Good day, and thank you for standing by. Welcome to the Investor Presentation Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you need to press star one one on your telephone keypad. You will then hear an automatic message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our speaker today, CEO, Mr. Lars Barstad. Please go ahead.
Thank you very much. Good morning, and good afternoon to those of you in the U.S. We're sorry to disturb your Columbus Day. And thank you all for taking the time to join us on this a bit extraordinary call on this what we believe is a very exciting day for Frontline. I first want to kind of start off with saying that this transaction has been made possible by two titans of shipping coming together, together with the supervisory board of Euronav, namely John Fredriksen and Marc Saverys. Together, they managed to create an integrated solution to what has been a strategic and structural deadlock in Euronav. This benefiting Euronav shareholders by offering them a choice, Frontline, for growing its—to grow its fleet, and to bring Euronav back to CMB.
I think we'll, we'll focus on the Frontline part of this transaction. Let's start off by jumping to slide three. This is the broad outline of the acquisition that we're very excited to announce today. Frontline will buy 24 VLCCs from Euronav. This is a modern and high quality fleet, average age of 5.3 years, and all of them are ECO vessels. All these vessels are on the water, and I think this is important to note, as we on previous calls have explained to the market how illiquid the modern resale tanker market is. But by this, we're able to access 24 of these units at what we believe is a good time in the cycle.
Frontline will increase our total fleet size to 89 vessels and will become the largest tanker owner in the public domain, measured by deadweight tons. We reduce our average fleet age overall to 6.1 years, and we increase our operational leverage toward what the shipping segment that we believe has the highest upside as we move forward here. The acquisition is fully funded through an attractive debt package. It will be accretive to free cash flow and earnings per share. Frontline will have—Frontline already has a robust balance sheet, but will have so post-transaction as well. What we're seeing right now, and what we have communicated numerous times, is that we are in a position where we have the lowest VLCC order book since the 1980s.
We see Asian imports, and in particular Chinese, moving to all-time high as they come out of the pandemic. We continue to have the picture with extended trade line lengths due to the Ukraine-Russia conflict. We believe there is a strong rate and supply outlook, in particular so for the VLCCs. Let's move to next slide. So this is a fully funded acquisition of 24 ECO VLCCs. This has been a key focus point for us. Basically, we focus on the segment that yet has a lot of room to perform. All these ships are predominantly Korean-built, high quality ships. The oldest one is from 2015. All of them are ECO design, and nine of them have scrubbers.
I think I would like to add that, our main shareholder has been very involved in this transaction, showing his support and also showing, giving Frontline ample support on finance. As you all know, this is a segment that's very close to his heart. With that, I'll move over to Inger to explain the details.
Thanks, Lars. Yeah, the purchase price is $2,035,000,000 . And the acquisition is done fully financed, as Lars said. I will go through the details of the financing. We will use a sale of Frontline's 13.7 million shares in Euronav to CMB, generating proceeds of $252 million. We will have some cash on hand, which is $37 million in received dividend on the Euronav shares. We will part draw down under the existing $275 million senior unsecured revolving credit facility, and we will also have a new five-year senior secured term loan facility in an amount of $1.41 billion, provided by a selection of leading lending banks.
This facility carries an interest rate of SOFR plus a margin in line with Frontline's other credit facilities and has an amortization profile of 20 years, commencing on the delivery date from the yard. In addition, Hemen Holding has offered Frontline a subordinated unsecured shareholder loan of up to $514 million on similar terms as the bank loan to enable them swift execution with limited complexity and time to optimize the capital structure post-closing. The shareholder loan may not be fully drawn, as Frontline is exploring other alternatives to free up capital, including releveraging part, sorry, part of the existing Frontline fleet on attractive terms, and or sale of older non-ECO less efficient vessels.
Today, Frontline has a historically low loan to value and comfortable leverage capacity to refinance the shareholder loan through the leveraging part of the existing fleet in Frontline. With this, I leave the word to Lars again.
Yeah, I'll go through some of the kind of more practical details of this transaction. The sale of Euronav shares and the fleet acquisition is interconditional. As some of you may have noticed today, CMB filed what is referred to as an Article 8, which puts them effectively in a mandatory bid position. When that mandatory bid becomes valid, the Frontline shares will be passed on to CMB and Famatown, of course. And then CMB will pay for them in cash, and then the rest of the shareholders will have a cash bid in their hand. At that time, at that exchange time, that's when the MOAs, which are connected to all these ships, become effective and Frontline starts to take delivery of the vessels.
The only conditionality or the only two conditionalities to this structure is an approval by the special general meeting in Euronav, which is gonna be called fairly shortly, and secondly, normal regulatory approvals. As a part of these agreements, the arbitration or the legal actions initiated by Euronav against Frontline will be terminated. Frontline will post transaction, as Inger mentioned, have a very strong balance sheet. Frontline has no new building commitments and no meaningful debt commitments before 2027. With that, let's move into slide five. This is what Frontline will look like, in the relationship to peers post-transaction. So having scale allows us to better serve our clients. Size also matters in respect to synergies. Synergies achieved on technical management, operations, and so forth within Frontline.
Frontline's platform, in fact, is set up to accumulate this kind of, you know, transaction and to, to, you know, in a very good position to increase the fro- the fleet. Here we're actually increasing the Frontline fleet by 57% or close to 60% in deadweight tons. I believe most of you know our history. We first started with entering into the LR2/ Aframax market. This has been hugely beneficial in the last period, in particular, having three legs to stand on. Frontline did some heavy lifting on Suezmaxes, basically renewing that, renewing and growing that asset class for the company. Now we believe it's the VLCC's turn to shine, and we achieve even greater economies of scale. With that, I'll go back to Inger.
Yeah.
Look at the post-transaction cash generation.
Yeah, let's then look at slide six and post-transaction cash generation. We have updated our usual slide on cash generation with the acquisition of the 24 VLCCs, and we estimate then post-transaction cash break-even rates of $27,500 on a fleet average. Including that includes drydock costs for eight VLCCs and three Suezmax tankers in 2024. The post-transaction estimate for 2024 fleet average OpEx, including drydock, is $8,300 per day. The average cash break-even rate post-transaction increase with about $4,900 per day compared to pre-transaction, but so does the potential cash generation and potential return.
At this graph on the right-hand side, at assumed VLCC TCE rates of $75,000 per day, with 5.5-year historic spread to VLCC for Suezmax and for LR2 tankers, the annual free cash flow potential post-transaction is $1.8 billion, or $8.19 per share, translating to a free cash flow yield at of 45%. This is an increase compared to pre-transaction with 29%. But with that, I leave the word again back to you, Lars.
Thank you, Inger. So let's move to slide seven, and I'll start to dig into the fundamental rationale we have in entering into this transaction. If you look, historically, the order book to fleet ratio is quite interesting to address between the various asset classes. And to explain this slide, if we go to the left-hand side, the LNG order book was at its lowest point at 11% of existing fleet in 2010. Since then, from 2011 to 2013, the LNG earnings outperformed the long-term average by 56%, and so it goes on. Containers was at its lowest point in 2020. For VLGCs, it was at its lowest point in 2011.
In dry, the lowest point on the Panamax side was in 2002, and we saw that the following three-year average came in 42% above the long-term average. The product tankers, the order book, or the MR product tankers, in specific, the order book had found its lowest point of 5% in 2022, and so far, the 2023 average is at $29,000 per day. If you look at the car carriers, we had the lowest point in 2020, and in the three years past that, they had 113% higher TC than the long-term average. On the VLCC side, in specific, we assume we are at the lowest point, and we are at least at the lowest point in the last 20 years.
We expect that for the next three to four years, we'll have a relatively high outperformance compared to the long-term average. Let's move to slide eight, and we look at the unique combination that's going on right now. The unique combination of high utilization and rates, and record low order books. Most of you are aware that we've actually been through 12 months of very solid VLCC markets. It started around this time last year. Despite this strength, the order book has not started to grow. Also, in the time charter market, the forward TC rate offering is north of $50,000 per day. We are experiencing short-term headwinds, which we believe is more related to seasonality than anything else. This unique position motivates us to be very ambitious, and by that, entering into this transaction.
If we move to slide nine, this is kind of a new swing on something we have addressed numerous times. As mentioned, the VLCC order book is at record low levels, hovering at 2% of existing tonnage. Also, in deadweight tons, in absolute deadweight tons, although the oil market is much greater now than in 2020, in previous years, it's the lowest we've seen since 1980 or 1990s. The VLCC ordering remains muted. Only 11 vessels have been ordered in the last 12 months, this representing 1% of the existing fleet. We have an astonishing 14% of the fleet still floating around, over the age of 20 years. We have 30% of the fleet older than 15 years, and we actually have 30% of the fleet being non-ECO.
And we're all aware of the regulatory tightening that we are expecting going forward, Poseidon Principles and so forth. And 30% of the VLCC fleet will be challenged by EEXI and CII or energy efficiency as we move forward. We are in a situation also where we have reduced yard capacity. Shipyards are full of contracts for other shipping sectors, including LNG and containers, and the earliest newbuilding slot available right now is 2026. Any material amount of orders, you need to look to 2027. Currently, only 40% of the VLCC are ECO, exactly the segment that we are now taking a bite at. And the VLCC order book, as I said, is virtually nonexistent for the next couple of years. Then let's move to slide 10. This slide should be familiar to many of you.
The carrying capacity of deep sea tankers is, or we argue, is in question. If the oil demand projections are correct, we look to end up in a deficit on the shipping capacity going forward. In this, this argument, we're looking at VLCC equivalent, basically comprising of all the Suezmaxes and all the VLCCs in the market area in the world, in addition to the crude-carrying Aframaxes. In order to cater for the expected growth in oil demand going forward, we would need 92 VLCC equivalents coming into the market by the end of 2024, but there are only 17 to come. At the same time 54 more VLCC equivalents will turn 20 years. And efficiencies of tankers are reduced by age as the customer base is limited.
We believe that the current age limitations imposed by traders, oil majors, and national oil companies may come into question, but this is only likely in the case of a strong pricing. This further cements our very positive outlook to this sector. Then let's move to slide 11. This is a new chart, but it's to try to explain what's going on in oil trading and trading lanes, or at least trying to have a new view on it. Here, we're basically taking world quarterly net exports for crude and condensate. And when I say net, net export, you're gonna find that regions that import more than they export, they're gonna have a deficit.
Above the line, you'll find Americas, which comprise, which is comprised of U.S., Mexico, and Latin America, together with Africa, are the net exporters in this picture. The net importers and the growth in net import is happening in Asia and actually in Europe, and particularly so over the last couple of quarters in relation to the disruption of Russian crude exports into Europe. Basically, what this tells us, that the larger the distance between the supply and the deficit, you incur longer ton miles. This has been going on ever since 2016. It also supports our argument that incremental demand, which at least according to every research report, is gonna happen in Asia, that is gonna continue to extend trading lanes, further amplifying the outlook that we are advocating.
Let's try and sum this up if we move to slide 12. We believe that we're putting Frontline in a unique position to benefit from a tight market balance. Frontline more than doubles its VLCC position in what is a very illiquid resale market. We increase operational leverage as global demand is expected to grow far beyond pre-pandemic heights. Frontline total fleet grows by 57% in deadweight tons . Looking at tanker supply, high forward visibility due to historical low order books and delivery creates a very compelling dynamics. This is a fully financed transaction with an attractive debt package, and it's highly accretive to free cash flow and earnings per share. Thank you very much. With that, I'll open for questions.
Thank you. 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 your question, please press star one one again. Please stand by, we'll compile the Q&A roster. This will take a few moments. Now we're going to take our first question. Just give us a moment. The question comes to the line of Jon Chappell from Evercore ISI. Your line is open. Please ask your question.
Thank you. Good afternoon. Super quick clarification question first, Inger. I think you said it, but I didn't hear it. The terms on the $1.4 billion five-year senior secured term loan, did you give the interest rate on that or the spread at least?
No, I did say it was based on SOFR plus a margin in line with other credit facilities. I didn't explicitly say the margin.
Yes, I'm sorry.
No, yeah.
Okay, but similar to your current facilities?
Yeah. Yeah.
Okay. And then the other question for you, Inger, is just on the timing of some of these things. As you noted, you do have a pretty unlevered balance sheet, at least by Frontline's history. So I'm guessing there's a lot of opportunity for you to either add that to unencumbered vessels or to refinance. What's the timing on that vis-a-vis, you know, drawing down the $275 million from Hemen, which is at a 10%? I'm guessing the quicker you can get the refinancing done, the better it would look for the interest outlook in the near term.
Yeah. We have already started this process, so, to give you an exact timeframe is a bit difficult, yeah, dangerous, probably. But, at least it will be something we are working on, short term-wise and going on for, let's say, a year or something, maximum, I guess.
Okay.
Yeah.
Okay. Thank you. Last one, Lars. You mentioned the, or maybe Inger mentioned the scale, or the synergies, I think it was Lars, of having a fleet of this size. From an operational perspective, it should give you more flexibility as well. I know you're very bullish about the outlook. There's a lot of uncertainty in the world right now, whether it's the economy or now what's happening in the Middle East. Does this acquisition give you the opportunity to have better balance in the fleet, and therefore maybe take advantage of some of the big time charter rates that we've seen published in the market, either with the newer vessels or with some of Frontline's legacy fleet?
Absolutely, Jon. So this is, you know, obviously something we're gonna look at. Now we have a fleet size that, you know, we're quite kind of happy with. We always have an optimistic view on the time charter coverage. We'd like to kind of, you know, our proposition to the market is obviously to give our investors spot returns. But, you know, given the operational gearing, we might be more kind of prone to try and at least cover some of our revenues going forward, yes.
Yeah. Great. Okay. Thank you, Lars. Thanks, Inger.
Thank you.
Thank you, Jon.
Thank you. Now we're going to take our next question. Just give us a moment. The next question comes from the line of Omar Nokta from Jefferies. Your line is open. Please ask your question.
Thank you. Hi, Lars and Inger, good afternoon.
Hi, Omar.
You know, I-- you, you, you clearly outlined, I think, a very compelling picture for why, you know, expanding your VLCC exposure right now makes sense. And maybe just sort of touching on the last point you had with Jon, you know, the deal is, is, is fully funded, as you guys highlighted. How do you feel about taking on this amount of debt at this point in the cycle? It looks like your LTV probably goes back to where it was pre-upturn. You've clearly got the capacity to take that on, and it's not like your LTV goes dramatically higher, but how do you think about what that then means for the use or focus of free cash flow?
You, you outlined maybe looking to cover some of your additional vessels, on or having just a little bit more time try to cover on your vessels. But in terms of use of free cash flow, do you aim to delever to a certain threshold? And also, what do you think about what that means for the sort of unofficial payout of, say, 80% of earnings?
I think we are comfortable in a way to bring the leverage back to, let's say, close to 60%, which will be the case, only 59%, I guess. And looking back historically, the average leverage at Frontline has been much higher. That's actually been more than 67% on average. So I think this is kind of comfortable for Frontline. I also think in a way that you mentioned the question with respect to payout. I don't think it will affect that, since we have this capacity to, let's say, refinance the shareholder loan with re-leveraging of the Frontline fleet. I think that will not be affected by the dividend, or the dividend will still not be affected.
And also, I think, Frontline is generating significant cash flows, and we have a very good or positive outlook for the future. We think that after this transaction is very accretive, so both free cash flows and earnings per share is going to grow. So in sum, I think that should be supporting for the dividend going forward.
But, Omar, I would like to add one point, which I rarely... we haven't really put it in any presentation yet, because, you know, it's, you know, some, some call it, kind of a bit, speculative, but some of the analysts have this slide in their decks. If you look at LTV and the V in the LTV, we are, you know, there is a big question whether if we're high, low, or mid-cycle. You know, we, we- if we look back to, you know, kind of as the highest point on resales, assume resales are now hovering between $125 million and $130 million on the VLCC. In 2008, we saw a print that's $160 million.
Since then, and if you compare it to Korea, which is actually the country where most of the ships are built, we've had an accumulative inflation of more than 30% since then. So you could actually argue that the V in LTV is closer to $98 million-$100 million, and then we're actually not high in the cycle. We're actually a little bit below mid in the cycle. So I think you need to kind of keep that in mind as well, and this is also why we're, you know, not really too afraid of levering up. And also we have 100% visibility of what's going to happen on the supply side for the next two to three years, and that gives us kind of decision support.
Mm-hmm.
In order to go out a little bit on the limit.
That makes sense, Lars, and thanks for that color, and also, Inger, thank you. One follow-up. You know, just sort of you mentioned perhaps selling ships if you wanted to, whether they were non-core or maybe older, non-ECO.
Mm-hmm.
Any color you can give into that? You know, obviously, you have critical mass now with the VLCCs. You've had it with the Suezmaxes, and I guess to an extent, you've also had it with the LR2s. What do you think about the LR2 fleet from here? Is that something you think you would focus on, perhaps monetizing that and, and maybe refocusing Frontline towards pure crude transportation, or do you want to still keep the, the product exposure?
I think the non-core term in the press release is probably more caused by the time pressure we have the last 48 hours in getting this together, rather than, you know, you shouldn't put much strategic weight on that. Yeah, I think kind of what we put in this presentation is more telling. You know, we obviously strive to have the most efficient fleet in the market, and this naturally would make kind of older, non-efficient vessels something we could divest in when we see that opportune. So I would focus on that. We're very, very happy with the clean exposure. The, the, the, you know, all our efforts are allowed to, so I call it the clean exposure....
you know, that has its own kind of very good kind of markets picture going forward. So I wouldn't expect us to divest out of that fleet.
Okay, that's very clear. And just, yeah, so just to focus or to just double check that, so clearly, you know, the press release talking about selling non-core assets, that's more of just kind of a throw-in comment as opposed to a plan to, to sell assets?
Yeah, and I think, again, I think the term that you used is probably more telling,
The non-ECO-
Yeah
Inefficient vessel.
Inefficient. So, so link it to efficiency, not asset class.
Yeah. So that's just a trickle of vessels for Frontline. Okay.
Mm-hmm.
Well, well, thank you, guys. I really appreciate it.
Thank you, Omar.
Thank you. Now we're going to take our next question. Our next question comes to the line of Sherif Elm aghrabi from BTIG. Your line is open. Please ask your question.
Hi, good afternoon. Thanks for taking my question. So I'm curious, what makes this transaction interconditional, and why that still requires a 50 + 1 vote if CMB will have 53% of the voting rights?
Very good question. I think kind of it was in the interest of all parties to put this in front of all the shareholders. So you could... You're right technically, that assuming both, and that can be assumed, both CMB, Famatown, and Frontline supports this transaction, you would have a majority. But it was important for the independent board in, you know, the independent advisory board of Euronav, to put this in front of all the shareholders to voice their either appreciation or displease. So I think it's more like, you know, I think that's the line of thinking you should have.
Okay, that's, that's helpful. Focusing on the fleet, any plans to install scrubbers on the, any of the V's that you're acquiring that or haven't already got them fitted?
We don't have any concrete plans on that. We always look at kind of each case individually, looking at obviously, cost and availability of scrubbers. We have rightfully installed scrubbers on all our ships during periodical surveys. So, but if the economics are there, and the ship is in for periodical survey, you should probably expect that. But we're probably not, you know, it's highly inefficient to actually do this, you know, when the ship is normally trading, to be quite honest. Yeah.
Got it. And then lastly, just pivoting to what's going on in the Middle East this weekend. I feel it has to be asked, you know, any market developments from what's going on there as it impacts kind of the VLCC and the broader tanker market?
I don't really want to dive into that, to be quite honest. You know, we've been kind of working on this deal for quite a long time, and obviously did not expect what's going on, and the tragedy, human tragedies happening in Israel and Palestine, over the last 48 hours. How that plays out is, you know, I don't really want to dive into that today, to be quite honest.
Totally understandable. Thanks for taking my question.
Thank you.
Thank you.
Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad. Now we're going to take our next question. The question comes to line of Sam Bland from JP Morgan. Your line is open. Please ask your question.
Thanks. Thanks for taking my question. Just one, please. I guess if we look at Euronav's fleet, there are quite a few Suezmaxes, including some which are quite modern tonnage. Did you look at maybe whether you could acquire Suezmaxes from Euronav, or was it always very focused on the VLCCs? Thanks.
No, we've been, we've been primarily focusing on the VLCCs. And, you know, as, as we described in this presentation, we feel we have adequate, number of Suezmaxes, basically all of them modern. So, so, and, and VLCC has been a segment, we've communicated, for a long time now that, we wanna, wanna grow. There is one kind of particular advantage with the VLCC, we believe, and it's the economies of scale with that vessel. You'll find that the operational costs or, or even the cash break-even levels, between the segments that we run, don't differ that much. But the potential earnings you can get out of the VLCC is significantly higher than the other segments.
Also, in particular, so now, with the complete lack of ordering in that segment, we, you know, this made us kind of focus on the VLCCs.
Understood. Thank you.
Thank you.
Thank you.
The speakers are now for the questions, and I would like now to hand the conference over to Mr. Lars Barstad for any closing remarks.
Yeah. Again, thank you all for dialing in on such a short notice. This is extremely exciting times for Frontline, and we look forward as we proceed into the fourth quarter here, both to see what happens in the spot markets, also as we close in on you know, putting this deal into motion. Thank you very much.
That does conclude our conference for today. Thank you for participating. You might now all disconnect. Have a nice day.