Frontline plc (FRO) Q4 2025 Earnings Call Transcript

Dear all, thank you for dialing in to Frontline's quarterly earnings call. In discussions with market actors in recent weeks, a recurring phrase has been heard. People basically saying, what a time to be alive. Frontline has been around through many cycles, but the tanking markets do actually evolve over time. We will argue that we've never been in a cycle like this, where indices and freight derivatives weigh so heavily in the freight pricing mechanism.

This fuels almost violent moves as we proceed.

For every 200,000 dollar per day fixture done physically, there is an exponential number of contractual obligations that are triggered, giving this market a new dimension and very exciting dynamics. Before I give the word to Inger, I'll run through the TC numbers, so let's move to slide three in the deck. In the fourth quarter of 2025, Frontline achieved $74,200 per day on our Wilson Sea fleet, $53,800 per day on our Seussmax fleet, and $33,500 per day on our LR2 slash Afromax fleet. So far in the first quarter of 26, 92% of our VOCC days are booked at $107,100 per day. 83% of our Seussmax days is booked at $76,700 per day, and 67% of our LR2 slash Afromax days are booked at $62,400 per day. Again, all numbers in this table are on a load to discharge basis with the implications of ballast days at the end of the quarter this incurs. However, for the VLCC's, there's little mystery left with such a high percentage in the book. I'll now 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 four. We report profit of 228 million dollars, or one dollar and two cents per share, and adjusted profit of 230 million, or one dollar and three cents per share, in the fourth quarter of 2025. The adjusted profit in this quarter increased by $188 million compared with the previous quarter, and that was primarily due to an increase in our TCE earnings from $248 million in the previous quarter to $424.5 million in this quarter. And that, again, was a consequence of higher TCE rates. we also have some decrease in finance and ship operating expenses and also some creations in other income and expenses ship operating expenses in particular decreased 7.1 million from previous quarter mainly due to an increase in supply rebates of 7.1 million let's then look at the balance sheet a slide five the balance sheet movements this quarter were are mainly related to ordinary items and also prepayment of debt under revolving reducing credit facilities. Frontline has a solid balance sheet and strong liquidity of 705 million in cash and cash equivalents and that includes undrawn amounts of revolver capacity, marketable securities and also minimum cash requirements as of in the bag, as per December 31st, 25. We have no meaningful debt maturities until 2030. In January 2026, we sold eight of our oldest first-generation eco-wheels disease for a total sales price of 831.5 million. And after commissions and repayment of existing debt on the vessels the transaction is expected to generate net cash proceeds of approximately 477 million dollars in parallel we acquired nine latest generation scrubber printed eco vlcc new buildings from affiliate of hemen for an aggregate purchase price of 1 billion 224 million dollars. We will pay approximately 25 percent of the purchase price in the first quarter of 2026 and 75 percent is due upon delivery of each vessel. The company intends to finance this acquisition with cash and then 60 percent long-term debt financing. Let's then look at slide 6. That's the fleet composition and cash break-even rates and OPEX. Our fleet consists of 41 wheel surfaces, 21 SUSMAX tankers and 18 LR2 tankers, has an average age of 7.5 years and consists of 100% ecovessels where 57% are scrubber fitted. We estimate average cash break-even rates for the next 12 months of approximately twenty five thousand dollars per day for these disease twenty three thousand seven hundred dollars per day for suzmax tankers and twenty three eight hundred dollars per day for lr2 tankers that gives a fleet average estimate of about twenty four thousand three hundred dollars per day this number includes dry dog cost for five years deceased two suzmax tankers and eight lr2 tankers And the fleet average estimate excluding dry dock cost is about $23,300 per day, or $1,000 less. We record OPEX including dry dock in the fourth quarter of $9,600 per day for WTCs, $7,600 per day for Swiss Max tankers, and $12,400 per day for LR2 tankers. This number includes dry dock of 3 VLCCs and 3 LR2 tankers. The Q425 fleet average OPEX excluding dry dock was $7,600 per day. Lastly, let's look at slide 7, cash generation. Following that we entered into one-year time charter agreements, and we also had fleet renewal in the first quarter. The spot date for the next 12 months is about 24,400 days. Frontline has substantial cash generation potential with 27,700 earnings days annually. As you can see from this slide, the cash generation potential bases current fleet rates and TCE as of February 27 is 2.8 billion dollars or 12 dollars and 51 cents per share which provides a cash flow yield of 34 percent basis the current share price and a 30 percent increase from this current spot market will increase the cash cash generation potential to 3.7 billion dollars or 16 dollars and 84 cents per share Likewise, a 30% decrease from current spot market will decrease the cash generation potential to $1.8 billion or $8.19 per share. With this, I'll leave the word to Lars again.

Thank you very much, Inge. So let's move to slide 8 and look at the current market highlights. So Oil demand seems to be growing healthily outright, but with a key focus on non-sanctioned molecules, creating substantial year-on-year changes in trade, as shown on the illustration or the graph on the right-hand side of the slide. We have a very politically-laden market environment. We talk about U.S.-India trade, U.S.-Iran-Israel discussions, and U.S.-EU-Ukraine-Russia talks. Venezuela liberation and further pressure on Russia, in addition to Iran tension, creates strong tailwinds for us operating in the compliant market of oil transportation. We are also in an environment where weakening U.S. dollar is supportive of global oil demand and the inflationary economic environment is supportive of the commodities in general. Asset prices for ships is appreciating firmly. Order books are building materially in 2029 and onwards, but with the 20-year age cap observed, future supply remains manageable. Let's move to slide 9 and look at the flows. Global crude oil in transit continues to be at elevated levels. On the graph on the right we've added the TD3C Baltic index, by some referred to as the Dow Jones of the freight markets, and there you can see how sensitive this index seemingly is to the oil trading on the seven seas. In this picture we see sanctioned crudes moving slower particularly for the Russian barrels or being stored particularly for the Iranian barrels. This creates an increased dark fleet utilization and the dark fleet then needs new capacity or attract new capacity into the dark vessel pool. These vessels are pulled out of the compliant fleet. OPEC Middle East exports is growing firmly and but also adds to this increased demand for compliance and approved tonnage. But despite the are you watering freight levels we're facing right now we see very few charters in fact none breaking this 20 year age cap which supports the case that we have been arguing for years strong import growth to Far East and India contradicting the energy transition narrative and especially for China. I think people are starting to get familiarized with the energy addition not transition term. Long-haul ARBs are challenged and just to explain what an ARB is, that's basically the price difference between one continent to another in respect of oil which basically if it's at a wide enough point a trader or an oil major can make a profit moving the oil over long distances and selling it in a different market. Freight is, of course, a key component in this. And by example, if the freight for a VLCC from US Gulf to China is $18 million, the charter is actually exposed to $9 per barrel freight and basically this spread between the two oil markets need to accommodate that. This has put some pressure on these ARBs and we've seen fairly little volume moving from the US to the Far East but again if oil needs to move or when it needs to move these differentials will just have to price to accommodate this spread. The incremental marginal barrel is now compliant. We've also discussed this in previous calls is that we don't see any kind of fantastic production growth in Iran. We don't see any kind of fantastic production growth coming out of Russia, but we do see compliant oil production and exports growing. The big factor is of course OPEC, reversing cuts, but then you have countries like Brazil, Guiana, performing extremely well. And these are the new molecules coming to market and they need compliant ships. Let's move to slide 9 and look a little bit as a fleet development. So the order book continues to grow. We are basically in a market where decades high prices for modern tonnage, if tonnage is even there for sale, that is on the water, meaning that the vessel can trade straight away, is so high that it pushes actors into the yards. Other asset classes as LNG containers brokers continue to populate yards order books, but we do see tanker ordering accelerating for 2029, especially in China. As the chart on the top right hand indicates, it shows basically the efficiency loss of a vessel as it ages. And the curve starts to dip around 10 years of age and then further deteriorates into almost ignorable when it gets to 20 years. With this in mind, as we move forward and move into 2039, we're going to meet the generations of ships that were delivered around 2010 and onwards. And this is a large population of ships that then again will be 20 years of age and exposed to this deteriorating efficiency curve. With that in mind, although ordering is accelerating and we have a kind of high amount of ships expected to come in 2029 and it's basically being added for every day, It's not alarming with this in mind, considering the age of the fleet and the fleet profile. We see it as we have two to three years of a very good runway before the supply could become a worry. We also expect going forward that yard capacity will grow, and especially in China. And it's not necessarily new yards, but it's yards that haven't built tankers, or at least not been specialized in tankers, but they're now adding berths in order to cater for this We believe there is another trend that will evolve as we proceed here, considering or assuming this rate environment is sustainable, that Korea and Japan will increase its focus on building tankers in general and we also see in special as the margins on these contracts start to compete with what they can achieve for containers or LNGC. Let's move into slide 11 where we have the familiar tables. I'm not going to spend too much time on this slide only to say that in our methodology methodology and we try to be consistent, we use data that's based on when an IMO number is registered. This means that this statistics will always be a little bit slow to react. The general assumption in the market is that the order book to fleet ratio for VOCC is probably already at 20%. But this will become more and more evident as these contracts are being registered and the IMO numbers are being created with that I think we move on to the summary and I've changed the headline here so we also see take the center stage Zeus max and Afromax to follow question mark it's actually not much of a question mark because the series maxes are already on the way and the aframaxes is boiling. We are in a fundamentally tight market condition that yields extreme volatility. Oil demand and supply is developing positively but especially for compliant molecules. The global tanker fleet age profile and efficiency loss tighten the supply demand balances. Asset prices are on the move as both spot and period markets support the investment decisions. The volatile political landscape fuels energy insecurity, conditions where tankers tend to thrive. And frontline efficient business models tend to produce material shareholder returns as as we proceed. Thank you very much and with that I will open up for questions.

Thank you so much. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad and wait for your name to be announced. To withdraw a question, please press star one and one again. This will take a few moments and now we're going to take our first question and it comes line of John Chappell from Evercore or ISI. Your line is open. Please ask your question.

Good afternoon. Thanks very much. Laura, so many things to ask you, but I'm not going to be greedy. I'll keep it to two. So the first thing is, obviously, we're in a parabolic situation right now. We've seen this once or twice before, but as you said, the underlying factors seem to be very different this time. But rates don't go to the moon. There's a certain point where there's a ceiling. So what's the catalyst to provide a plateau and maybe a little bit of an easing from here? Is that a geopolitical event? Is it a seasonal event? Is it a Sinecor event? What takes a little bit of the froth out of the market, which would still be very fantastic rates, but maybe lower than where they're moving this week?

It's an extremely good question. I think the answer is kind of seasonality. seasonality, there's also, you know, kind of normal seasonality. We're actually not, you know, unused to having fairly, you know, kind of poised markets during this time of the year. Many times due to U.S. refineries going into turnaround, allowing for more barrels to be exported. And so we're kind of, we're actually going into that phase now. So there will be potentially a few more months where we actually can't sustain these rates depending on how the flows work. But then, you know, there is going to be a summer low, you know, and it's almost inevitable. But whether if it's a summer low that moves from $200,000 to $100,000 or, you know, that is almost impossible to gauge. I also think one needs to note that, you know, There's one major important in this market being China, and they have built an enormous amount of inventory over the years. They could, for any reason, choose to basically turn down the speed a little bit for a period of time. And this will also create volatility. But this is, and I expect this to occur, but it's, of course, extremely impossible or extremely difficult to say when something like that might happen.

Yeah, definitely. Thanks for that. The other one is also maybe a bit difficult, but it's just something I've been wondering about. Nobody's done what your Korean friends are doing right now for like seemingly 50 years. And that includes your shareholder, who many people probably would have anticipated would have been the one to try this. Why hasn't anyone tried to corner the VLCC market in the past? And where could it go spectacularly wrong for them? You know, just what are the risks, I guess? And I guess the final thing is, how do you position frontline so that you're not affected by if it does go spectacularly wrong for this player?

Yeah, no, it's a good question. And you're right, it hasn't really been done in a material manner in the tanker market for at least longer than I can remember. But there is a parallel story from the mid-2000s involving a certain person from Taiwan, but this was in the dry bulk space. and but the key to his success in dry and the potential key to the success that the korean actor might might have is actually that you go in a market that is already fundamentally tight and then you don't need much to weigh it kind of uh or or to slow the surprise side of of tanker capacity before you get these violent moves and also as most people are familiar with if you look at how freight prices just empirically um you know the minute you go from 90 utilization to 95 uh you know how freight prices uh the moves are exponential so so so so i you You know, that would be kind of, you know, be my explanation to why this is possible. I'm not going to comment on why, you know, Mr. Frederiksen hasn't looked at this. But the thing is, you know, we are a stocklisted public company. This is, of course, easier to do if you are a private entrepreneur in this market. And, of course, willing to risk a substantial amount of money in such a game. Where it can go wrong? In these situations, and we've seen them before, potentially to a smaller scale, it ends up being, you know, it's almost like a game of chicken. You know, who can hold the longest? so this is what makes me extremely excited over the months to come and the summer and so forth because we will see some very interesting dynamics kind of come to play but one thing I'm 100% certain of is that there will be volatility.

That's all very helpful thank you Lars.

Thank you now we're going to take my next question. And the next question comes to the line of Sharif Al-Maghrabi from BTIG. Your line is open. Please ask your question.

Hey, good afternoon. It seems like charterers are seeing what you're seeing and willing to take more ships on term. Would you say that's the case and the TC market's more active, or is it just that rates have risen to a level that ship owners are more comfortable with?

No, I think as I kind of touched upon in in the introduction today is that, you know, this market has evolved quite a lot in the last 20, 25 years. And if you, by example, if you look at the Middle East market, for instance, for VLCC, you know, transport from, you know, plain Manila from Middle East to Asia, you know, this market used to have a lot of physical liquidity. What happened over the years is that more and more actors are using the index itself to price the freight. So basically doing contracts, floating contracts, that prices off the Baltic index quote. To the point where actually very little liquidity is actually transacted in the market. So price visibility has been quite difficult actually sometimes. to do a parallel, you know, for every barrel, physical barrel of Brent oil that is produced, you know, it trades tenfolds on paper. And we've seen a little bit of the same kind of tendency or trend in freight. And this, you know, this becomes a problem then if everybody are kind of pricing their freight of an index that runs out of control and then suddenly you you need to hedge and then you need to access the paper market or you need to buy back hedges for the guys who have taken ships on time charter and basically hedge the the you know parts of the curve in in that exposure and so forth and you end up with a very vibrant ffa market which every ffa broker today would you know with the testify to and you get these kind of ebb and flows out on the curve from from panic to to to to some sort of quiet until the panic kicks in again so because over the last couple of weeks we've seen you know you see the index it's just relentlessly printing what is physically actually being done but it's not like 10 cargos are fixed a day it's two to three cargos maybe fixed today but the amount of pricing exposure around that quote is enormous and this triggers kind of it's almost like self-propelled move going forward but I think it's important to note this is you know this is not manipulation the market is fundamentally extremely tight But, of course, you could argue that maybe freight rates are moving ahead, basically due to this tightness, you know, as the panic ebbs and flows.

Something else that I thought was interesting was your comments specifically about new tanker yard capacity coming online. And so I apologize if you mentioned this and I missed it, but do you have a sense of what the turnaround time on these projects might be and when first ships might hit the water?

No, it's 2029. So a yard that is now marketing kind of a new birth that they're going to build, but it's not like a green field because the yard exists. It is there. But they're just kind of introducing a new birth that can say accommodative build. That is 2029, so three years. Got it.

Lars, thank you for your time.

Thank you so much. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad. And now we're going to take our next question. And it comes to the line of Devon Sangoy from Tej Investments. Your line is open. Please ask your question.

Hi, Lars.

I just want to ask you, what will be your strategy on, you know, spot versus time charter as you go through these interesting times? and that's that's my first question yeah no and it's a good question um as we said before um you know we we we we kind of you know our proposition to our investors is of course to to give you spot returns so basically you don't have to buy a ship you can just buy frontline but you know at times we will choose to use elevated markets to try and secure revenues we've also kind of we don't have a fixed policy or anything but what we have like a golden rule of one third so in theory you know our board would be comfortable under certain conditions that we get up to you know time shutter coverage of 30% we were of course in in you know as you've seen from the stuff we did you know we We reported the seven one-year time charters. You know, in the report today, we also reported another one that was done like a week later. So we are in this modus operandi to try and secure some longer-term income. But we are so constructive about this market that we are not really engaged in yet, at least, in the longer term. because we actually do believe that there is still some to go for the longer-term contract. But they're also appreciating quickly. So I'm not going to exclude anything. But you will not find frontline in a situation where we put 50% of our exposure out on time charter because that's not really what our investors are after, we believe.

Sure. Yeah. And see the dark fleet, which we've been struggling and finally it's coming with sanctions and whatever was needed to be done, been done now in this, though the probability of 50 percent, if Russian crude oil and if the war stops and the sanctions are lifted. is also going to get into a compliant fleet. Do you foresee in such scenario what will happen to the market?

Yeah, so if you'd asked me this in like September 2022, I would have said it would be, you know, like an immediate kind of bearish kind of proposition. But so much time has passed. And, you know, if the Russian barrel becomes a compliant barrel, you know, kind of you'll probably get half of the capacity back into the compliant on the shipping side, into the compliant fold. But the other half will either be or will actually be disqualified basically due to age. And this is the same for the Iranian or the fleet servicing the Iranian oil. you know with a lot of ships yes but these are ships that were supposed to be recycled years ago basically due to age so very few of them are actually going to come back into into a kind of compliant trade and also the scrutiny in the compliance market on ship's history is extremely kind of tough. So it's not very easy to kind of whitewash a tanker that's been involved in illicit trades. But one point I need to make, you know, we've actually seen this before when sanctions were eased towards Iran in 2016. They have a national fleet, a national tanker company, NITC. And of course, any part of a sanctions lifting kind of solution will also involve nationally controlled shipping companies. So for Russia, that would be so conflict and potentially others. But again, just analyzing those fleets, H is the problem. So actually, we would welcome these molecules into the compliance fold. sure and the last problem is that if this sustains and obviously uh and you do the best to get make out of the cash becomes a cash file obviously you're paying out large part of it but uh do you think at what point in time you will start deleveraging balance sheet or you will stay delivered um no our intention is to stay levered because for for for every share you buy in front fine you get like a 1.4 ship exposure equivalent basically due to our leverage so that we still believe that's the model and obviously I can't rule anything out but but we have you know no inclination to deliver apart from what actually happens when you pay down that so so the point of cash is actually going to you guys congratulations and all the best for the future thank you very much thank you dear participants just a quick reminder if you would like to ask a question please press star one one the speakers are no further questions for today I would not like to hand the conference over to speaker last but start for any closing marks thank you thank you very much for listening in and I hope you are as excited as I am to to what the future is going to bring I I think it's the tanker market's turn now, so let's enjoy the ride. Thank you very much.