Ladies and gentlemen, thank you for standing by, and welcome to Q2 2022 Frontline Ltd Earnings Conference Call. At this time, all the participants are in listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question, you will need to press star one and one on your telephone. I would now like to hand the conference over to the CEO, Lars Barstad. Please go ahead, sir.
Thank you very much. Good morning and good afternoon to everyone. Welcome to Frontline Q2 earnings call. As mentioned in our release, this is the quarter where the LR2s took center stage. The market tends to forget that close to a third of our vessel days come from this asset class. We started to see the displacement of Russian crude and products also affecting the Suezmaxes during the Q2. Finally, the VLCC got a pulse as the Q2 came to an end. Before we get to the Q2 financials and what lies ahead, let's have a look at the highlights on slide 3 in the deck. In the Q2, Frontline achieved $16,400 per day on our VLCCs.
$65,000 per day on our Suezmax fleet, and a very impressive $38,600 per day on our LR2/Aframax fleet. So far, in the Q1 of 2022, we have booked 73% of our VLCC days at $28,100 per day, 73% of our Suezmax days at a solid $45,000 per day, and 62% of our LR2/Aframax days at even more impressive $46,200 per day. All numbers in this table are on a load to discharge basis and may be affected by the amount of ballast days we end up having at the end of Q3. This is more relevant to the VLCCs that normally tend to go on the longer voyages. It occasionally affects Suezmaxes, and to a lesser degree, LR2s.
With that, I'll now let Inger take you through the financial highlights.
Thanks, Lars, and good morning and good afternoon, ladies and gentlemen. Let's turn to slide five and look at the income statement. This quarter, Frontline achieved total operating revenues of $159 million, and adjusted EBITDA of $98 million. We report net income of $47.1 million or 23 cents per share, and adjusted net income of $42.5 million or 21 cents per share in this quarter.
On the right-hand side of the slide, we show the adjustments made this quarter, which consists of an $8.9 million gain on derivatives, a $6.1 million share results of associated companies, a $1.3 million amortization of acquired time charters, a $0.8 million gain on insurance claim, $12 million loss on marketable securities, and $0.4 million loss on termination of leases. The adjusted net income in the Q2 increased $44.1 million compared with the Q1. The increase in adjusted net income was driven by an increase in our time charter equivalent earnings due to the higher TCE rates in the quarter. It was partly offset by an increase in ship operating expenses of $7.5 million, mainly as a result of higher dry docking costs and other movements in income and expenses.
Let's take a look at the balance sheet on slide 6. Total balance sheet numbers have increased with $304 million in the Q2 compared to the Q1. The balance sheet movements in the quarter are primarily related to taking delivery of the two new buildings, VLCC Front Alta and Front Tweed, together with the acquisition of the Euronav shares in exchange for Frontline shares, in addition to ordinary debt repayments and depreciation. As of June 30, Frontline had $351 million in cash and cash equivalents, including undrawn amounts under our senior unsecured loan facility, marketable securities, and minimum cash requirements. Let's then take a closer look at slide 7. Keeping costs down has always been in Frontline's DNA and core values of the Frontline platform is keeping it simple and focused, and maintain lean and efficient management teams.
This slide shows that Frontline also outperformed peers on OpEx, G&A, and interest expense. This together with outperformance of peers on revenues for at least two out of three segments this quarter explains the superior operational performance of Frontline in the Q2 of 2022. I think we should look at slide eight. That is the cash break-even and cash generation potential slide. We estimate average cash cost break-even rates for the remainder of 2022 of approximately $24,900 per day for the VLCCs, $20,000 per day for the Suezmax tankers and $17,200 per day for the LR2 tankers. This gives a fleet average estimate of about $20,700 per day.
The fleet average estimate includes dry dock of six vessels in the remainder of 2022, with an impact of about $530 per day. The distribution of these six vessels is two VLCCs, one Suezmax tanker, and three LR2 tankers. In the Q2, we recorded operating expenses, including dry dock of $8,100 per day for the VLCCs, $10,400 per day for the Suezmax tankers, and $8,400 per day for the LR2 tankers. In the Q2, we have dry docked six vessels, four Suezmax tankers and two LR2 tankers. The graph on the right-hand side of this slide shows the free cash flow per share after debt service and free cash flow yield based on current fleet and share price August 24 at alternative TCE rates.
Based on historic Clarksons TCE rates for non-eco vessels in the period 2000-2021, adjusted for premiums on scrubber and eco vessels, Frontline has a free cash flow per share of $2.34, and a free cash flow yield of 20%. Free cash flow yield potential increases with higher assumed TCE rates and on a fully delivered basis. With this, I leave the word to Lars again.
Thank you, Inger. Let's move on and have a look at slide 9, and recap the Q2. I've basically made a title here called The Pivotal Point for Tankers. Q2 is normally a softish quarter, also referred to as a shoulder quarter. As we see on the graph at the bottom left, something happened as we went into Q2 this year. Global oil demand came in 700,000 barrels per day lower in Q2 compared to Q1, averaging at 98.4 million barrels. Supply came in at 99.1 million barrels per day at a modest 0.2 million barrels per day in the quarter.
It's basically the volatility we've seen in the market in Q2 and first and foremost on the LR2s is a ton-mile story. We're currently reaping the benefits of that story that started during the Q2. We're seeing highly inefficient trading patterns developing, and this to the benefit of oil in transit and utilization as we can see on the graph at the bottom right. Towards the end of the Q2, we saw all Frontline's asset classes, including the VLCC, start to move up. Asian, and in particular Chinese demand, was still subdued. Current level of activity paints an interesting picture for future stats to come. Let's move on to slide 10.
Global exports, and what we're looking at here are two charts where basically it's the tracked output of oil and products split from basically every producing country in the world and every producing or products producing region in the world. We've seen a dramatic change in demand and trading patterns for refined products developing during Q2 this year. I think people tend to forget, and it's a bit overshadowed by the situation in Ukraine, that most of the Western world has actually fully come out of COVID-19 pandemic, with the effects that have had on demand. At the same time, refining capacity, particularly in Europe and to some extent in U.S., was reduced quite dramatically during the pandemic where these regions experienced horrific refining margins.
In addition to that, we've had the situation with sanctions on Russia making Russian oil and products more difficult to move. Basically what we see is that global clean product exports are actually approaching the highest we've seen, and this takes us back to 2017. If you go further back, AIS tracking is not as efficient as it has been in this period. We are reaching all-time high on clean products exports globally. Global crude oil exports is improving. It's lagging though on the product side. This is kind of the appreciation in the global crude oil exports is primarily caused by U.S. SPR releases and U.S. production, and their export capabilities growing. U.S. production has increased by 1.4 million barrels year to date according to EIA.
As most of you would know, the U.S. are releasing what's equivalent to almost 1 million barrels per day of their SPR or from their SPR. In I would say writing, but in speaking, we currently see very high demand for tonnage, both in the Middle East and in the U.S. Gulf, indicate that this positive development for freight looks to continue. Let's move on to slide 11. The order book continues to dwindle, in particular on the crude side. There has been no orders for VLCCs or Suezmaxes in the last 12 months. I have to correct myself there a little bit because I saw reports this morning that there were VLCCs ordered or rumored to be ordered in Japan. We'll get back to that. In order to get a significant change to this picture, we need far more.
On the VLCC side, we have seen 27 vessels delivered year-to-date, and there are still 21 to come. Some of those will obviously move into 2023. The total order book is at 41 vessels. We have a fleet of 861 vessels, of which 81 during this year will be over 20 years old. You know, once this order book is finished delivered, 114 VLCCs will be above 20 years old. On the Suezmaxes, it's even more pronounced. We've seen 25 Suezmaxes delivered this year. There are eight more to come, six next year and two in 2024. That's a 16 total in the order book. We have 65 Suezmaxes that will pass this 20-year threshold this year.
Looking at the time the order book delivers, it's a total of 111 Suezmaxes that would effectively be disqualified from the commercial trading oil market. On the LR2s, we have in fact seen some orders placed this year. You know, the broker reports vary, but we've landed on identifying 13 orders placed. But still, I would argue that that's not an alarming development. There are 20 LR2s, or at least vessels that are registered as LR2s, that are going to be over 20 years this year.
If you kind of heighten the threshold a little bit and put it at 15 years, which for anyone that trades clean products know is a more relevant yardstick, you have more than 70 LR2s built prior to 2008. So basically when this order book has delivered, these will come to age. So we're not really that alarmed about the development on the LR2 side either. I think if we look at the chart at the top left side here, and this has become quite repetitive over the quarterly presentations that we have. The blue line is the absolute deadweight size of the tanker order book, and the yellow one is as a percentage of the fleet.
As we can see in absolute deadweight, we're back to 2000, 2001. We all know that the oil market is much larger now than it was in 2000. In a percentage of a fleet, it's even more pronounced, where we need to go back to 1996 and even before. I actually don't have history prior to 1996 on this, so it's difficult for me to gauge whether if we are early 1990s, mid-1990s or in the 1980s. This is an alarming development, I would say. You know, we're starting to see the early signs of that tankers could become a bottleneck in the energy logistical chain.
I'd like to add, though, for those of you not that familiar with freight and tankers is that not every country in the world is blessed with oil. There's also an asymmetrical relationship between population growth and oil resources. This transportation need is actually real. Let's see how this develops. Let's move over to slide 12. I find this quite exciting. The time charter market has almost erupted over the last month. The time charter or the period market is an old school bellwether for large oil transporters expectations. These are, as we refer to, the big guys, the Shells, the Equinors, the BPs, the Chevrons.
You know, these the big boys in the game that have equity crude substantial transportation needs are in the market, all of them, for up to three-year commitments on time charters. To them, even for them, a three-year commitment is significant. We have seen earlier kind of in the reporting season, even five-year charters being concluded. This is extremely interesting and extremely encouraging. This is obviously in line with the spot, but it's not that often that you, after a relatively short period of firm spot markets, see this kind of activity in the long-term time charter market. This basically means that our analysis might be in line with some of these guys' analysis. Frontline will remain a spot-focused owner with the objective to offer our investors spot market returns.
However, a certain degree of secure revenue and margin plays a part of our long-term vision. As we have reported, we are actively looking at the time charter market for some of our asset classes. Let's move over to slide 13. We are, although it's been fairly quiet from Frontline in this respect for the last couple of months, or actually not months, last month, I would say. Frontline and the Frontline-Euronav combination is on rails. We are moving forward. Basically the part of the process we are in now is led by legal, and it's more a regulatory job towards the regulators. We're working towards a Frontline relocation filing for the relocation of Frontline from Bermuda to Cyprus. That will be followed by a tender offer.
We expect that to happen in Q4 this year. There's always also been discussions around the various outcomes of this tender offer. I've left the achieving less than 50% acceptance out of this. Obviously if that should happen, we don't believe it will. We think this is an industrial solution the market wants. You know, I'll just left that out. If we get above 75% acceptance amongst Euronav shareholders, we will go directly to a merger with Euronav. Should we, in the case end up between 50.1% and 75%, the outcome is more or less the same. Frontline gains control of Euronav and a combination of the two complementary platforms will be created. We'll perform basically as one company, although Euronav will be juridically a subsidiary of Frontline.
With that, let's move to slide 14 and do a summary. Q2 2022 was a shoulder quarter in terms of oil demand, and in fact Q3 should have been the same. That's if you follow normal seasonal patterns. This is currently a tanker story with sanctions on Russia being a catalyst, but we may face a structural catalyst when it comes to products. I mentioned earlier in the presentation the dislocation between refining capacity and demand. Global crude oil exports are approaching pre-COVID levels, and oil in transit is already there. Order books continue to dwindle, and there are currently no incentives present to invest in new capacity just yet. Also, there is a question of when this capacity can be ready for the market should the ordering start now.
The other question then is, are we starting to feel the structural bottlenecks of oil transportation that may come? Frontline has a modern, efficient spot exposed fleet and the stars are looking to align. I might add, winter is coming. I'd like to draw your attention to the chart at the bottom, which is different from the last three quarters, and it's basically a seasonal chart of the average weighted earnings of all tankers. It's not Frontline's tankers, it's all the tankers, basically all the tanker indices. As you might notice, it's a very unseasonal pattern evolving. With that, I'll open up for questions.
Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question, please press star one and one on your telephone. We are going now to take our first question. Please stand by. The first question from Jonathan Chappell from Evercore ISI. Please go ahead.
Thank you. Good afternoon. Lars, two quick questions on capital allocation. First of all, it's good to see the dividend renewed for the first time. If we do the math looks like maybe a 70% payout ratio. It's just been so long, just wanted to get confirmation on a rough range. The second part to that question is, as we're going through the final steps of consummating the Euronav transaction, are there any restrictions on the amount of dividends or any other corporate actions you can take until that process is finalized?
First of all, Inger just handed me a note here. I believe it's up 79%.
Yeah.
Yeah.
Yeah. Because you need to calculate the dividend based on the 222.6 million shares.
Mm.
And not based
Okay.
On the shares standing at the end of the quarter, Q2, I mean.
Mm.
You will come to that it's 79% distribution.
That's helpful.
Yeah.
Uh, and then
That's right.
Go ahead.
Back to your other question. There is, you know, the combination agreement was made public in July and, you know, the exchange ratio is set. And it's within that exchange ratio that the dividend is being paid. But for future dividends, it needs to be basically adjusted either via the exchange ratio, which is very unlikely, and then via the amount of shareholders that Frontline will have post-merger.
Okay.
The dividend.
My second question for you, Lars, is you mentioned in the presentation that, you know, you haven't really seen China come back to the market yet. It feels like Russia's still pretty reliant on, I'm sorry, you're still pretty reliant on Russian crude, and the sanctions clearly haven't gone into effect yet. Is there any way to quantify or even qualify what's driven this VLCC spike before you've really seen the impact of these two potential big catalysts into the market?
Well, first I'd like to say that, the European and U.S. sanctions on Russian crude has not affected the Russian flows per se, but it's altered the trading pattern. Basically what we see right now is that Russian crude oil and Russian products is sailing past Europe and to Asia. At the same time, Europe has had to change their purchase patterns and are importing to a much larger degree, feedstock and products from Middle East, West Africa, and the U.S. This is what created this highly inefficient trading pattern. The sanctions has stopped Russian crude to enter Europe, just as far as we see it.
With regards to the VLCC, that's a very kind of a recent development. I think it's more related to the U.S. production and the U.S. SPR release and their export capacities. As you know, and I think I've described this before, on the previous calls, that the oil market is a bit like a, you know, a toothpaste tube. If you press it, you know, the toothpaste will pop out somewhere. You know, basically, U.S. crude oil has then priced itself to go Far East, basically by the share volume being offered.
That, I think, is the game changer here. I also think, and not to be too technical, the flat, you know, in a very steep backwardated market, it's quite expensive to hold large volumes of crude oil over a long voyage. It's basically unhedgeable. Obviously, with a flat structure in the crude oil market, you know, it's easier to hedge your exposure over the 60 days you need in order to transport crude from, say, U.S. Gulf to China.
That's all very helpful. Thank you, Lars, and thanks, Inger.
Thank you for your question. We are now taking our next question. The next question from Chris Tsung from Webber Research.
Hi, good afternoon. How are you?
Oh, thank you. We're good.
We're good. Yeah. Good. Good. Thanks. Yeah, just to follow up on that last question. Are you saying that we'll continue to see VLCCs lag Suezmaxes for the near term? Is that right?
Basically, what we're seeing is that at least the VLCC you know when these large trade lanes open up as we've seen US Gulf to Asia or to North Asia you utilize the vessels for a very long period of time. It takes away capacity for a long time. We also see the activity continue. When we fix VLCCs now, we fix them for late September laycan. Basically, the oil will be lifted in September and delivered to China sometime in late October, early November. This we see continue as October dates are already being addressed. This does, however, create a bit of a hole in the Suezmax program because they fix closer to the loading dates.
At the same time, the Suezmax has a lot of support from the flow of crude from both Middle East, but primarily West Africa into Europe. We basically see, you know, this seems to be maintaining or maybe even firming.
Okay, great. Yeah, thanks for that color. That's really helpful. Just talking to your fleet mix. I know in the presentation, you guys are not looking at new capacity just yet, but with the four V's delivering into early next year and the potential merger with Euronav fleet, which is heavily V-weighted, I just wanted to understand, is there a desire to rebalance your fleet mix? Or, you know, how should we think about that?
Oh, you're absolutely correct. It is to rebalance our fleet mix. You know, historically, Frontline has been a predominantly VLCC company, you know, secondary having Suezmaxes. The LR2 additions to our fleet is actually kind of in the long term fairly new. We do see them obviously as very efficient trading vehicles. I think this quarter tells the story of that. No, it's a simple analysis which we've repeated a few times, but I'm happy to repeat it again.
If you look at the average cash break even, Frontline has per vessel cost, and you also then think of the economies of scale in oil transportation, you'll find that the limit on or the kind of where the VLCC peaks is so much higher than, for instance, for the VLCC and Suezmax or compared to an LR2. It means that you get to put it very bluntly, more bang for the buck owning VLCC in a good market. This has basically been Frontline's philosophy all along. We're also quite good at running VLCCs, have a good client base in that segment. This has basically been kind of where the bread and butter over the years has been gained from Frontline.
The Euronav transaction is a part of that, of continuing that story.
Got it. Great. Thank you. Just if I can squeeze one last modeling question in. Just noticing your admin costs have inched up a bit this quarter. Is this a one-time thing associated with the Euronav merger with Euronav or is this something else?
Yeah, you're right. Well, we do have some more professional, like, fees and expenses related to professional fees and legal costs in this quarter than we usually have related to the merger.
It wouldn't be like the run rate going forward is just slightly elevated this quarter, maybe into next.
Sorry, I didn't catch your question.
Okay. I was just saying that this shouldn't be looked as a new run rate for admin expenses, and it's just you know, this quarter and next, it's just gonna be slightly elevated.
Well, I mean, as long as we are in the process of, let's say, combining the companies, I guess you would could assume that we will also have higher professional fees and legal expenses in the next quarters to come.
Right. Yeah. No, makes sense. Thank you, Inger. Thank you, Lars.
Thank you.
Thank you for your question. We are now taking our next question. Please stand by. The next question from Omar Nokta from Jefferies.
Hi there. Hey, guys. I have a couple questions for you just on the Euronav transaction. Obviously, in the Q2, you did a few share deals that took your stake up to around 20% in Euronav. Is there anything that prohibits you from doing more, assuming the opportunity exists, to take your position higher ahead of the tender offer?
It is in fact you know these two kind of transactions you can call them were bilateral and they were kind of driven by incoming to put it that way. There is a regulatory kind of mechanism called the creeping tender offer. If you continue to do this at least the U.S. legislators will kind of arrest you. No not like physically but you know you will you know they don't deem it the correct way of going about this. That's why we kind of stopped there. Also there are limitations to you know when you become a related party and so forth.
That's not necessarily a big issue for us as we are very much related through the combination agreement already. You know, there is no kind of big incentive for us to continue that path. It isn't a path to do more of those transactions.
Yeah, got it. No, that makes sense. Appreciate that. I guess this is maybe sensitive, so I understand if you're not able to respond, but are you having any discussions with the Euronav shareholder that has been vocal in his opposition to the deal, you know, maybe reaching an amicable solution? Does it just simply come down to the, you know, how the tender offer comes about later in the year?
In the end, it comes down to how the tender offer, you know, what happens, you know, when we count the shares at the end of the tender offer.
Understood. Okay. Well, thanks, Lars.
Thank you.
Thank you for your question. As a reminder, if you wish to ask a question, please press star one and one on your telephone. There are no further questions at the moment. I will hand back to conference for closing remarks.
Okay. No, thank you very much for calling in. Again, these are exciting times. You know, we're quite excited both by the market developments and our ambitions with regards to the combination with Euronav. With that, I thank you and have a good day.
That conclude the conference for today. Thank you for today. Thank you for participating.
The conference will begin shortly. To raise your hand during Q&A, you can dial star one one.