Earnings Call: Q1 2021

May 28, 2021

Good day and thank you for standing by. Welcome to the Q1 2021 Frontline Earnings Conference Call. At this time, all participants are in a listen only mode. After the presentation, there will be a question and answer session. I must advise you that this conference is being recorded today on Thursday, 27th May 2021. And now without any further delay, I'd like to hand the conference over to your speaker Today, Lars Bastott, Interim CEO. Please go ahead. Thank you very much. Thank you and good morning and good afternoon to everyone. Welcome to Frontline's 1st Quarter Earnings call for 2021. We're obviously quite content to being able to provide black numbers, Maybe to the surprise to many of you, Q1 21 was a fairly quiet quarter corporate wise As we are in a good position financially and no major transactions were concluded during the quarter, we Continue, Frontline, to have a high focus on the well-being of our seafarers as they are out there being exposed to the global ebb and flow of COVID-nineteen infections. Our technical and operations team are doing a fantastic job in mitigating the challenges that arise. And I'm very happy to report as we are well underway in vaccinating our sales. Let's now move to Slide 3 and have a look at the highlights. The Q1 2021 performance is very much a testament to keeping true to our strategy. Being mostly spot exposed and not expecting an imminent recovery in the market, Our chartering desk remained true to trading the ships in a manner where we allow our vessels to commit to long voyages, securing income but potentially giving away upside. Our modern fuel efficient fleet is built for this purpose, And it also gives us this flexibility. This proved to be the right call. In the Q1 of 2021, we made $19,000 per day on our VLCC fleet, dollars 15 $1200 per day on our Suezmax fleet and $12,000 per day on our LR2Aframax fleet. So far in Q1, we have booked 70% of our VLCC days at $18,100 per day, 63% of our Suezmax days at $13,600 per day and 59% of our LR2Aframax days at $14,200 per day. All these numbers in the table are on a load to discharge basis. Before Inger takes you through the financial highlights, let me quickly comment on the fleet development as well. We took delivery of 2 Of our 4 LR2s coming this year, Front Fusion and Front Future in March April, respectively, bringing our number of LR2s on the water to 20. Further, subsequently, we confirmed acquisition through resale of 6 High spec eco scrubbers fitted VLCCs to be delivered from Anti Heavy Industries in Korea, 5 in 2022 and 1 early in 2023. I'll now let Inge take you through the financial highlights. Thank you, Lars, and good morning and good afternoon to all of you. Let's then turn to Slide 4 I'll look at the income statement. As Lars said, we are happy to report numbers in black. And TransAlta achieved total operating revenues, net of oil expenses of 107,000,000 In the Q1, we also had an adjusted EBITDA of $59,000,000 and we report net income of 28,900,000 or 0 point 1,000,000 or $0.04 per share. The adjustments consist of $15,700,000 gain on derivatives, a $3,100,000 unrealized Again on marketable securities, a $1,200,000 amortization of acquired time charters and a 0.1000000 The adjusted net income in the Q1 have increased 29,000,000 compared with the previous quarter. And the increase was driven by a decrease in cheap operating expenses Of $11,000,000 mainly as a result of $6,400,000 lower drydocking cost. We also had an increase in time charter equivalent earnings of 6,800,000 And that was due to the higher TCE rates. As well as we had a $11,200,000 decrease in other costs. Let us then take a look at the balance sheet On Slide 5. The total balance sheet numbers have increased with $10,000,000 in the first quarter. The balance sheet movements in the quarter were primarily related to taking delivery of the LR2 tanker transfusion In addition to ordinary debt repayments and depreciation. As of March 31, 2021, Frontline Had $380,000,000 in cash and cash equivalents, including undrawn amounts under our senior unsecured loan facility, Let's then take a closer look on Slide 6, on the cash breakeven rates and the OpEx. We estimate our risk cash cost breakeven rate for the remainder of 2021 of approximately $21,500 per day for VLCCs, $17,700 per day for the Suezmax tankers and $15,900 per day for LR2 tankers. This gives a free average estimate of about $18,100 per day. These rates are the all in days rates That our vessels must earn to cover budgeted operating costs and write offs, estimated interest expenses, TC and bareboat hire, And installments on loans and G and A expenses. In the quarter, we recorded OpEx Expenses of $7,300 per day for the VSACs, dollars 7,100 per day for the Suezmax Tankers and $7,200 per day for the LR2 tankers. We did drydock 1 Zustak tanker in the Q1 only And we expect to dry dock 2 Suezmax tankers and 4 LR2 tankers in the second quarter. Let's then look at the graph on the right hand side of the slide. As usual, we show the incremental cash flow after debt service per year and per share assuming 10,000, $20,000,000 $30,000 or $40,000 per day achieved rates in excess of our cash breakeven rates. The numbers include vessels of time charter routes, are adjusted for new building deliveries and we're looking at the period of 365 days from April 1, 2021. So in this graph as an example with a fleet average cash cost breakeven rates of $18,100 per day and assuming $30,000 on top of the average fleet earnings That the TCE rate would be $48,100 per day. The Frontline would then generate a cash flow per share after the service of 3 point With this, I leave the word to Lars again. Thank you very much, Singer. Let's move to Slide 7 and have a look here or a recap of the Q1 2021 tanker market. And it goes without saying that it's been somewhat demanding. So total world oil consumption Rose by 4,300,000 barrels from January to March and reached 96,500,000 barrels per day. On the other hand, supply fell by 500,000 barrels. This was mostly fueled by the actions from Saudi Arabia And their volunteer cuts to that ended up at 93,500,000 barrels per day at the end of the quarter. As we continue to draw on inventory, tanker demand remained basically unchanged. We did during the quarter see return of Libyan volumes and we also had towards the end of the quarter the U. S. Cold snap that created a lot So tanker rates firmed towards the end of the quarter and this I find quite positive because It actually is indicating a thinner balance than what may be perceived. So basically to wrap up Q1, We see demand or consumption is running ahead of supply and The drawn inventories is kind of mitigating that volume. If you look at the chart on the right hand side, You see what I refer to as a ripple rather than a very strong market, but we see how quickly rates react Where we saw firstly the Aframax market move in line with the Libya opening up. And secondly, the Suezmax market reacted And that was mostly fueled by the U. S. Gulf cold snap or the U. S. Cold snap affecting the volumes out of U. S. Gulf. So let's move on to Slide 8 and look at the tanker order books. On all other classes, We are observing delayed recycling. We see very little support for keeping older tonnage in this market, but they remain in the Recycling prices are up 30% year to date and are now kind of being negotiated around 5.50 dollars per long ton or $23,000,000 for VLCC. This is, to some extent, been outcompeted by the fact that we continue to see demand for vintage tonnage from undisclosed price buyers At relatively firm prices, the overall tanker order book has shrunk year to date by approximately 4%. This asset that was delivered and new ordering has been fairly muted. We've seen on the VLCCs, 20 new 28 new orders placed. But as 25 vessels are delivered at the same time, The order book remains to be fairly flat. The VLCC order book stands at around 9% of the existing fleet and the overall order book for tankers is up or around 7% of the existing fleet. Let's move to Slide 9 and look at what's going on, on the asset prices. So the asset prices are on the move. We have over the last 6 months seen more than 170 new orders for container ships. We've also seen quite firm ordering on LPG and also seen confirmation of LNG orders, which has further contributed to the activity. And in line with the entire commodity space, steel prices have depreciated sharply. The fundamentals of the tanker market suggest the tightening of capacity over the coming years And the regulatory tightening in respect of greenhouse gas emissions further supports the case of investing in modern fuel efficient ships. So propulsion is yet not the driver. Right now, it's the yard capacity or rather the lack of it, Which is driving prices together with the steel. So let's move to Slide 10 and look at the short term outlook. So we're currently right in the middle of OPEC plus productions increasing. They are increasing somewhat slowly, but they are adding to transportation demand. Currently, Asia and in particular, China are coming out of refinery and maintenance, and oil demand Continues to recover. Now it's U. S. And European focus as we're coming out of Inventories both on land and floating are now normalized and at pre COVID-nineteen levels. From where we are now, according to EIA, oil supply is expected to grow by 6,000,000 barrels by year end. If you look at the graph on the left hand side below, we see that most of these increases Are expected to happen basically from where we stand now and over the summer. The key to the demand bounces in 2021, You can find on the right hand side. We know that gasoline demand fell by 3,300,000 barrels per day in 2020 And it's now expected to grow by 1,800,000 barrels per day in 2021. For Jet, It affected the crude oil balances by 3,200,000 barrels per day negative in 2020 And about 1,300,000 barrels per day is expected to return this year. For diesel, we're actually adding more than lost 1,200,000 barrels per day. And for fuel oil, we're keeping at level. Other kind of uses of oil is also adding to this at 0,700,000 barrels per day. Let's move over to Slide 11 and my summary. So basically to wrap this up, all key macro indicators points towards a firm recovery. Global GDP is expected up 6% this year. Asset prices are on the move, FCR capacity is tightening Steel prices are increasing. As I've just mentioned, global oil supply is expected to grow by 6,000,000 barrels by the end of 20 The COVID-nineteen vaccination pace in the developed countries is very encouraging and countries are opening up. We can see on the graph below, which indicates activity within the various Key segments of the shipping sector that the cyclical recovery run has started. All key shipping sectors are firm, The tankers are lagging. Frontline is ideally positioned to capitalize on And with that, I would like to open up for questions and answers, please. Thank you. Your first question today comes from the line of Jon Chappell of Evercore. Please ask your question. Your line is now open. Thank you. Good afternoon. As long as I'd say that's a pretty balanced outlook on the market, Maybe a bit more balanced than some of the optimism out there. Yet obviously the press release last week on the 6 new VLCCs indicate, I think a lot of optimism about where the market is going. I think I asked this 3 months ago, but at this stage in the cycle, based on what you see for the next Do you think you're a more aggressive acquirer of assets? And if so, How much of this fuel propulsion question play into whether you're doing more new builds like you announced last week versus maybe the traditional frontline Activity in the secondhand market. Well, it's all a question on well, first of all, I would say that we're Always aggressive, but the right opportunity has to kind of come our way. But our overall view of the market Has kind of firmed over the last couple of months, And we have more conviction now that we are moving in the right direction. With regards to resale versus modern Kind of vessels on the water. We obviously have to look at the current kind of spot market when we weigh to take a ship that's sailing in this market or taking a ship that will be delivered at the point in time where We're expected to be on full throttle again. So that's obviously a part of the consideration. Secondly, it's actually not that many vessels for sale that kind of fall within where we want to invest. So you could say that although the activity in drybulk has been tremendous And the activity on ordering container ships and LPG has been fantastic and so forth. The VLCC kind of Asset market has been fairly muted year to date. Okay. That makes complete sense. And then just a follow on to that as far as the financing is concerned, like I understand you're going to almost certainly get financing for these ships ordered or announced last week. It was a bit curious to me that for the down payment, given the cash you have on your balance sheet, you still drew down $50,000,000 from the Hemen facility. So what's kind of the thought process around the amount of liquidity you want to keep? Taking debt to pay down payments, Not resuming the dividend despite a profitable quarter. I understand that the second quarter is weak and we have a kind of near term choppy outlook. But Should we think about just drawdowns of debt to finance new builds going forward and maybe retain the cash for a A stronger market than you can think about capital returns again. I think we have flexibility with respect to this Facility that we are drawing on, we will establish the, let's say, debt Financing, we intend to do that, I guess, probably in the second half of twenty twenty one, at least for the first vessels And maybe also for all of them, depending upon the opportunities that arise when we look in or start to work on that. So with respect to equity and repayment of This facility that we're drawing on, we will have flexibility going forward to decide how to do that and when to do if we We would like to use the ATM. That depends upon the share price and when we would like to raise equity, it also depends on that. So I think we will keep that a bit open a bit. Okay. All right. Thank you, Inger. Thanks, Lars. Thank you. Thank you. Your next question today comes from the line of Randy Giveans Jeffrey. Please ask your question. Howdy, team front line. How's it going? It's good, Randy. How are you to you too? All right. I guess question, we talked a lot about the crude markets. Just looking also at the product tankers, Maybe how do you view those 2 and maybe the timing of an inflection where you really start to see some rate improvement? And then with that, are you using any of this kind of soft patch to clean up some of your LR2s that were trading dirty to start trading clean going forward? Well, to start with the first one, We are obviously in a recovery phase. And I think we probably just Finished kind of drawing on inventories. That's at least some of the steps I'm seeing, which is relatively live, Which means that and we're also in the refinery turnaround, the relatively heavy one. So actually, I was quite hopeful for the product market to start to run kind of already in March And but kind of faded. I think in order for the product market to start to properly move, we need A bigger portion of the lost Jet demand back. And But there is always a product market to be had around arbs kind of opening up. And for that, we need to see the refineries So it's like a chicken and egg kind of discussion. And to be quite honest, I'm still kind of Not 100% sure which would come first. So whether if it's going to be a pull or a push or whether if we're going to see Increased demand for crude oil first, pushing the VLCC market, then drizzle into LR2s as product is transported or the other way around. So it's difficult to say, to be quite honest. With regards to cleaning up, we have cleaned up one vessel and use kind of this opportunity in the market. It's not really an opportunity because it always comes kind of with some degree of cost. And we always have to remind ourselves that we actually have a lot of incremental income dirtying up when we're doing this. But I think it should be expected that we gradually will look at utilizing our vessels as LR2s because that's what they are Robert, Anafris. Yes, that makes sense. All right. And then I guess second question for me. You've shown some impressive Spence control here with the market downturn, specifically more recently a sharp reduction in vessel OpEx and G and A. So going forward, what's a good run rate for those two line items? As I mentioned, for this quarter that we are Into now, we will have a drydocking cost which is higher than we had in the Q1. We only had Less than $600,000 of drydocking cost in the Q1 and I guess for the Q2 we estimate around $7,000,000 or Probably a bit more as well. So in that sense, of course, the operating expenses will increase in the next But it will vary a lot between quarters depending upon how much vessels we drydock. In the Q3, we are planning to dry dock 3 vessels instead of 6, Meaning that it will be kind of half again of what I said for the Q2 then of course, I mean. With respect to the Admin expense, I would say that G and A would other than What we have now in the Q1 is not the going rate. I think it's probably a couple of $1,000,000 on top of that would be a going rate going forward. Couple million on top of this. Okay. So $9,000,000 is that a good run rate going forward? That's probably a bit too high, but a couple of dollars on top of what is in the report that is against 8 Point something then, 8.3 or 8.5 whatever, something in that respect. Okay, perfect. That's it for me. Thank you so much. Thank you. Thank you. Thank you. Your next question today comes from the line of Magnus Fyhr of H. C. Wainwright, please ask your question. Yes, good afternoon. Just most of my questions have been answered, but just Kind of going back to John's question regarding your thoughts on ordering or buying more ships. Do you think there's an opportunity here? There seems Like a lot of the operators, I'm a little hesitant to buy ships or order ships at these levels given the uncertainty Regarding propulsion technology, but just curious to see if you think there's further opportunities there, New building versus acquiring resales? Thank you. Well, we I think we will remain true To kind of our word, I'm trying not to add to the order book. And to be quite honest, where the current order book is, is quite difficult to Yes, because I think you would struggle tremendously to order a VLCC say For delivery in Q4 2023. And if you should locate a slot there, I think the prices Probably north of 100. So it could be that We would rather than focus on acquiring either resales or modern eco vessels On the water. So but I think it's important to note here that it has been a frantic activity with the yards. And Inger and I would like to compare some of the outlook going forward to the period we had in 2002, 2003. And at that time, we had a lot more yard capacity coming. Right now, we don't have that. So we even have yards Starting to look at 2025, just to give you a color on kind of the situation out there. Okay. And you guys have a really modern fleet and you mentioned the scrapping prices are picking up. What do you see out there as far as actually some of these older ships finally heading to the scrap yards? I mean, Current market prices, I mean current spot prices are very challenging for these older ships. And I was just curious if we if you expect to see Does scrapping finally start to increase here during the summer? I think it will. Kind of our Count stands at 8 VLCCs sold for crap year to date, and I think it's 3 Suezmaxes. We have to remember though that there have been disruptions in the capacity for the recycling yards to actually accept office due to COVID. So the pandemic has affected the kind of efficiency there as well. I think where the prices are now on recycling steel, we should definitely see some action. But having said that, we still have this competition out in the market for vintage secondhand tonnage Coming from undisclosed parties, which most likely are involved in the trade that I like To refer to us the dark web of oil, basically transporting either Venezuelan or Iranian sanctioned crudes. So I guess with the ongoing yes, I guess with the ongoing talks with the Iranians and potentially those sanctions being removed, What's your thoughts about those vessels finally maybe not being able to compete in an open market? I think that could be a tremendous kicker to the conventional lower binding tanker market. And it's basically we all talk about the COSCO moment in the tanker industry. And I think you could have that because suddenly, at least with the nuclear deal between U. S. And Iran, You're going to have quite a lot of volume that needs compliant ships to trade kind of within the compliant market. Okay, great. And just one final question, if I may, to Inger regarding the dry docking schedule. What's are you trying to do all the dry dockings ahead of the Q4? Or you think you will have some ships in the Q4 as well, just Kind of position yourself for a market recovery. We will not do any dialogue ins in the Q4. It's only in the second and the third. Okay, great. Thank you. Thank you. We do have one more question at this time. This comes from the line of Chris Song. Please ask your question. Hey guys, good afternoon. How are you? Hey. Hey. I wanted to kind of dig in just a little bit more to a question that was asked A bit earlier regarding the OpEx, I saw that it kind of came down significantly from Q4, roughly around 20%. And just looking back at your Previous presentation of the OpEx, the daily OpEx for like the Suezmax is like around $9,700 a day. And in this presentation, it's down to like 7,100. So maybe, if you can help explain Yes. How that is achieved? The OpEx will vary between quarters, as I said, due to the Drydock of the vessels, whether we are drydocking or not in a way. And in this particular quarter you are referring to with the Suezmaxes having Hi. OpEx, that was due to that you had drydockings of Suezmaxes in that quarter. Why now? You only had a small drag on cost which didn't really affect the OpEx. I think to further clarify, we actually take the actual dry docking cost in the quarter. Expensive, yes. We expense it. We don't capitalize as many of our peers do. So that's why we get that volatility in that? Yes. Right. I see. Okay, understood. Thanks so much. I guess just following up on another question is for your the 6 VLCCs resales that's been starting delivery in 2022. Could you perhaps expand on Cadence of the delivery, is it more front loaded or back loaded? I know one is delivering in 2023. Just wanted to know if it's going to be smoothed out or Any color will be appreciated. Well, it's going to be fairly smooth to be quite honest. The first vessel delivering very early in 2022. Obviously, we have a little bit of flexibility in the deliveries at this stage. So and then coming like pearls on the string and the last one coming very, very early in 2023. Okay. And great. And just the last question, I noticed in The presentation or in your press release, there was a purchase there's a decision to purchase shares In Golden Ocean, just I think only about $400,000 so it's not material. It's not big, but I wanted to kind of See if you can go into your details on the decision to purchase shares Golden Auctions. Yes. This is related to that we have a Forward contract where we forgo Notion shares where we then through that contract in a way Got the possibility to take part in that right issue which Golden Ocean had. So it was not a huge amount. It was Few shares, but anyway, we did it because it was in the money anyway. All right, fair enough. That's it for me. Thank you, guys. Thank you. There are no further questions at this time. Inger Lars, back to you. Yes. Well, thank you very much for hosting and also thank you very much for listening in. Thank you to the entire From Klein team for fantastic efforts in Q1, and stay safe, everyone. That does conclude our conference for today. Thank you all for participating.