Earnings Call Transcript
Frontline plc (FRO)
Earnings Call Transcript - FRO Q3 2020
Lars Barstad, CEO
Good morning and good afternoon. Welcome to Frontline’s Third Quarter Earnings Call. This is my first call in the hot seat. I’m both excited and honored to serve our companies in this capacity. Frontline’s long-term strategies are well cemented by the board and we run a very professional organization that has easily adapted to this management transition. This has been a volatile quarter and an extraordinary year-to-date. I’m tempted to bring in back zones, but they seem to become common to the shipping industry. The global COVID-19 pandemic has affected us all. And even though we still need to endure the situation a bit longer, there is no glimmer of hope on the horizon. Let’s have a look at the highlights on Slide 3. Frontline came into Q3 2020 on a high note, but as the quarter progressed, freight rates started to increase. We still landed the quarter with good returns on a load-to-discharge basis earning $49,200 per day on our VLCCs, $25,100 per day on our Suezmaxes, and $12,800 per day on our LR2/Aframaxes. This yielded a net income of $57.1 million, or $0.29 per diluted share. Our adjusted net income came in at $56.4 million, rounded to $0.29 per diluted share. We are very happy to report that Frontline has entered into three term loan facilities of up to $485.2 million. Inger is with me here today and will elaborate more on our financing activities later in this presentation. So far in the fourth quarter, we have about 74% of our available VLCC days at $22,600 per day, 61% of our available Suezmax days at $12,600 per day, and 65% of our LR2/Aframax days at $13,800 per day. The booked earnings are a reflection of the challenges this market faces. And although we want to be upbeat for the future, there are uncertainties going forward. Frontline has therefore decided to refrain from paying dividends this quarter to preserve the company’s cash position. I’ll now let Inger take you through Frontline’s financial highlights.
Inger Klemp, CFO
Thanks, Lars. And good morning and good afternoon, ladies and gentlemen. Let’s now turn to Slide 4 and look at the income statement. Frontline achieved total operating revenues, net of voyage expenses of $178 million in the third quarter and also an adjusted EBITDA of $108 million in the third quarter. Frontline reported net income of $57 million, or $0.29 per share, and adjusted net income of $56.4 million, or also $0.29 per share in the third quarter. The adjusted net income this quarter decreased about $160 million compared to the previous quarter. And that was primarily driven by a decrease in our time charter equivalent earnings due to lower reported TCE rates that Lars went through in the third quarter, along with more than five dry dock days in this quarter due to the dry docking of four vessels. We also recorded a $13.9 million increase in ship operating expenses that was mainly due to an increase in dry docking costs of $4.3 million, an increase in repairs and maintenance of $2.1 million, and we also had $4.8 million in additional crew costs due to COVID-19. In addition, we also had a reduction of $12.4 million as a result of a technical difficulty in the second quarter. Let’s then take a look at Slide 5. We have completed loan facilities in a total amount of approximately $920 million during 2020, whereof $725 million of that was funded to refinance four existing loan facilities that were due in December 2020 and the first half of 2021. But we have also completed two financings over $196 million to finance new vessels. All these loan facilities were done at attractive terms with LIBOR plus 190 basis points or even better, maintaining our competitive cost structure. In November 2020, the company entered into three new term loan facilities in a total amount of $485 million. Where two of these facilities were to refinance two existing term loan facilities maturing in the second quarter of 2021. The third facility was in the amount of $133 million to partially finance the four LR2 tankers under construction. The detail on the refinancing of the two facilities was, first, that we had one senior secured term loan facility done with a strong banking group consisting of the largest global shipping banks in the amount of $250.7 million, to refinance the $466.5 million facility, which was maturing in April 2021. The new facility matures in May 2025 and has an amortization profile of 18 years. The facility was fully drawn down in November 2020, and $256.8 million of the refinance facility has been recorded as long-term debt as of September 30, 2020. Further, we then entered into one senior secured term loan facility with ING and Credit Suisse in an amount of up to $108 million to refinance the $109.2 million facility, which matured in June 2021. This new facility matures now in November 2025 and has an amortization profile of 17 years. The facility was also fully drawn down in November 2020, and $78.6 million of refinance facility has been recorded as long-term debt as of September 30, 2020. The slide shows debt maturities prior to refinancing in the grey column and following the refinancing in the blue column. You will notice that following the refinancing, we had no material debt maturities until 2023. And the debt maturities from 2025 onwards have increased substantially. Lastly, we also entered into a senior secured term loan facility with CEXIM and Sinosure in an amount of $133.7 million to partially finance the remaining cost of $142.3 million for the four LR2 tankers under construction. The facility will have a tenure of 12 years and an amortization profile of 17 years, and following that the new building program is fully funded. Let’s then take a look at the balance sheets on Slide 6. The main happenings in the third quarter affecting the balance sheet were that we entered into the two new loan facilities, which I went through, to refinance the two term loan facilities with total balloon payments of $324.4 million, which were due in April 2021 and June 2021. This has led to the short-term debt and current portion of the long-term debt decreasing by $311 million, and long-term debt increasing by $283 million. Further, we paid $97 million in dividends and we earned adjusted net income of $56.4 million. At the end of December 30, 2020, Frontline has $423 million in cash and cash equivalents, including the undrawn amount of unsecured loan facility, marketable securities, and minimum cash requirements. Then let’s take a closer look at cash breakeven rates and the OpEx on Slide 7. We estimate that the average cash cost breakeven rate for the fourth quarter 2020 will be approximately $21,900 per day for the VLCC, $20,400 per day for the Suezmax tankers, and $15,700 per day for the LR2 tankers. The fleet average estimate is about $19,500 per day. These rates are the all-in daily rates that our vessels must earn to cover the budgeted operating cost on dry docks, the estimated interest expenses, TCE and bareboat hire, installments on loans, and G&A expenses. The Suezmax tanker cash cost breakeven rates in this fourth quarter 2020 are impacted by dry dock for Suezmax tankers in the fourth quarter, as well as dry dock for one LR2 tanker in the fourth quarter. As already discussed, the Q3 OpEx was affected by increases in dry docking costs, increases in repairs and maintenance, and additional crew costs due to COVID-19.
Robert Macleod, CRO
Thank you, Inger. So, let’s move over to Slide 8 and recap the third quarter in the tanker market. Global oil demand bottomed in May and in June, we’re already in recovery and demand surpassed supply amidst deep cuts by OPEC and other key producers. The oil markets switched from inventory builds to inventory draws. This can be seen on this slide at the bottom left with the yellow bars. Subsequently, OPEC+ increased production slightly, which kept the cuts significantly below January 20 levels and the draw cycle continues. When in draw mode, it’s normally the expensive barrel that draws first, and this is typically floating storage. The majority of OPEC cuts have been geographically centered around the Middle East Gulf. This has led to recovering economies, particularly in Asia, sourcing their oil from further afar, which incurs longer-term miles. In the end, this has favored the VLCC markets as these vessels offered the best economies of scale. We also saw continued demand for product storage during the quarter, specifically for jet fuel storage, keeping LR2 markets relatively strong. This development is well reflected in our results for the quarter. Let’s move to the next slide, Slide 9, and look at the fleet and order books. Tankers continued to enter the market during the quarter, with many being engaged directly from the yard in product storage. This has limited the impact on crude spot markets. There was a report of a significant delivery backlog due to the COVID-19 related disruption, but this backlog seems to have been cleared. There are recent speculations of mammoth orders in clips of 5 and 10 vessels being placed in Asia. These are yet to be confirmed and are not a part of this dataset. However, as a short indication, there is room for fleet growth in both 2022 and more so in 2023, assuming 20-year-old ships leave the competitive spot markets and oil demand develops on trend in that time horizon. One of the big x-factors for shipping going forward is obviously propulsion technology. Frontline follows these developments closely, leveraging our extensive business platform, but there is still a way to go to reach any conclusions. Let’s move to Slide 10, where we’ll try to explain one of these market’s mysteries. We have a record number of vessels, literally in all asset classes, reaching or passing the 20-year mark. The average recycling age for a tanker is very close to this age, sometimes depending on the underlying freight rates. We are now in the markets with relatively higher volumes of inventory still, in addition to a higher amount of sanctioned oil volume. This seems to have supported the demand for tankers in the tail end of their effective lifespan. In the chart below, we’ve illustrated this by comparing the average price achieved on tonnage transacted at age close to 20 years, and the reported price achieved for recycling. The disconnect is pronounced and likely explains the muted recycling activity. Selling for alternative use is currently the preferred option for the owners. I think it’s important to note that for the competitive spot markets where we operate, we are under strict scrutiny from vetting policies, so these vessels play an insignificant part in those balances. Let’s move on to Frontline’s approach to ESG. Efficient, safe, and transparent operations have been Frontline’s core values for years. Efficient in order to save costs; safe in order to safeguard our seafarers, environment, and our physical assets; transparent in order for the investing community like yourself to easily understand our business model. What we have found, as we familiarize ourselves with the relevant ESG framework for the industry over the last couple of years, is that for us, it’s more about how we structure our communication on policies and routines we already have in place rather than enforcing completely new routines or altering the way we conduct ourselves. A central part of our business model is for technical management to be clustered or shared, if you wish, with other listed companies we’re familiar with. In this, we gain economies of scale as we share knowledge and practices across more than 230 vessels. This collaboration gives us an impressive leverage to shape and influence standards we expect to be mapped, both on social aspects and on governance. But we also share synergies when it comes to applying technology to optimize performance, both in the traditional manner as in speed and consumption, but also with respect to our environmental footprint. Frontline, yet although potentially a bit under-communicated, is very well positioned to comply with the stricter environmental, social and governance framework the shipping industry has to get comfortable with moving forward. So let’s move to Slide 12, the tanker market outlook. Increased oil supply is now key in order for the tanker market to balance. We were shielded for a period; our tankers were employed by storage. Now we’re dependent on volumes to come to the markets and normal trading patterns resuming. The demand for tankers is still kept by the OPEC+ and we find it extremely encouraging to see oil prices performing strongly as the volumes offered increased significantly, particularly due to the Libyan exports that resumed in October. This in isolation indicates that oil demand might actually be firmer than the market in general expects. Looking at the benchmark Brent oil curve, we see the same pipeline expressed in a dramatic move from contango or carry, if you like, to near flattening of the curve. This signals inventory draws to accelerate and oil markets potentially finding a balance at an earlier stage. It’s obviously a bit early to call, but just to explain how these mechanisms work. If we are drawing in a territory of 3 million to 4 million barrels per day from inventories now, that’s the volume needed from producers once inventory levels normalize, which in turn can be translated into increased tanker demands in the months to come. Finally, let me sum up on Slide 13. Frontline is financially strong. We have no material debt maturities until 2023. The company is very well-positioned towards these three related expectations: despite extended regional lockdowns, oil demand continues to recover, crude oil price action indicates a change in oil market sentiment, and we expect freight market volatility to increase going forward. Thank you. And then we can move on to the Q&A.
Operator, Operator
Thank you. Ladies and gentlemen, we will now start the question-and-answer session. Your first question comes from Randy Giveans from Jefferies. Please go ahead with your question.
Randy Giveans, Analyst
Howdy team Frontline, and congrats again on your promotion, Lars.
Lars Barstad, CEO
Thank you very much, Randy.
Randy Giveans, Analyst
So first question around the dividend; you brought it back last year, paid a $0.10 dividend, despite a loss following 3Q 2019 results. You increased this to 40 or–sorry, 70% of net income following the first quarter, fell in the second quarter, now you cut it to zero despite a $0.29 gain. So I guess why has the dividend payment bounced around so much over the last year? And what will cause you to reintroduce the dividend? Clearly, it’s not just positive net income.
Lars Barstad, CEO
Yes, the derives is not only positive net income. We work in an extremely volatile market and we also normally have quite a good visibility on our earnings going forward. For Q3, the earnings were good, but our visibility or when we look into Q4, it doesn’t look too great. And we are in the middle of a global pandemic and uncertainties are quite high going forward. So we decided to keep the cash and obviously return to paying dividends the minute we see that the market stabilizes and potentially is ready to return to levels where we see that suited.
Randy Giveans, Analyst
Got it, okay. So more of just a subjective outlook for the market regarding...
Lars Barstad, CEO
Our dividend policy stands in such a manner that we like to use our discretion when we deem it necessary. And in this particular case, we found that to be prudent.
Randy Giveans, Analyst
Got it, all right. And then I guess one more question about your quarter-to-date rates. The VLCC and Suezmax are down from the third quarter for the fourth quarter, which makes sense. However, your LR2 rates are taking higher. So maybe what caused this and how many of your LR2 product tankers are operating in the crude trade?
Lars Barstad, CEO
Well, we have eight of our LR2s operating in the crude trade. We have ten operating in the clean, of which one is on time charter. The estimated time charter return for Q4 is probably being more affected by the returns we’ve seen on the clean side.
Randy Giveans, Analyst
Okay. And then do you have an outlook for crude versus products here in the next 6 months to 12 months? Which kind of sector do you see as more attractive? I know I think you mentioned neither are very attractive?
Lars Barstad, CEO
Well, it’s a very good question. The thing is that we’ve come through seven quarters where the crude part of the equation was the clean trade. It’s only the last quarter and a half where the clean product tankers have actually outperformed significantly. So it’s really difficult to call. The dirty Aframaxes are obviously now being penalized by the fact that Russia kept quite severely together without that and that hurt the North Sea barrel or the Baltic barrels coming out of Russia. I think I would wait to make that call until the trade flows have normalized.
Randy Giveans, Analyst
Got it. All right. Well, I’ll let you go. Thank you so much.
Operator, Operator
Thank you. And the next question comes from the line of Chris Tsung from Webber Research. Please go ahead and ask your question.
Chris Tsung, Analyst
Hi, Lars. Hi, Inger. How are you?
Lars Barstad, CEO
Hi. We’re good. Thank you.
Chris Tsung, Analyst
Great. Good to hear. I wanted to ask about the decision to sell SeaTeam; could you expand on that a little bit more? And what do you guys also plan to divest other JVs like your position in Clean Marine?
Lars Barstad, CEO
Well, first of all, regarding SeaTeam; it has been a really good company for us to have in-house for a period of time. It’s obviously not core business. Our business model is outsourcing services like SeaTeam was offering. But it’s obviously given us great knowledge and it’s also made us understand the markets or the technical management markets quite well. Deciding to divest from that was more related to an opportunity that came rather than something that we strategically wanted to do quickly. An opportunity arrived, and we found a solution where OSM will continue to run SeaTeam almost in its original form and take care of our vessels that are under management with the same mindset that they were already inside SeaTeam. So it’s more about keeping to our original strategy. With regards to Clean Marine, it’s an investment we’re still holding. We are not an active owner in that. We see our role more as having a listening post. The scrubber market or ETFC market is a little bit dormant, as you probably understand, but the company is still working. We are basically looking at it more as a passive investment.
Chris Tsung, Analyst
Okay, thanks. Yes, that makes sense. And just looking at not so much guidance but fixtures to date in Q4, the other two are a little bit hard and two as masses hasn’t typically ended this way. I guess how much of it is driven by the number of clean tankers versus dirty, or I guess what factors are allowing the Suezmax trade below LR2, or LR2s to trade above the Suezmax for Q4?
Lars Barstad, CEO
Well, as I indicated when I summed up Q3, Q3 was a bit of an atypical quarter regarding how freight rates developed. Because in a normal market, Suezmax will perform a little lower than VLCCs and then a lot of your efforts will follow suit below that. But this quarter, Suezmax has actually underperformed VLCCs by more than 50%. This situation is kind of not particular to us. With the OPEC cut, we’ve seen that the longer-term miles have been prioritized. This has put VLCCs in a much greater position due to their economies of scale. This has particularly been the case for Suezmax. The LR2 has outperformed literally all the other segments apart from VLCCs throughout the quarter, and this is obviously due to their ability to store clean products.
Chris Tsung, Analyst
Okay, just storage clean trade. Okay. And just one last quick question on dry docking. During your prepared remarks, you talked about the dry dock schedule for Suez and one for LR2 in Q4. Can you tell me the number of Suezmax in Q4 that are dry dock?
Lars Barstad, CEO
The number in Q4.
Inger Klemp, CFO
Four for Suezmax.
Lars Barstad, CEO
Yes, four.
Chris Tsung, Analyst
Great. Okay. Four Suez and one LR2 in Q4. Thanks guys. Have a good day.
Operator, Operator
Thank you. Your next question comes from the line of Jon Chappell from Evercore ISI. Please ask your question.
Jon Chappell, Analyst
Thank you. Good afternoon, Lars and Inger.
Lars Barstad, CEO
Good afternoon, Jon.
Jon Chappell, Analyst
Inger, first question for you just quickly on the dividends. So completely prudent given your fourth quarter rates to date, but you guys are also able to refinance a lot of debt at very good terms at a very difficult time in the market. Are there any restrictions on dividend payouts or payout ratios as part of those new facilities that may have played a role in the decision to suspend this quarter?
Inger Klemp, CFO
Nope. We don’t have any reductions in our new facilities, so that made no difference.
Jon Chappell, Analyst
Okay. And then Lars joining at an interesting time. Frontline has a legacy of being aggressive when others can’t be. So you’re retaining cash through dividends; Inger’s done a great job shoring up the balance sheet. But you’ve mentioned the uncertainty and the pandemic asset values dropping pretty aggressively. How do you view 2021 in your role and in Frontline’s role in the industry as far as acquiring assets, chartering in assets, just adding more leverage when others are just worried about survival?
Lars Barstad, CEO
Well, as you said, it’s already in our DNA to be aggressive when others can’t. We also have a very strong shareholder in our back. So it’s obviously something we’re very excited about looking forward. Right now, I think the uncertainties are a little too great to be quite honest. Although we are upbeat, there are some risks looking into the next couple of quarters. We think opportunities will probably arise as we churn and we have these levels particularly on the freight side. People will find that the Frontline DNA hasn’t really changed, even if I’m in the hot seat to fill it out.
Jon Chappell, Analyst
Okay. I appreciate it. Thanks, Lars. Thanks, Inger.
Operator, Operator
Thank you. Your next question comes from the line of an unnamed investor. Please ask your question.
Unidentified Analyst, Analyst
Hi. Thanks for taking my call. Two things: one, you mentioned the unwind from the contango storage situation. Could you tell us what you think the percentage of that has occurred? And then secondly, Libya has gone from basically not exporting much of anything; so I read the other day, it’s over 1 million barrels a day. Is that providing us some support before rate-wise for the Suezmax market in the Eastern Mediterranean?
Lars Barstad, CEO
Thank you. These are really great questions. Firstly, the floating storage. In our presentation on Slide 8, we have some data there from ClipperData. The way I look at or we look at storage is—we put the bar of 21 days. Those levels peaked north of 100 million barrels. Now we’re down to 60 million barrels. So there is a 40% decrease. How much oil—when that is finished—it’s difficult to tell because there’s also something about the structure of not only the crude curve but also of the market itself. We also have a record amount of sanctioned barrels in the world, which probably calls for a bit more floating inventory than we normally would observe. But it’s on its way down. I think we’ve at least taken off 42%, maybe even 50% of the floating storage. With regards to Libya, it has been really exciting and quite surprising actually. So they’ve managed to ramp up, and I think the last numbers I saw were up to 1.2 million barrels per day. This has indeed made it far more interesting to be a Suezmax shorter than they have been for the last couple of months. We do see a lot of more problems appearing in the markets. We also see opportunities arising. A lot of these barrels have been going East, and that is a perfect fit for the Suezmax size of vessels. So yes, it has supported the market in the Mediterranean significantly.
Unidentified Analyst, Analyst
Okay. Thank you very much.
Operator, Operator
Thank you. Your next question comes from the line of Greg Lewis from BTIG. Please ask your question.
Greg Lewis, Analyst
Yes. Thank you, and good afternoon, and then Lars congrats on the position. I guess I just had kind of a broad question. I mean, it was kind of talked about people focused on the dividend, rightfully. So I guess I’ll ask it a different way as I look at Frontline and the company looks like it trades on—depending on what valuation metric—and I know you don’t want to talk about NAV, but we can look at Wall Street-like EBITDA and the companies that are premium. And the company has been able to leverage that premium to grow and be opportunistic over time. So just kind of curious, what do you think drives that premium?
Lars Barstad, CEO
So what drives our relative pricing to our product is about...
Greg Lewis, Analyst
Correct. So, yes, like if you wanted to go out and buy a company, it’s good to be at a premium if you want to do it. And so I’m just kind of curious how you think about that because it definitely gives you opportunities? So just kind of curious how you think about that?
Lars Barstad, CEO
Well, I think it’s—first, there are many factors that decide our pricing. Some are maybe not in our control; we’re a preferred stock where our liquidity is high and so forth. We also have extremely low cash breakeven levels. We have a relatively high leverage, which gives you relatively quick returns whenever the market moves. Historically, we have proven to be quite rewarding toward our shareholders. As I said since I joined Frontline in 2015, when you invest in Frontline, you invest together with our main shareholder. You’re not a sole investor in a big corporation, and his history for being interested in enhancing shareholder terms is well-known. So, I think that’s a postulate; it’s a difficult number to break down.
Greg Lewis, Analyst
Okay, great. And then just as I think about that, as the companies out there—and clearly, you’ve laid out the way to move forward and that the market’s not good now, but there are reasons to be constructive in the out years. Is the company—realizing you have a pretty attractive fleet right now, all good age, big—should we be thinking? Are there going to be opportunities to come? Is there any M&A opportunities do you think that could develop over the next six to 12 months, or has it kind of been all the same players for the last five plus years, and you don’t really see any potential for consolidation?
Robert Macleod, CRO
There is always potential for consolidation, but there is always the question of price and opportunity, of course. The markets have actually consolidated, but maybe not in the way that the investors would want it to do. That’s more like in bigger pools being built and the trading entities growing and so forth. So, the amount of sole owners trading three or four ships has maybe not reduced, but at least their tonnage has been consolidated in a way. With regards to M&A, as you know and I know, there are always the usual opportunities or suspects, or whatever you’d like to call them. We are constantly monitoring them, and we’re always in the markets to look at opportunities. But then, we’re not actually looking at any at this moment considering how the market is performing right now.
Randy Giveans, Analyst
Hey, back for more with two quick modeling questions. First, for the loan facilities, we’ve done LIBOR plus 190 basis points, so certainly pretty impressive there, Inger. But following those recent refis, is now the plan to maybe repay the remaining $60 million on the Hemen facility? And then also with the new recent refis in place, what is your weighted average interest expense and debt amortization schedule through 2021 in terms of quarterly payments?
Inger Klemp, CFO
Yes. We expect to be—did you talk about the ordinary installments? Was that the question?
Randy Giveans, Analyst
Yes.
Inger Klemp, CFO
Yes. Okay. In 2021, the ordinary installment based on the current loan facilities we have is approximately $160 million a year, evenly split between the quarters. It will be—a slight increase in these ordinary installments in 2021 as we then take delivery of the four LR2 tankers and draw down on the new Suezmax tankers facility, which we talked through earlier in the presentation.
Randy Giveans, Analyst
Yes.
Inger Klemp, CFO
And your other question was with respect to the Hemen facility. Was that the question?
Randy Giveans, Analyst
Yes, the $60 million remaining on the Hemen facility.
Inger Klemp, CFO
We do have an agreement there in place stating that it matures in May 2021. So, we plan to follow that agreement, and we’re going to repay it in May.
Randy Giveans, Analyst
Got it. All right. And then for the total weighted average interest expense, I see your interest expense came down pretty meaningfully from the second quarter. Just trying to see where that runs up to in the third or in the fourth quarter.
Inger Klemp, CFO
Okay. At the end of the third quarter, I think the average cost was around 2.3%. I think in the fourth quarter, it will be slightly lower, around the same level.
Randy Giveans, Analyst
Got it. All right. And then one more last modeling question before we can all get to Thanksgiving, I guess here in the States. For the operating expenses, they had a huge tick up in the third quarter. I know you said most of that was due to some dry docking and some one-time crewing costs. Just trying to get a sense for a good run rate there in the fourth quarter in 2021.
Inger Klemp, CFO
Other than SFL, it would deliver pay in the third quarter. However, we have 22 in the press release that they would also have a kind of one-off in the fourth quarter with respect to this crew cost related to COVID-19 or $1.5 million.
Randy Giveans, Analyst
Yes.
Inger Klemp, CFO
Our reduction is of course down from this quarter, which was $4.8 million. We also stated that we would have our vessels dry dock in the fourth quarter. So, I don’t think you can expect that the cost would come down from the third quarter with respect to dry docking in the fourth quarter; probably it will be a little bit higher. But otherwise I don’t think we would have any extraordinary items in Q4. With respect to 2021, I don’t foresee that to be extraordinary in a way. The only exception that Frontline has to make is, of course, the development of the COVID-19 pandemic. I’d be confident to see it, but it seems like it’s active, coming in place, and everything should be pretty normal after a while as well. So, it shouldn’t be any costs related to crude changes and that sort of thing going into 2021.
Randy Giveans, Analyst
Sure. Let’s hope so. That sounds good. Well, thanks so much. Have a good day.
Lars Barstad, CEO
Thank you.
Operator, Operator
Thank you. Your next question comes from the line of George Burmann from CL Securities. Please ask your question.
George Burmann, Analyst
Good morning, gentlemen. Good afternoon. Thanks for taking my call. I’ve got a few questions. Number one, you used to be predominantly in the VLCC and Suezmax based. Recently, in two years, you moved into the LR2 Aframax area. Can you comment on the reasoning behind that? Number one.
Lars Barstad, CEO
Yes. Over the years, the Frontline fleet has diversified into three key or core segments. The LR2 Aframax market, or rather the LR2 market, is like the VLCC of the clean trade. That has been a long-standing development globally where refining capacity has been growing rapidly in the Middle East and also in Asia, alongside the cost of refining capacity in North America and Northwest Europe. That case stumbled a bit on the fracking revolution, meaning that the U.S. refineries ended up having a relatively cheap feedstock. We were able to maintain run rates and margins for a prolonged period. But the investment initially was out of the displacement between supply and demand on the product side. This is becoming increasingly relevant again with India claiming to double their refining capacity in a relatively short time. We also see tremendous growth of refining capacity in China, meaning that China could become a significant exporter of petroleum products. At the same time, we see now refineries in Europe have struggled and are largely shutting down. So that was the key strategy behind the diversification. What we experienced, obviously, was that the clean markets didn’t perform as expected—the LR2s got engaged in the dirty trade, and now drawing about half the fleet into the dirty trade. But these ships can be cleaned up and can move back to the LR2 markets.
George Burmann, Analyst
Okay, great. Next question, you did a pretty big deal last year with Trafigura, I believe it was for 10 Suezmax tankers, pretty new ones, 2019 built. Are there still several under time charter back to Trafigura, and at what rates are those?
Lars Barstad, CEO
There are still five of them on time charter back to Trafigura with a profit-sharing agreement. The level is $28,400 per day.
George Burmann, Analyst
So, they are good earners for you at the moment, even though we don’t profit share with them, right?
Lars Barstad, CEO
Absolutely.
George Burmann, Analyst
Okay. Then concerning scrapping, you mentioned in your initial remarks that it looks like with the current rate environment, there are many companies that, if they still transport, they will do so at huge losses. Do you see any openings in the scrap yards recently that enable companies to scrap? And then you made a remark: other than scrapping, what would some company do in buying a 20, 25-year-old VLCC or Suezmax tanker?
Lars Barstad, CEO
Well, firstly on the scrapping. We like to call it recycling. First, understand that the recycling plants were also heavily affected by the global pandemic, meaning that they had to shut down. There is an increasing activity in the recycling markets right now. We see more and more vessels being sold for recycling, but there are very few deals to see for Suezmaxes. As I mentioned in my presentation, there is a disconnect between the price these vintage vessels can achieve for storage and what the recycling companies are willing to pay for this deal. With regards to what these tankers are used for, I think I would be a little bit cautious to speculate, but obviously there is oil that is transported outside of the normal stock market. There is also a significant amount of sanctioned barrels in the world right now, and they need somewhere to be stored.
George Burmann, Analyst
Okay. And then lastly, maybe you can comment again on the divestment of your ship management division. You look to book about a $7 million gain here in the fourth quarter on the sale. What are the reasons behind divesting this division, essentially taking your in-house ship management to an outsourced version? Is that more cost-efficient for you?
Lars Barstad, CEO
Well, let me explain a little bit about our model. We do have in-house technical managers, but we do outsource the crewing and effectively the day-to-day handling of the vessels. This means we have an organization in-house, a technical management department, a relatively large one actually that oversees third-party technical managers. SeaTeam was viewed as a third-party technical manager. Therefore, indirectly, we were owning a company that we usually outsource to, basically. This explains my comment about it not being a core business, and divesting was due to the opportunity that OSM presented us to continue running the company. It will be run in very much the same manner and to the same expectations that we maintained while owning it directly. We obviously buy the services of that company going forward, just like we do with any of the other third-party technical managers that we employ.
George Burmann, Analyst
Okay, great. One last one if I may; what is your average interest rate on the debt you’re absorbing at this point in time? You mentioned that you had a very good debt facility there with a very good interest rate, and with rates basically worldwide close to zero, I’m wondering what kind of an advantage is that for your company at the moment? How long are those rates locked in for?
Inger Klemp, CFO
Off the new facilities, which we have put in place now, we went through with respect to term loan facilities during the call, so that margin was locked in for five years on those facilities. Obviously, we have also shown our debt maturity profile in the presentation, so you can see how it will mature going forward at various facilities. The average rate we have announced today is the 190 basis points in margin and LIBOR on top of that, which is a very low level now. The three months LIBOR is about 30 basis points or 25 basis points in that area. That is what we are looking at. In addition to that, of course, we have this turn-out facility we talked about a bit earlier in the presentation, where we have a rate of 6.25%, which we pay on that $60 million, but that is a very small part of our total loan portfolio. So, it doesn’t really have much influence on the average.
George Burmann, Analyst
So, if LIBOR rates raise, would your interest rate costs also go up a little?
Inger Klemp, CFO
Yes, it will. And we do have interest rate swaps in place as well for $550 million at a level slightly higher than the 25 basis points or 30 basis points, even though they are very competitive. So, we are not entirely exposed to an increase in LIBOR rates, but does just make sense?
George Burmann, Analyst
Yes. And then maybe one quick last one concerning scrubbers, is your entire fleet now outfitted with scrubbers where necessary?
Lars Barstad, CEO
No. We have about two-thirds of our fleet fitted with scrubbers as it is right now. We kind of slowed down the pace of scrubber installations with the diminishing spread between high and low sulfur fuel. We could easily reinitiate that program in the future.
George Burmann, Analyst
Do you expect—I’ve recently heard reports about slow steaming. Would that be a positive effect on day rates and tanker demand?
Lars Barstad, CEO
It could be. I’m not sure in what context you’re thinking about that. But first of all, during the label leg, when we are empowered, we can many times adjust our speeds. In this earning environment, we will slow down as much as we can to be quite honest. But there is also a general discussion around when we measure our carbon footprint, how slow steaming could play a role in the tanker fleets to comply with the goals of IMO going forward. But this is still a bit up in the air. I must admit, we haven’t really looked deeply into that yet.
George Burmann, Analyst
Okay, great. Thanks very much for your time here.
Lars Barstad, CEO
Thank you.
Inger Klemp, CFO
Thank you.
Operator, Operator
Thank you. There are no further questions at this time. Please continue.
Lars Barstad, CEO
Okay. Then I just wish to say thank you very much for this call, and thank you for listening. Happy Thanksgiving to those joining us from the States, and stay safe. Thank you.