generation and potential at current fleet and spot market earnings from Clarkson's research as of May 29, of $55,900 per day for VCCs and 50,000 per day for SUSEMax hackers and 65,000 for LR2 tankers is $835 million a year, or $3.75 per share. If you look at this slide to the right-hand side, you can see that 10% increase from the current spot market will increase the potential cash generation with about 19%.

And with this, I leave the word to Lars again.

Thank you very much, Inger.

Let's move to slide 8 and have a look at the current market narrative. We're still in a situation where the situation between Israel and Hamas and between Israel and Iran, we are in an environment with growing political risk. We're also seeing increased sanction evasion scrutiny from the US and EU. And this causes kind of what I refer to formally as the gray fleet to move further into the dark, which is growing as we move forward. On the very positive side, the global oil demand is now estimated according to EIA to reach all time high in June at 103.76 million barrels per day. I think we need to kind of recognize that Although we are in a transition mode into greener fuels, and we're part of the green transition, but as the overall energy demand globally is growing, oil and hydrocarbons plays a part and continues to grow. What's kind of very interesting in Q1 and following into Q2 has been that the period markets have really started to show some strength. On the chart on the right-hand side, I've basically used the Clarkson indices. We're looking now that a VLCC, a three-year time chart for an eco scrubber VLCC, is closing in on $55,000 per day. the time-sharter market, actually, in almost like a contango, where one-year, two-year, and three-year time-charters for VLCC, but actually that differently. Also, you should note that the LRQ and the SUSEMX market is more or less priced equally. Another exciting kind of development is that the TMX pipeline is now kind of expansion. It's coming into to reality and we're starting to see or will start to learn how that oil will move. We're talking about 650,000 barrels per day when the expansion is finished into the Pacific basin. And that will have an effect on basically utilization in that region. The port where the TMX pipeline comes out can only cater for Afromaxis. It cannot cater for SDS operations, and there is virtually no storage there. So we'll see trading patterns where, depending on where the oil is heading, where you'd either have Afromaxis taking down the coast to a suitable SDS location or going into the US refining system. And lastly, on that note, the Dangote refinery, which I know that the market has kind of speculated how that will affect Tonmah going forward. It's a significant refinery starting up in Nigeria, finally, after 16 years. It's quite interesting to see that they are also then taking feedstock from the US Gulf, which is not expected sitting next door to, you know, Nigerian crude supply. The order books continue to grow. But as the order books grow, the delivery windows are up in time, and I'll get back to that later. We see that on the charts at the bottom on the slide, you see that the VLCC, I've said it many times now, we seem to be in this kind of grind, positive grind, where the bottoms are higher for every cycle we go through, and that still seems to hold. The Suezmax, I mentioned it in the introduction, Suezmax and Suez Canal are connected. So Suezmax seem to be very range bound around the $40,000 per mark and doesn't really seem to have legs to go anywhere. But the LR2 are the ones to shine. They're most affected by the disruptions in the Suez Canal passage. and we see the volatility is increasing. We're also seeing examples, and Frontline has participated, in Suez Maxis cleaning up in order to kind of compete in particularly gas oil going from the Middle East Gulf to westbound. So let's move to slide nine and look at some of the kind of developments in flows. I have kind of talked about this earlier. OPEC is maintaining its cuts, which is predominantly located around the Middle East Gulf. Non-OPEC supply has been given kind of the opportunity to grow, and this growth continues. So on the top left-hand side, you can see ton of miles generated from America's oil exports. America is basically the whole continent included. And we see that continuing at a very, very kind of high level. And we also see VLCC are starting to get favored, particularly so in May. And this basically is an indication that a lot of this volume is going long haul. We also see that Europe continues to draw oil from a kind of longer distances on the bottom left hand chart. So the ton mile generation by Europe avoiding Russian crude is continuing. but i think lovely and very interestingly we're seeing and i think that we're going to close to the support of the community it's not going to force grow are in much larger than pulling oil so they're all basically what students let's move just like that

But sometimes they continue to grow.

But now, again, this data is based on a register that's been submitted by a number of issues. So I think that's more of a confirmed. In these, you know, in the last couple of years have been cold to tankers is now reached a level of 26.6% of the existing LR2 fleet. But I think one has to take into the consideration here that as LR2s pass 15 years, they tend to turn into Afromaxes. And I think to truly reflect the picture in the Afromax size class, one should actually include the overall Afromax number, which would drastically reduce this percentage. But anyway, we continue to see these order books grow, but to a lesser and lesser degree in 27. And actually now we're talking about 2028. And let's move then to slide 11. And I think if there is one slide that's important in our quarterly presentation this time, it's this one. And I have a look at the bottom left-hand chart. So from 2024 onwards, we're in fact hitting a wall of replacement needs. Based on tonnage that has to be phased out at the age between 20 or 25 years, depending on acid class, there is a monster of vessels or deadweight tons. that was built between 2004 and 2011, that basically come to age. 2011 was the absolute peak year of new building. And this is again, all asset classes included. And at that point in time, we had 519 shipyards in the world. Now we have 247 shipyards in the world. So in amount of shipyards globally, the number of yards has been reduced by 52%. The capacity of some of these yards are bigger. The reduction is somewhat less, being 40%. We're seeing that in South Korea and in Japan, they're struggling basically to be able to expand the existing yard capacity, basically due to demographics, being able to attract workers, and so forth. I've said it on a few presentations. In South Korea, they actually need to take in workers from the Philippines to get basically the capacity needed. In Japan, one is saying that the average age of a welder is 56 years. So this is a demographic challenge. It's not that many kids in South Korea and Japan that really, really wants to work in a shipyard. China has potentially a lot of capacity, but this is a structural supply story. In order to replace all this tonnage that needs to be replaced over the next 10 years, we have an issue. If you look at on the tanker replacement alone, we're actually, if you put the long goggles, the big goggles on, know from now until 30s we need more than close to 400 vlcc's built we need 300 sus maxis built we need 187 lr2s built and close to 400 afro maxis so this is kind of massive and it's a structural problem so it's not easily sold and as all market intelligence agree on oil demand to continue to grow Although ton miles may contract short to medium term, if Ukraine-Russia is resolved and if the Red Sea passage is opened up, one cannot escape the fact that shipping supply growth looks to be challenged. With that, let's move to slide 12 and go through the summary. So again, the highlight of Q1 for Frontline is that we have a fully delivered VSTC fleet sailing under the Frontline flag. We have concluded the sale of Frontline, and it's given Frontline one of the most fuel-efficient fleets in the market. We've finalized and inked the expansion in financing, completing our strategy of re-leveraging the existing fleet. The security situation in Red Sea, Gulf of Aden, and Middle East in general remains. There's continued contracting in the tanker markets, but building capacity is coming into question as delivery dates now move into 2028. Short and medium-term all-demand picture remains firm, and we're also kind of being alerted by the market that the OPEC Plus comes in second half of 2024. There is increased liquidity in the period market with long-term time-sharp rates moving up. And this is, in all fairness, the intelligent money coming into the market. So with that, I would like to open up for questions.

Thank you, sir. As a reminder, to ask a question, please press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. Once again, please press star 1 and 1 on your telephone and wait for your name to be announced. Thank you.

We are now going to proceed with our first question. The questions come from the line of Omar Nocta from Jefferies.

Please ask your question.

Thank you. Hi, Lars and Inger. Good afternoon. Thanks for the presentation, always very detailed and informative. across different different elements of the story and in the market it's a couple questions for me maybe just first on the on the financing you as you just highlighted you finalized an inked expansion financing you've unlocked a good amount of cash here recently and it looks like I'm just telling the numbers 417 million has been unlocked and that's going to basically repay the human holding borrowings at 395 which was used initially on the year-and-a-half deal But what about the seven tankers, the seven older ships you just sold? Those unlocked 275 million after you paid down the debt. Is that cash, is that earmarked for anything in particular? Or will these go into further debt reduction?

You have to remember that we used more to finance the Euronavis than the 395 million. that we drew under the Sterna facility and also the Hermann shareholder loan. We spent some cash from approbation until we sold the vessels, the older vessels. So that's the answer to your question.

Okay. Yep. So just as simple as that then. Okay. And I guess just more kind of sticking with, you know, Lars, you talked quite a bit about the market and the LR2s being the sector that's shining. Um, and you've also, you also talked about TMX. How are you thinking about the LR2 fleet in the way it's trading currently? Um, the, or how are you balancing say that the LR2 is, um, between dirty and clean, given the strength and, and, uh, uh, outside the Suez market, and then also the potential pull into Vancouver.

Yeah, no, it's a good question. This is a time where we probably would have wanted to have some Afromaxis in our fleet, to be quite honest, you know, unquoted. But the, so basically, with regards to the LR2 shining, you know, this is obviously related to the fact that, you know, with the Suez Canal virtually closed, products, you know, from east to west, the ARBs, work periodically, but west to east, there's very little material going. You need to incentivize an owner to actually balance the ship going east, and that means that the rates actually have to go up. So the utilization of the La Trou fleet is simply increasing quite a lot, basically, by this inefficiency. And also to the point where great efforts have been done in order to clean up Sue's Maxis for this trade. Sue's Maxis can obviously clean. Sue's Maxis can obviously not cater for all the cargos. Basically, gas oil is probably as far as it goes. But this is basically what's driving this market. Dangota, I don't think we've, sorry, TMX, I don't think we've seen that fully affecting the AfroMax market. But at least as we can see now, as the market is developing or evolving, it looks like a lot of these barrels are actually going west. It's the other side of the world. And so basically what we see is a trade emerging where Afromaxis will go up and down the coast. You have certain SPS locations. You have some in the US, you have Mexico and you have Ecuador. Ecuador also had tankage, and we see this to be where you collect the oil from TMEX on AFRES, so increasing utilization on AFRES to some extent, but not necessarily to the extent as if the Afromaxes were going all the way west to China. And then FTS activity and then put into VLTCs that takes it over to clients there. So I think we still need to have a look at this trade for a few more months until we understand how it's going to work. But you could say that the worst case scenario, which is obviously the best case scenario for a ship owner, is that all this, you know, you need to load an AfriMax every day. So you talk to ships and if they need to travel for 40 days before the discharge, you have 80 days until they're back. It's going to take a lot of vessels. But as far as we see, you know, initially, is that it doesn't, you know, you don't use that amount of days because you're basically just going down the coast to a possible SDS location. And then it's a larger vessel. And so far, it looks like going into VLCCs.

Okay. Thanks, Lars. That's helpful. And just a final one for me, just kind of on the VLCC performance in the first quarter. the repositioning of the year and a half ships is obviously, there's a big divergence between what your initial fleet earned and what those ships have done. Should we think about further repositioning dynamics in the second quarter? And then is 3Q really the first kind of true quarter of ongoing operations on the BL?

Yeah, I think you have a good point, but there are a few points I want to make. Number one is one has to remember that the Euronav fleet has a lower scrubber penetration than the former, the existing frontline fleet prior to the transaction. So that obviously affects the earnings you can get. Secondly, initially all the vessels were delivered, basically all the vessels were delivered around Singapore. So we have kind of an introduction trade that maybe didn't yield what we would have wanted. It's also a timing issue when these enter the market. We got them very concentrated in time. So it meant that, you know, we hit basically a very narrow window in the Middle East, which, you know, just to top it was the weak spot in Q1. But anyway, I think you're absolutely right that we move forward here. You know, we'll spread the fleet more evenly around the globe and, you know, we will see that the Euro-Navis will just blend in, and we're probably not going to comment on, you know, kind of distinguish between the two fleets going forward as a report. But also you have a very good point in, you know, these ships are done on long voyages. So it takes a bit of time before everything is kind of fully acclimatized or whatever the word is into the total fleet. So Q2 will maybe to some extent be affected, but Q3 we should be running a normal show.

Okay. Very good.

But obviously to a lesser degree in Q2 than Q1, obviously.

Okay. All right. So 2Q will be better and then 3Q is full on. Okay.

Yeah.

Excellent. Thanks, Lars. Thanks, Inger. Thank you, Mark.

Once again, another reminder to ask a question, please press star one and one on your telephone and wait for your name to be announced. Once again, it's star one and one to register for questions. Thank you.

We're now going to proceed with our next question. The questions come from the line of Craig Lewis from BTIG.

Please ask a question.

Yeah, hey, thank you, and good afternoon, and thanks for taking my question. Lars, it looks like the depth of the time charter market is picking up. Obviously, you're taking advantage of that. As we look at the back half of the year and the outlook for rates and the spread between, I guess, the curve and spot market, I guess I'm kind of curious what you're seeing and how you're thinking about the opportunities to continue to put some vessels on some term charters.

We're constantly but I think keep in mind that our view is that we're in for a longer one here. I hate saying it because We used the expression stronger for longer back in 2020, and that was absolutely not right. But there we were actually quite aggressively chasing counter counter coverage. But now we are watching it and we want to kind of, you know, it makes sense. We want to lean into the market, but we're not going to kind of, you know, we have like a rule of thumb in Frontline that we try to cover 30% of our largest exposure being revenues, interest rates, and the bunkers. So that's kind of the rule of thumb. We're very close to that or fairly close to that on interest rates ops. Fantastic timing. On the bunker side, we're a bit below. On the revenue side, we have virtually, apart from on the LR2s, we have virtually zero revenue kind of secured going forward. But we will lean into this, but we are in absolutely no hurry because we believe this cycle kind of gradually getting into here and back to the, you know, I mentioned this structural issue you have in the supply side and oil demand looking to be very, very resilient. It's going to take us a little bit of time. So, but, you know, we want to, as we, you know, when or, well, it's always a when we get out of this cycle. We want to have some proper coverage, but we're not aggressively pursuing this right now.

Okay, great. And then just, I did want to ask a little bit about, you know, you had those asset sales, you know, I guess looking at the, you know, maybe you have two more Suez Maxes that are in that 2010, 2011 range. You know, like we kind of agree with the outlook for the market where, you know, generally in previous cycles, older vessels have outperformed or, you know, the spread has converged for older vessels versus modern tonnage. And it's typically made sense to own the older vessels in bull markets. And just kind of curious, I mean, I guess since the frontline acquisition was announced, will have sold 16 vessels. And so I guess my question is, do you see this cycle playing out differently where there's that much more discrimination against older vessels that maybe that spread that traditionally converges during these multi-year up cycles doesn't play out the way it historically has?

That's a big question. I think in our analysis and looking at this market, as I've said numerous times, we subscribe to this notion about the revenge of the old economy. So the way this is going to play out is, which obviously it hasn't yet, but oil prices and everything is going to go up. The commodities boom that we're facing going forward. And with that, we'd rather have the most efficient tools. We are seeing some scrutiny, preference from clients for more efficient tonnage. We cannot forget the regulatory framework we're facing. It's kind of disappeared a little bit in the narrative over the last year, year and a half. There's still this thing about CII and there's still this thing about kind of energy efficiency and so forth. And we basically, we subscribe to that a lot and that's a part of our strategy. So I think kind of, you know, it could be that looking back in two, three years' time, that, you know, what you should have done is focus on 12 to 15-year-old vessels and where you get most bang for the buck. But, you know, we continue to kind of build long-term, you know, to be in the 20 to 30 years. And that's basically the plan we're aiming for.

Okay, super helpful. Thank you very much. Thank you.

We are now going to proceed with our next question. The questions come from the line of Peter Hogen from ABG, Sandor Collier. Please ask your question.

Yes, good afternoon, guys. Thank you for taking my question. Just on the final sentence in the summary, Lars, you talk about the the longer-term time charter markets. And I guess the question is popped in two. Firstly, in terms of the requirements, is it the traders or is it sort of the fundamental cargo owners which are asking for a longer period? And the second part of the question, have we seen an interest for sort of five to seven years charters for new builds with 27, 28 deliveries as of now?

Thank you, Petter. First one, absolutely yes. This is the oil majors, the guys who have transportation needs. So this is basically the big boys entering the market, oil majors, national companies and so forth. Secondly, yes, there is interest for longer term businesses. in the market. So maybe not 10 years, but five to seven years, definitively, and seven-year charters, absolutely. So, but, you know, this is kind of a little bit different market than, you know, just to remind everybody, our proposition to our investors is to give you spot exposure. These kind of deals, we might, you know, we're very likely to pass on. We don't have an order book either. So, but it is absolutely, you know, starting to emerge a market around these longer-term deals as well.

If I could just follow up on that, what sort of rates would you expect? Let's say that if you had a new build with 27 delivery, what sort of rate would you expect to get for a five-year time-charted deal from there?

That's a big question, or a difficult question to answer, actually. But it looks like the curve is pretty flat, and it gives the owner a decent return on their equity. So you're talking somewhere around $50,000 per day, regardless, only be able to see that. Sorry, the $50,000 per day doesn't really make, you know, it makes some excited, but others maybe not. It's, you know, the 2027 delivery, depending on when you ordered it, it's setting you back $110, $215, $220 million. So it's a big number. But, you know, I think at least for now, that's where these prices are.

Okay, thank you. I guess the final one from me in terms of dividends going forward here. I know that you have this discretionary policy, but this time you pay out everything, which I think is appreciated by, well, most. How should we think about the payout ratio going forward here? And I'm thinking perhaps in particular in next quarter, because in next quarter I'm potentially Q3 with... with a summer market, it could be, well, less, I suppose.

I think you should, you know, kind of the rule of thumb, which is, again, not a policy, is 80% of adjusted net income. And I think that's what you should have in the back of your head if that's what happens. But I think also, you know, Why we chose to go for 100% this time is that we have good visibility, we are in a good liquidity position, and our job is to give our shareholders the money we make. But obviously, depending on how the markets evolve forward, you can speculate whether if we're going to do 100% again or if it's going to be 80%. But I think it's going to be linked to the general market temperature, and this is This is what we've tried to do all along. When the market corrects sharply downwards, we're not going to drain the company's cash. But then again, if the market stays firm and maybe even improves, we have room to, unless we're doing something structurally where we rather reinvest the cash on behalf of our shareholders, then you should be handsomely rewarded.

Thank you for that Lars. That was all from me.

We have no further questions at this time.

I will now hand back to you Mr Basted for closing remarks. Thank you.

Thank you very much and thank you all for listening in.

These are exciting times still, although we are still missing some of the volatility we wish for. uh but um you know let's just monitor how these markets develop and um thank you very much this concludes today's conference call thank you all for participating you may now disconnect your lines thank you