Earnings Call Transcript - FRO Q2 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Second Quarter 2025 Frontline plc Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lars Barstad, CEO. Please go ahead.

Lars H. Barstad, CEO

Thank you, Nicolas. Dear all, thank you for dialing into Frontline's quarterly earnings call. Shipping and tankers from our vantage point is still in the eye of the storm in relation to global conflict and trade policies. We have started to grow numb in respect to our industry's ability to regulate the ever-increasing parallel tanker market, stealing margins from the law-abiding citizens of the tanker trade. But now we are hopefully seeing the contours of change. One being trade policy reflected in nations' behavior on crude sourcing and the simple fact that global oil demand growth has surpassed what sanctioned molecules can satisfy, meaning incremental oil demand and supply for that sake, its growth seems to benefit the compliant fleet being the market Frontline operates in. So before I give the word to Inger, I'll run through our TCE numbers on Slide 3 in the deck. In the second quarter of 2025, Frontline achieved $43,100 per day on our VLCC fleet, $38,900 per day on our Suezmax fleet and $29,300 per day on our LR2/Aframax fleet. This is up from the first quarter of the year, but admittedly somewhat short of expectations. So far in the third quarter of '25, 82% of our VLCC days are booked at $38,700 per day, 76% of our Suezmax days are booked at $37,200 per day and 73% of our LR2/Aframax days at $36,600 per day. And again, just to remind you, all these numbers are on a load-to-discharge basis with the implication of the ballast days at the end of the quarter this incurs. However, we have fixed very far into Q3 at this point in time. So there's not that much that can move the needle coming in from here. And I'll now let Inger take you through the financial highlights.

Inger Marie Klemp, CFO

Thanks, Lars, and good morning and good afternoon, ladies and gentlemen. Let's then turn to Slide 4, profit statement and look at some highlights. We report a profit of $77.5 million or $0.35 per share and adjusted profit of $80.4 million or $0.36 per share in the second quarter of '25. The adjusted profit in the second quarter increased by $40 million compared with the previous quarter, and that was primarily due to an increase in our TCE earnings from $241 million in the previous quarter to $283 million in the second quarter as a result of higher TCE rates, partially offset by fluctuations in other income and expenses. Let's then turn to balance sheet at Slide 5. The balance sheet movements this quarter are related to ordinary items. Frontline has a solid balance sheet and strong liquidity of $844 million in cash and cash equivalents, including undrawn amounts of revolver capacity, marketable securities and minimum cash requirements bank as of the end of June 30, 2025. We have no meaningful debt maturities until 2030 and no newbuilding commitments. Let's then look at Slide 6, fleet position and cash breakeven rates and OpEx. Our fleet consists of 41 VLCCs, 21 Suezmax tankers and 18 LR2 tankers. It has an average age of 7 years and consists of 100% ECO vessels, whereof 55% are scrubber-fitted. We estimate average cash breakeven rate for the next 12 months of approximately $28,700 per day for VLCCs, $22,900 per day for Suezmax tankers and $22,900 per day for LR2 tankers, with a fleet average estimate of about $25,900 per day. This includes dry dock costs for 12 VLCCs and 8 LR2 tankers. The fleet average estimate, excluding dry dock cost is about $24,600 or $1,300 per day less. We recorded OpEx expenses including dry dock in the second quarter of $8,700 per day for VLCCs, $8,900 per day for Suezmax tankers and $7,600 per day for LR2 tankers. This includes dry dock of one VLCC and one Suezmax tanker. And the Q2 '25 fleet average OpEx, excluding dry dock, was $8,100 per day. Then let us turn to Slide 7 and look at cash generation. Frontline has a substantial cash generation potential with 30,000 earnings days annually. As you can see from the graph on the left-hand side of the slide, the cash generation potential basis current fleet and TCE rates for TD TC for VLCCs, TD20 for Suezmax tankers and the average of TD25 and TC1 for Aframax and LR2 tankers from the Baltic Exchange as of August 28 '25 is $648 million or $2.91 per share. And further, a 30% increase from current spot market will increase the potential cash generation with about 64%. With this, I leave the word to Lars, again.

Lars H. Barstad, CEO

Thank you very much, Inger. Let's turn to Slide 8 and discuss the current market themes. The compliant tanker fleet is experiencing improved utilization, driven by increasing compliant oil exports and the lengthening of some trade routes. India and China are adjusting their feedstock exposure while negotiating U.S. trade policies, and we have seen heightened pressure from both the U.S. and EU regarding sanctions. Additionally, OPEC's voluntary production cut reversals have not yet significantly impacted export volumes. In the Middle East, around 20% of electricity generation relies on oil, leading to a consumption of about 800,000 to 900,000 barrels per day during the hot summer months, although we expect this to cease in the coming weeks. Projections for Q4 global oil supply growth are strong, with the EIA predicting a year-on-year increase of 3 million barrels per day, translating to nearly 2 million barrels per day more in exports. U.S. exports are rebounding after a slow start since January, with August tracking towards 3.9 million barrels per day from the U.S. Gulf, increasingly directed towards Asia. Brazil and Guyana's production is also performing well along with their exports. We are in a favorable environment with improving refinery margins, which supports crude demand and product arbitrage. The EIA projects global consumption to reach 105.4 million barrels in December, up from 101.5 million barrels in January. Moving to Slide 9, we can explore how policy affects behavior. The oil discount that countries gain by importing sanctioned oil compared to their trade balance, particularly with the U.S., is a significant factor for nations that do not comply with the current sanctions. For example, India gains approximately $2.7 billion from discounted benchmark oil prices by importing substantial amounts of Russian feedstock, while their total bilateral trade with the U.S. is around $86 billion. If U.S. tariff pressures persist, India could face a loss of about $20 billion in trade with the U.S., prompting them to adjust their strategy. We have observed an increase in sanctioned barrels' market share in key growth regions over the years, particularly after 2022 and Russia's invasion of Ukraine. However, with OPEC's voluntary production cut reversals and supply growth in Latin America, the market now has the flexibility to opt for compliant oil sources without significantly impacting prices. As global demand continues to rise, it appears we are reaching limits on production and export growth from sanctioned nations. The charts on the slide indicate that production from these key sanctioned countries is tapering off, and their exports are declining even more quickly. The loss of knowledge and components from the global market often leads to reduced productivity for these nations. The chart showing year-on-year crude imports for China and India indicates a positive trend, although the sustainability of this is uncertain, we are at least progressing in the right direction. Let's take a closer look at the information on Slide 10. In the top left corner, we can see the year-on-year changes in global crude production and exports, with a particular focus on exports that affect tankers. We have observed significant positive year-on-year changes in the second quarter, and this trend appears to continue into the third quarter, reflecting an approximate increase of 2 million barrels year-on-year in exports, mostly from compliant sources. The chart below illustrates this trend, excluding Iranian, Russian, and Venezuelan oil, and it looks encouraging. The chart in the bottom right corner is particularly important. The long-haul oil trade has faced challenges, impacting Frontline, as Russia has extensively supplied Asia while Europe has sought alternatives due to the absence of Russian barrels from the U.S., Brazil, Guyana, and West Africa. Ideally, we need Latin American and U.S. oil directed eastward, which would significantly extend the voyages compared to local transatlantic routes. However, for this to happen, Atlantic Basin oil must be priced for eastbound shipments, meaning it needs to be cheaper, including freight, than the benchmark grade from the Middle East known as Dubai. Recently, with India increasing its presence in the Middle East market, they have consequently raised prices there, allowing for the potential of cheaper U.S. barrels being offered to the Asian market than those sourced from the Middle East. While it takes time for these changes to influence rates, we’ve already seen a notable rise in U.S. Gulf fixtures for September, which will impact October deliveries as well. Moving on to Slide 11 to discuss order books, the developments noted in the previous slide suggest about a 6% increase in freight demand, without adjusting for ton miles, indicating that the potential change could be even greater. However, the fleet is not expanding at all. By 2025, the active trading fleet, not subject to sanctions or inactive, is projected to decrease by about 0.5%. The influx of new vessels into the market is so minimal that we are experiencing negative growth. When combining this situation with longer trade distances, an increase in compliant oil availability, and stable fleet development, we have positive indicators as we enter fall. There's a record number of vessels over 20 years old in the fleet, and a record proportion of the fleet is sanctioned. Given this context, the order book remains very limited, and there has been little activity in tanker orders for a considerable period, with very few new orders being placed. If you place an order for a vessel today, you will likely have to wait until 2028 for it to be operational. Therefore, the tanker market is essentially sold out for 2027. There may be resale transactions for deliveries in 2025, 2026, and 2027, but to increase the order book from now, 2028 is the earliest possibility. To summarize, and I jokingly refer to this as a potential compliant bull market, trade policies are impacting crude sourcing for key demand regions, and we have noticed a shift over the past couple of months. The compliant fleet is seeing increased utilization, leading to healthier growth in both employment and freight rates. The effective growth of the tanker fleet remains subdued due to aging vessels and expanding sanctions. Refinery margins are strong, marking the first consistent improvement since November last year. We experienced a robust summer market, further confirming positive demand growth. OPEC's cut reversals are anticipated to boost exports from the Middle East as winter approaches. Frontline is well-positioned for this situation with our modern fleet, particularly those exposed to spot markets. Thank you, and we will now open the floor to questions.

Operator, Operator

Our first question comes from Omar Nokta with Jefferies.

Omar Mostafa Nokta, Analyst

Lars, Inger. Thank you for the update. Lars, always very good as you kind of go through all the detail and all the moving parts in the market. I did want to maybe follow up just on a couple of those discussion points. Maybe you made a point on Slide 10 talking about those West to East flows and how those have been missing from the market. But here recently, there's perhaps a jump in terms of U.S. VLCC exports going to Asia. I guess how do you think about how that starts to play out as we get closer to winter here over the next several months where you do get an incremental amount of volume into the Middle East market from OPEC. How does that all kind of adjust that dynamic overall in terms of the long haul of VLCC trade?

Lars H. Barstad, CEO

Well, I should mention Jefferies, but I actually have to focus on Goldman. They and other analysts have become somewhat more negative on crude prices this winter, partly because of the return of Middle East oil from OPEC. Additionally, we are producing about 1 million barrels more per day than what is being demanded. That's an important point. I don't want to engage in predictions or bets about this, but I believe we might see a contango in the oil market this winter, unless there are unexpected changes in demand. Typically, when this happens in oil trading, utilization tends to increase. Since future prices are higher than present prices, traders and oil transporters are in no rush to dock and unload. This situation also allows for longer transportation of oil. Most importantly, it encourages the building of inventories, which has been lacking lately. While we have reports of China increasing its inventories, other OECD countries are quite low in inventory levels. So, if this addresses your question, it's a potential scenario we might observe as we approach winter.

Omar Mostafa Nokta, Analyst

That's helpful. As a follow-up, I want to discuss the market further. A significant theme over the past few quarters or even a couple of years has been the fluctuations we've observed in the VLCC market, where rates gain momentum, suggesting a major shift, only to fall back and reset expectations. Last week brought some excitement with the movement in spot rates, which appear to have increased. It seems that this week they are stabilizing. What do you attribute these recent gains to? Are we starting to see export barrels from OPEC come to market, or is there something else influencing this?

Lars H. Barstad, CEO

What we are seeing in the market is a transition, influenced by some Russian and significant Iranian oil backing, leading to a rise in demand for compliant tankers as this oil gets replaced. This situation is pushing us close to a threshold around $50,000 per day for VLCCs, which we find challenging to surpass. This belief is tied to our position as long-term owners of tankers, which should ideally allow us to bypass any ceiling in pricing. However, for those on the short-term trading side, securing a vessel on time charter at $40,000 per day allows for a $10,000 per day profit margin, which is appealing especially when it could lead to bonuses for new investments. This dynamic has somewhat diluted the influence of owners in the spot market. What's promising is that since last Thursday, charters have been attempting to drive prices down, yet we’ve only witnessed a minor drop of about $5,000 per day in earnings. If we consider $45,000 per day as a stable floor for VLCC rates, it gives me hope that we can break through the artificial cap at $50,000 and establish a higher baseline. The ongoing adjustments and attempts to manipulate the market have provided charters some time to secure the vessels needed to transport their cargoes, which is positive news for the market. Next week will be intriguing as we observe how this situation evolves.

Omar Mostafa Nokta, Analyst

Okay. Yes, very good. Lars, I'll see how things indeed develop here. Appreciate it.

Operator, Operator

I'm showing no further questions at this time. I would now like to turn it back to Lars Barstad for closing remarks.

Lars H. Barstad, CEO

Well, thank you very much. I hope it's good news that there were so few questions at this point or if it's just Friday. But thank you very much for listening in and looking forward to see how this develops.

Operator, Operator

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