Frontline plc Q3 FY2024 Earnings Call

Thank you very much dear all and thank you for dialing into Frontline's quarterly earnings call. Thank you. Markets and stocks don't move in a straight line, I believe the last months have told us that. We have previously argued we are in a period comparable to the 2002 to 2008 bull run, although supply of tonnage driven rather than fueled by strong oil demand growth. That comparison still holds, I'd argue. As an example, in November 2004, the market was said to be doomed and we corrected more than 30%. The bull rally resumed a few weeks thereafter and we were off for the skies again. For the same reasons, it's difficult to predict the bearish sentiment; the bull runs are equally hard to call too. So before I give the word to Inger, I'll run through RTC numbers on Slide 3 in the deck. In the third quarter of 2024, Frontline achieved $39,600 per day on our VLCC fleet, $39,900 per day on our Suezmaxes and $36,000 per day on our LR2/Aframax suite. So far in the third quarter, we've booked 77% of our VLCC days at $44,300 per day, 70% of our Suezmax days at $39,600 per day and 60% of our LR2/Aframax days at $34,800 per day. And again, all numbers in this table are on a low to discharge basis, with the implications of balance days at the end of the quarter. The market has not offered us the numbers we hope for, but we are operating a decent margin still. With that, I'll let Inger take you through the financial highlights.

Thanks, Lars, and good morning and good afternoon, ladies and gentlemen. Let's then turn to Slide 4, the profit statement. We report profit of $60.5 million this quarter or $0.27 per share and adjusted profit of $75.4 million or $0.34 per share. The adjusted profit in this quarter decreased by $62.8 million compared to the previous quarter and that was primarily due to a decrease in our TCE earnings, coming down from $357.7 million in the previous quarter to $292.2 million at the end of this quarter. That results from lower TCE rates in the third quarter compared to the second quarter. Let's then look at the balance sheet at Slide 5. The balance sheet movements this quarter are related to refinancing to reduce debt in addition to ordinary items. Frontline has a solid balance sheet, a strong liquidity of $526 million in cash and cash equivalents, which includes an undrawn amount of the senior unsecured revolving Fed facility, marketable securities, and minimum cash requirements as per September 30, 2024. We do not have any remaining new building commitments and we do not have any meaningful debt securities until 2027. If we then turn to Slide 6, our fleet consists of 41 VLCCs, 22 Suezmax tankers, and 18 LR2 tankers. The fleet has an average age of six years and consists of 99% eco vessels, where 56% are scrubber fitted. We estimate average cash breakeven rates for the next 12 months of approximately $29,600 per day for VLCCs and $23,400 per day for Suezmax tankers and $22,000 per day for LR2 tankers. This gives the fleet average estimate of about $26,300 per day. This fleet average estimate includes drydock of five VLCCs and two Suezmax tankers in the next 12 months, where two VLCCs are drydocking in the fourth quarter of 2024, one Suezmax in the first quarter of 2025, one VLCC and one Suezmax in the second quarter of 2025, and two VLCCs in the third quarter of 2025. This quarter, we recorded OpEx expenses including drydock of $8,700 per day for VLCCs, $7,900 per day for Suezmax tankers, and $7,800 per day for LR2 tankers. This includes then drydock of two VLCCs. The Q3 2024 fleet average OpEx excluding drydock was $7,900 per day. Then let's move to Slide 7. Despite the current challenged spot market, Frontline generates a decent positive cash flow and with 30,000 earnings days annually, Frontline has substantial upside potential. As you can see from the graph on the right-hand side of this slide, the cash generation potential at current fleet and spot market earnings from Clarkson Research as of November 26 is $304 million or $1.36 per share and with a 30% increase from current spot market, it will increase the potential cash generation by about 100%. With this, I leave the word to Lars again.

Thank you very much, Inger. So the current market narrative is somewhat mixed. Global oil supply is increasing, but demand growth is very much muted; I'm on Slide 8 now. The geopolitical risk linked to the Middle East continues, and it's very important to see how the new kind of U.S. policy is going to be going forward. Seventeen percent of the shipped oil in the market is sanctioned and 6% of global consumption includes sanctioned barrels. The very recent tariffs on Canada and Mexico may increase inefficiencies in oil flows, but more importantly, the order books have stopped growing for tankers, as containers are starting to take the stage again. If you look at the chart on the right-hand side, this basically compares the balance between supply and demand according to EIA, which is the orange line versus the tanker markets and how they have performed over the years. What we see, and this is notable, is that although demand is quite disappointing, somewhat expected to continue to grow. When we move into 2025, we are looking to be in an oversupplied market again on tankers with the effects you then have on utilization on tankers. At the bottom three charts of this slide, you can see kind of how these markets are actually range-bound, although at a very, very low level, apart from an exemption of the clean market, the LR2 exposure which has corrected sharply during the period. Let's move to Slide 9 and look at the key oil flows. So as I mentioned previously, overall global demand growth is neutral year-to-date and this is across all regions. We do see oil supply continuing to rise, and this is predominantly happening around the Atlantic Basin. Countries like North America, Brazil, Guyana, and to some extent West Africa are increasing supply to the market. But the challenge we have is that these increments of barrels tend to stay local. By local, I mean to remain in the Northern hemisphere, of course going into Europe to replace the lack of Russian barrels, but also trading regionally. That said, it's a pretty stable flow of oil leaving the Atlantic Basin going to Asia, but there's no growth to be seen in those barrels. This basically means that although we've had for years a positive effect on ton miles as oil has generally traveled further, what we've seen over the last period is that the ton miles have actually not depreciated more than the volume coming out and actually, to some extent, reduced. If you incorporate what's the compliant fleet and what's not, we see the sanction exposed oil market as a share of Asian demand has reached 25% in Q3 2024, and this we would argue tells us that the tanker market is increasingly exposed to any changes in sanctions and policies going forward. Let's move on to Slide 9 and have a look at the order books. The order books have increased materially during the year, specifically so for Suezmaxes and for LR2/Aframaxes, but also to a great degree on VLCC. At the same time, we are seeing the fleet continuing to age as virtually zero ships have been sold for recycling. If you look at the current VLCC fleet, the order book equates to 76% of the existing fleet, while 14.8% of the fleet is above 20 years and not trading in the market that we recognize ourselves with. On the same metrics for Suezmaxes, the order book is now equal to the population of ships that are above 20 years old. Sorry, on the LR2 slope, we see that there is a whopping amount of ships on order. But if you take the LR2s and combined, as there are very few unquoted Aframaxes being on order, the picture becomes more balanced where you get into Suezmaxes, where there is an equal number of vessels above 20 years that are on order. With that, we basically don't look at the order books as a big threat, particularly for the VLCC going forward. There are five vessels scheduled to be delivered next year, and there are 131 VLCCs trading in the market which formally wouldn't be qualified to trade. Similar numbers for Suezmax, there are 108 about 20 years as we call it come to an end. If you look at the Afra/LR2 market combined, you've got more than close to 200 vessels trading in the market—basically ships that are not necessarily accessible for the mainstream players. So moving from page 10 and going to 11. So in summary, we like to call it roller-coaster bull market sales. Frontline has a modern fleet, strong balance sheet, and we continue to retain the upside here. Oil supply is expected to outpace demand in 2025 with the implications that may occur; the current trade flow developments are challenging as sanctions bite and I put 'bite' in exclamation marks because the sanctions are forcing the long ton miles onto ships that we don't identify ourselves with. Policy changes in the Middle East and with the maximum pressure which Trump has been calling for going forward, this will be a very interesting space to watch. The order book growth has stopped, and modern asset values remain firm. On a small note on that, with the order book now kind of moving into 2028, no shipyards are in any urgency of discounting tankers as they continue to be busy contracting or getting interest on container ships and other asset classes. Also, some fun fact at the end of the presentation: world oil trade is now serviced by the oldest fleet in more than two decades. You need to go back to 2002 to have an average tanker fleet of this age, which is somewhat surprising considering the efforts to reduce emissions and the tightening scrutiny around the world we're observing. So with that, I'll open up for questions.

We are now going to proceed with our first question. The questions come from Jonathan Chappell from Evercore. Please ask your question.

Thank you. Good afternoon. Inger, I want to start with you. I know you've done a lot with the capital structure this year, refinancing, paying down debt, etc. As the market becomes a bit more volatile and maybe lower lows that people are concerned about, maybe just the leverage by appearances looks still a little high. So has there been any thought about taking the strong market that we've had for the last couple of years, some of the strong asset values, some of the fleet, older fleet that you sold, and even though you don't have any near-term big debt maturities, to be a little bit more proactive in deleveraging the balance sheet in this part of the cycle?

My thinking is that the long-term value that we have currently is just below 50% and we don't really see any depreciation. The modern fleet will decrease in value, so we don't really see that this is the high leverage that you probably are running out to; we are comfortable with that debt level.

Okay. Lars, you touched on a couple of times the narrative geopolitics watching what's going to happen from here. Maybe we could just tease that out a little bit because sometimes the narrative dominates the view of the market. I think there's probably two, well, one thing that people are really focused on and one thing maybe a little bit less so, so maybe short answers to both, but if there were to be a resolution in Ukraine, but the sanctions and the pressure were to be ratcheted up on Iran, what would be the puts and takes of those two things happening somewhat simultaneously?

Well, you know, if, kind of let's do the Russia-Ukraine first. The sanctions that are imposed on Russia are, I would argue, somewhat flaky. Europe is buying record amounts of gas from Russia, whilst they're having this price cap on oil and products. We're also just as a coincidence buying a record number of fertilizers from Russia as well. So this kind of leads me to the thinking that any kind of long-term solution to the conflict or the relation from Russia on Ukraine, I think these sanctions may be reversed fairly quickly. The political cost of holding these sanctions in place, particularly now coming into or what's expected to be a cold winter in Europe, could actually motivate politicians to actually walk back on these sanctions fairly quickly. This would almost immediately put a lot of oil, which locally belongs to Europe, back into Europe and that would push a lot of the Atlantic Basin barrels to find another home and that's more likely to be priced into Asia, incurring longer-term miles. If you on top of that do something about Russia, sorry about Iran, and I mentioned it numerous times that Iran is having very, very great success in exporting huge amounts of oil despite sanctions. And if one is able to limit that, that oil also needs to be replaced. And there the likely replacement is from OPEC. It's quite surprising to me that OPEC are happy kind of cutting them up about they are, watching Iran growing their exports. So if something happens there as well, this means that the Iranian flow needs to go on compliant tonnage and that will kind of give an exponential effect on our market. With regards to the Russian fleet, basically what's happened over the last couple of years is that Russia is now more than or closely self-sufficient on how much they're required to 300 vessels, you know, split, you know, kind of major or to the most part it's Aframax and Suezmax, meaning that they can cater for their own volume. So you're not going to have this massive shift; of course, some of these ships are coming back to the compliant market once sanctions are lifted. But we have to consider that the average age of this fleet, more than half of these vessels are north of 20 years old and those we don't believe kind of compliance charters are going to change their age restrictions just yet.

Okay, that's very helpful. Thank you, Lars. Thanks, Inger.

Thank you, Jon.

We are now going to proceed with our next question. The questions come from the line of Omar Nokta from Jefferies. Please ask your question.

Thank you, Lars and Inger, good afternoon. Just a bit more kind of discussion from my end on the market itself and wanted to ask just in terms of how the VLCC market specifically how that's been developing. You know, it seems, and I think Lars you touched on this early in the presentation, you know, rates tend to be drifting at unexciting levels, then a run-up in charging activity takes rates higher, but then that activity kind of slows again and you're back to where we were and it just seems that rates are in this narrow range of call it for modern ships, maybe 25,000 to 50,000, and that's been the case seemingly since August. Do you think that there's a case that we can't see rates break out this winter or is there just simply not enough cargo in the market to move?

As you know, Omar, that's a very difficult question to answer. I think kind of the fact that we are actually ranging is a sign that the market balance is not that completely awful. It's basically we're just missing kind of those incremental barrels that we need to push the scale further. I would say though that the market has changed characteristics a little bit. We have the Middle East or the Ag market as we call it, which you know, is kind of, you know, there are Asian interests in more than 80% of those cargoes and Asians, again, are friendly with each other. Meaning that you don't really get pressure out of those negotiating. So basically, it's the Atlantic Basin that needs to price the markets. This TD3C, which is the benchmark index for Middle East to China, has kind of—it's like the Dow Jones freight, but it has the least kind of open interest to use the term from the oil market. So, you basically need that anti-basin to price because the mechanism then is that the vessels will just shun it, go straight to the U.S. Gulf, Brazil, or West Africa because that offers better returns. For that, we basically lacked the expansion in ton miles from those Atlantic Basin east. I mentioned that in my presentation that that volume has been more or less flat. So we need some dynamics to change here in order for that to occur, basically to force Atlantic Basin barrels to not force them, but attract them to Asia to a greater degree than what we've had. So, I would say, if you ask me right now, it seems like we are in this range-bound kind of motion, but again, the balances are still tight. You know, we're actually making black numbers on the fixtures we make here. So it's not an absolute disaster, but it's very difficult to put beyond this $50k per day as you described.

Yes, thanks, Lars, appreciate that and the difficult, definitely difficult question to answer. Maybe I'll throw another one at you, that's probably, you know, perhaps just as difficult or we'll see. But I guess maybe just in terms of, you know, 2025 and as talked before and with Jon, there's so much going on between, you know, the Middle East conflict, Russia-Ukraine, the Red Sea, Iran, and OPEC changes; there's just a lot of different variables. How in general would you see from your vantage point heading into 2025, what do you think is the base case next year for VLCCs in terms of earnings potential? I know it's obviously very difficult to define, but maybe just in relation to how 2024 is averaged, how would you say from your perspective what 2025 will look like relative to this year?

I was actually hoping that 2024 would be what we now probably have to wait until 2025 to see if—kind of we've completely underestimated to which extent this current state of the market can extend. I think it's on point that fees will be above that 6-7% of the oil fees from the sanctions and so forth and everybody would be happily trading. You know, I would say that's impossible, but apparently, it's not. I think the exciting part is that the incoming kind of government in the U.S. are arguing for a very hard stance on, you know—it's obvious to most what kind of these exports are financing. I think it should be also even at some point here obvious to the IMO that they shouldn't maybe focus on, you know, what's going on in the unregulated shipping market rather than talking about decarbonization every turn. So I'm very hopeful. I also think that we are extending ourselves here not by way of Frontline; we're very happy, but the market itself is extending itself here. So, kind of any adverse event in this market, say a shift in Russia-Ukraine that alters the balances, or if something happens in Iran and they miss their ability to export. We're extremely sensitive to these changes which obviously would put the tanker market in a suddenly very, very strong position.

Yes, understood. Well, largely appreciate it. I'll turn it over.

Thank you.

We are now going to take our next question. The questions come from Sherif Elmaghrabi from BTIG. Please go ahead with your question.

Hi, thanks for taking my questions. I was hoping you could give a little bit more color on the sale and purchase markets. It seems like asset values have softened slightly in the last month or two, and I'm wondering is that due to more sellers coming to the market? Maybe less appetite for vessels from the dark fleet? Any color would be helpful?

I think it's a combination of less appetite from the sanctioned trade. I mentioned previously that Russia is themselves more or less saturated in respect to the fleet they need in order to trade their markets. The margins, as I believe we mentioned a little bit in our Q2 presentation, the margins in this market are under pressure. We're even seeing that discounts on Iranian crude are getting smaller and smaller, meaning that there's less cost for freight. So there is hope that these markets are getting saturated with the effect that the latter or the older part of the tanker fleet will lose that kind of bid, and you'll have an adjustment in values. This is exactly why Frontline has been so focused on selling older vessels basically because we've seen that gap, you could say, or overperformance on asset values on the older fleet to be extremely risky. But I think kind of from what we're seeing, it's not many weeks ago that we saw fairly good prices on modern second-hand vessels. Right now, the market is a little bit paralyzed. There's nobody really exchanging numbers nor trading ships firm. But we're quite comfortable that for the modern part of this fleet it hasn't actually grown at all for the last couple of years and that the downside is very limited. But for the older part of the fleet and the tail end of the curve, I think we'll need to reach kind of recycling parity fairly soon.

Thanks. And then regarding this phenomenon of larger tankers that are trading products, hearing some industry reports that they're coming back into the dirty trade. My question is, what keeps them in the dirty trade once they switch back, especially kind of you highlighted what's going on with the rate momentum heading into December?

Well, it's, you know, this is just pure mathematics or economics to put it that way. If you have the ability, you know, when the crude market is subdued and you have a vessel and a cargo history that gives you the opportunity to within a reasonable cost clean up, you will do that. But, you know, none of these ships on the crude tanker side are really designed to carry products. So it means that they can't do it for an extended period of time. But I think kind of the key motivation here is the economics. Obviously now the clean market is not offering the economics to compete with crude. Basically, that you rather than switch back. But I think what this has showed us, that we saw in May, June this year is that the efficiency between asset classes has increased. We were surprised to see how quickly these e-comms put crude tankers into the clean trade. But that was obviously also due to the fact that the crude market was challenged at the time. So this will kind of in a scenario, say if the clean market suddenly rallies now, you would get crude vessels to clean up. But in a case where both rally, you know, you won't have that kind of interconnectivity between the Afra classes.

Yes, that's very helpful. Thanks for taking my questions.

Thank you.

We are now going to proceed with our next question. The questions come from the line of Devin Sanjoy from an investment firm. Please ask your question.

Hi, Lars, I have a couple of questions. One on the China demand because I asked you last time. So there's been a massive shift and significant downgrade in the consumption pattern due to shift to LNG and to more cleaner EV. How do you see the demand going back into 2025 and how much difference does it make to overall tanker demand?

No, you're absolutely right. There is particularly on the heavy duty trucks, heavy subsidizing going on in China in order to kind of get that fleet checked up to 16 million vehicles or something to get them to go into, for ease, let's call it gas propulsion; it's LNG and LPG with staggering sales numbers where 50% of new sales are actually on alternative fuels. This is being reported to have reduced diesel demand in China by somewhere between five and seven hundred thousand barrels per day. This is out of 3.5 million barrels per day with the current population of alternative fuel kind of heavy duty trucks. Having said that, we're actually at a very good position to have observed these kind of developments ourselves, particularly from Norway, because Norway has had the highest penetration—the highest new sales of EVs in the world for a long period of time. There were more Teslas sold in Norway than in the U.S. due to heavy subsidizing. Surprisingly, we've seen that fuel demand has not fallen as expected, which leads us more onto the point that it's more activity and consumer-driven than actually the penetration. Even though you have two or three million alternative fuel trucks, or maybe more, six million I guess you could get to fairly soon in China, you still have that existing fleet that is also driving and with increased economic activity, these tend to drive longer or further. This is at least what we've experienced here. On the EV side, there's a huge population of cars in China. I think we are still some years away from that market getting to tipping point where actually petrol demand starts to decrease materially. But I think kind of we have to expect that in most markets around the world except the U.S., we are getting to stages where at least for personal cars demand is not expected to grow materially. It's actually— we've reached peak gasoline demand in many countries already. But on that note, what we haven't seen peak demand of is on petrochemicals. If you look at the various agencies and how they report on petrochemicals, there is tremendous growth. This means that, you know, although transportation is a huge part of the demand picture, we're also seeing quite sustainable growth on demand coming from the pet chem markets. So I think kind of it's a little bit too early to call the doom for oil demand basically due to high numbers of sold EVs in Asia or in China.

Second question is on the OPEC. OPEC has kept on pushing back the production increase. What's your view going back to 2025? How do you see production? Will they focus on market share or will they focus on price stability?

That's the ten or so—but, you know, we read the same narrative as you do, you know, one month, you know, it's said that OPEC will look or particularly so Saudi will focus on market share rather than the absolute price. And, you know, kind of a month after, it's that the narrative is completely the opposite. What surprises me is that we are actually in this territory for such a long period of time, and it's quite impressive to see OPEC so disciplined as they see non-OPEC production numbers increase and taking market share to this extent. So it's logically for me, you know, I can't really understand why they're so disciplined. But that's only, you know, kind of how I see it. But I think kind of it's a very, it's very difficult to understand what's happening in the whole west of Vienna, well, actually online now on Sunday, but you know, when they discuss these matters.

And how do you see the current season, the current quarter, which is typically very strong, but we haven't seen that. As we go into December and January, how do you see the season going forward?

Sorry, I missed that, seeing what?

How do you see that, typically this quarter is the strongest quarter for rates, but we haven't seen that. So how do you see the rates going forward in December and January peak winter?

Well, it's actually been noted by a couple of kind of market analysts that maybe Q1 will be the new Q4. We've seen that on a couple of occasions that on the event of Q4 failing, Q1 has come back with a vengeance. You know, it's impossible to call. There are many factors that affect this. But I think kind of at what's the point in our presentation here, I think this kind of maximum pressure to owe on Iran is far more interesting coming into next year than the potential kind of seasonal slip where we're actually we see incremental demand coming in as we start to move into the new year. So I think kind of, I'm more excited about political events coming into the New Year or in the near term than whether if the seasons have shifted. But it is a fact we have actually seen seasonal demand increased into Q1. You know, there is kind of an increased degree of refinery turnarounds, basically putting more oil available for trade.

Lars, what makes you so confident about Iran? Is it the change in the political scene in the U.S. with the Trump administration coming in that Iranian sanctions will become much more tougher or it's something else?

No, no. So we're completely apolitical. But it is a fact that Iranian barrels are sanctioned by most of the countries in the Western world. The way they're able to evade these sanctions is by engaging in ships that are not regulated by or adhering to any of the IMO principles. So—and I don't think or I hope that's not a long-term situation. So something has to give at some point. Actually, the most bullish scenario you can paint is that all sanctions are listed on Iran. That would be a fantastic scenario.

Thanks, Lars. All the best.

Thank you.

We have no further questions at this time. I'll hand back to you for closing remarks.

Well, thank you very much for listening in and please don't forget that in 2004 we also thought it was doom and gloom and then only months after we were really rallying for the skies. So hopefully this market will develop a bit more excitingly than we expected for this quarter and have good Christmas presentations. Thank you.

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