Earnings Call: Q2 2021

Aug 31, 2021

Thank you all for standing by, and welcome to today's Q2 2021 Frontline Limited Earnings Conference Call. All the presentation for today will be followed by a question and answer session. Please be advised, the call is being recorded. And I would now like to hand the call over to your speaker, Lars Varsed. Thank you. Thank you. Good morning and good afternoon. Welcome to Frontline's 2nd quarter earnings call. Different from the Q1 this year, Q2 ended up being quite a busy one. As many of you have asked quite a few times now, Will Frontline try and exploit the weakness in this market to grow further? And I guess we have answered that now during Q2. We are in some way a 3 legged shipping platform with VLCCs, Suezmax and LR2s. Our VLCC leg has been a bit shorter than the others. Now we're mending that somewhat. Parts of the challenges in the market this quarter has been the continued flare ups of COVID infections In various locations around the world. Vaccination has come far in the Western parts, but other parts of the globe I'm not so fortunate. We remain vigilant towards our seafarers' well-being and are happy to share that our efforts to arrange vaccines for them is going well. In addition, I'd like to mention, we are very grateful certain port states are being extremely generous offering vaccines to seafarers literally for free. So let's move on and have a look at the highlights on Slide 3. Q2 'twenty one performance reflects the challenges the market faced this quarter. It is, however, a further proof that our business model, efficient operations, modern fleet And a very hardworking chartering team manages to outperform the key benchmarks. To put this in perspective, An average weighted earnings index I checked recently for all tankers came in just over $6,000 per day In Q2 2021, the lowest print in more than 20 years. In order to outperform this, The owner, and in particular, the owners' charters, must fight for every cent and know their position well to be able To play their hands best possible. Regretfully, this is not always the case as far as we can observe. Anyway, at Frontline, we do the hard work and manage to achieve $15,000 per day on our VLCC fleet, $11,000 per day on our Suezmax fleet and $10,600 per day On our LR2Aphromax fleet in the Q2 of this year. So far in Q3, We have booked 70% of our VLCC days at $14,000 per day, 64% of our Suezmax days At $9,800 per day and 63% of our LR2Aframax days At $11,800 per day. All numbers in this table are on the load to discharge basis. Before Inger takes you through the financial highlights, let me quickly comment on the acquisitions in the quarter. During Q2, we acquired Through resale, 6 latest generation ecotype VLCCs currently under construction at Hyundai in Korea. In addition, we acquired 2 modern ecotype VLCCs built in 2019 at the same shipyard. We have, for a period of time, followed the VLCC asset market closely to look for opportunities, As we didn't expect an imminent recovery in tanker markets, delivery was a key bargaining chip. They're rallying steel prices and high activity around us for non tanker assets, pushing potential delivery slots Wayforward, added to our conviction in making these investments. I'll now let Ingir take you through the financial highlights. Okay. Thanks a lot, and good morning and good afternoon, ladies and gentlemen. Following the acquisition of the VSACs, as Lars mentioned, We have progressed on the loan financing. And in August this year, we obtained financing commitments subject Final documentation for 3 senior secured terminal facilities. They are in a total amount of $247,000,000 And they will partially finance the acquisition on the 2 VLCCs built in 2019 and 2 of the 6 We'll see new building contracts. All facilities will finance 65% of market value, they will carry an interest rate of LIBOR plus a margin of 170 basis points, And they will have an amortization profile of 20 years, counting from delivery dates from the yard. We intend to establish long term financing for remaining for resale in lithotripsy gluvenir contracts closer to delivery of the vessels. Then I think we should move to Slide 4 And look at the income statement. Frontline achieved total operating revenues, debt of various Expenses of $80,000,000 and adjusted EBITDA of $28,000,000 in this quarter. And we report a net loss of $26,760,000 or $0.13 per share and adjusted net loss of $23,200,000 or $0.12 per share. The adjustments This quarter consists of a EUR 4,700,000 loss on derivatives, EUR 0,800,000 gain on marketable securities And a $1,300,000 amortization of acquired China charters and lastly, a $800,000 share of losses of associated companies. The adjusted net loss in the 2nd quarter decreased $32,000,000 compared with the Q1. And the decrease was driven By a decrease in our time charter equivalent earnings due to the lower TCE rates, as Lars mentioned, an increase in ship operating expenses of 9,300,000 mainly as a result of higher dry docking costs, offset by a gain on marketable securities sold in the quarter of $4,000,000 Let us then look at the balance sheet on Slide 5. The total balance sheet numbers have increased with $54,000,000 in this quarter. The balance sheet movements In the quarter are primarily related to taking delivery of the LR2 Tanker from Future and acquisition of 6 VFC newbuilding contracts In addition to order, we get repayments and depreciation. As of June 30, Frontline has $257,000,000 in cash and cash equivalents, including undrawn amounts under our senior unsecured loan facility, Marketable Securities and Minimum Cash Requirements. Then let us take a closer look at cash breakeven rates On Slide 6, we estimate our risk cash Cost per bill rate for the remainder of 2021 of approximately $2,800 per day for the VLCCs, $7,500 per day for the Suezmax tankers and $15,400 per day for the LR2 tankers. And the fleet average estimate is about $18,000 per day. These rates are the all in daily rates That our vessels must earn to cover the budgeted operating costs and drydock, estimated interest expenses, TC and bareboat hire, Installments on loans and G and A expenses. The highly attractive terms on the updated financing commitments on 4 of the acquired Receipts, which I mentioned earlier, decreases the daily cash breakeven rates with approximately 1400 per vessel In the quarter, we recorded OpEx expenses of $7,600 per day for Vistacis, $8,500 per day for Suezmax $9,000 per day for LR2. We drydocked 3 Suezmax tankers in this quarter sorry, and 4 LR2 tankers, and we expect to drydock 1 VLCC and 2 LR2 tankers in the 3rd quarter and none in the 4th quarter. The graph on the right hand side of this slide shows that if we assume $30,000 on top of the daily fleet average cash cost With the yield rate of $18,000 Frontline will generate a cash flow per share after the service cost of $3.51 per year. And the cash generation potential will increase after acquisition of the Atrius disease. With this, I leave the word to Lars again. Thank you, Inger. So let's look at Slide 7 and recap the Q2 tanker market. So global oil consumption averaged 96,700,000 barrels per day in Q2 2021. That's up 2,100,000 barrels a day from Q1 'twenty one. Production averaged 94,900,000 barrels per day. Hence, the world continued to draw about 1,800,000 barrels from inventories. Just to put that in perspective, When you draw from inventories, you're not really using that much transportation. And as a rule of thumb, on tanker utilization, you need about 30 VLCC equivalents in order to transport 1,000,000 barrel Of oil per day. So this kind of draw represents a loss Of 30 to 35 BDC equivalents in demand. The tanker rate gradually slipped throughout the quarter and volatility fade. OPEC plus did increase supply by more than 1,000,000 barrels per day during Q2 2021, The key OPE producers also went into higher demand periods, typically in the Middle East, where summer hits And you start to basically burn oil or fuel for electricity generation. U. S. And Brazil added another 900,000 barrels per day. Most of the Brazilian additions came out as exports. For U. S, they're also seeing a very strong growth in demand, hence less barrels were exported out to the U. S. Gulf. Demand rose sharply in North America and Greater Europe, while Asia that led the recovery saw far more muted developments In the Q2 of the year. As I illustrate in the two charts below, where I basically isolated North America, Europe and Eurasia, We see that during Q2, demand there rose sharply, whilst the rest of the world And in particular, Asia, and as I mentioned, that led the recovery towards 2021, has performed Kind of performed less first half this year. So let's move Over to Slide 8 and look at the tanker order books. The new ordering has naturally been muted during the Q2 of 2021. We've observed that the delivery window for ordering a significant number of VLCCs or Suezmaxes is now Firmly into 2024. This obviously due to all the ordering activity for asset classes kind of outside of the Tanki The overall tank top up order book for VLCCs through Max and LR2 has shrunk 10% Year to date, the overall order book for tankers above 10,000 deadweighttons stands at 8% of And this is in fact comparable to levels seen in Q1 1997. In absolute deadweight terms, We are at 20 years low. I'd also like to put this in some perspective. 20 years ago, The global oil consumption was around or at 76,000,000 barrels per day. A normalized market now is closer to 100,000,000 if not Above. So it means that the oil market is 30% larger now than in early 2000, And the order book is just about the same size. The VLCC order book is now at 81 units, give or take. At the same time, 124 VLCCs will above be above or past 20 years in the same period. For Suezmax, we are at 41 units and 123 passing 20 years On the same metrics. Let's move to Slide 9 and look at oil in transit. This is a very important indicator to us. We monitor this Basically on a monthly basis to see where we are. Oil in transit is basically oil being transported. So in essence, Excluding whatever is on storage. And as you can see on I've kind of circled in 2020 in a red rectangle here. As you can see, 2020 was a very We started off the year with the Saudi Russian price war, which distorted Q1 and Q2, and we had a massive production Increase and the transportation increase. Then the COVID-nineteen pandemic hit, And we saw demand shock that suddenly kind of took away a lot of production and also then transportation needs. In Q3 and Q4, the transportation needs diminished almost back to 2017 levels. Floating storage did save tank utilization at the time. 1st Half of 'twenty one, the tanker markets have well, basically volume has increased and transportation has grown, but We've been facing increased fleet supply by vessels released from storage and delivery of new builds together with seeing deep inventory Now where we are now, this is obviously July August for Q3, we're back To Q4 twenty nineteen levels. OECD commercial inventories are now down to 2019 levels, and I believe or we believe That's a fair proxy for global inventories. There's also another thing to note. When inventories are no longer drawn, transported oil will come Okay. As an example of this, EIA are currently estimating us to build 1,000,000 barrels Of oil per day for September, but then come October, we're supposed to draw 500,000 barrels per day from That gives you a delta of 1,500,000 barrels, which then needs to be transported. That's equivalent To the demand for 45 to 48 VLCC equivalents. And I think this gives you kind of a notion of how quickly this can turn. Let's move to Slide 10. I focused a bit on this in our press release, And I call it the VLCC III Paradox. This is almost the same for Suezmaxes, but I decided to point out This for the VLCCs. We may all speculate in what the older generation of VLCCs But it is undisputable that a 20 year old vessel will struggle As a very limited number of charters accept them, and this is purely on H. With the challenging trading environment During first half this year, earnings achieved on noneco high consuming vessels have been 0 Or negative. And mind you, 51 vessels are above 20 years as we speak. Year to date, 8 VLCCs are reported sold for recycling. The average recycling Price in Asia has risen 70% in the same period and is now close to $25,500,000 for Well, one of the typical exits for an older vessel in the tanker world is Crude oil storage. Well, crude oil curves turned into backwardation in Q4 last year and are not at all supporting floating storage. So far this year, we've seen 3 VLCC spot fixtures reported on the vessel that's either 20 years For older than that. And this is out of the 660 VLCC fixtures we recorded. So again, I want to highlight this because it is important And it's very important looking at the previous slide where we are in the cycle on oil being transported. If it is so, that the effective tonnage Actually hasn't grown over the last couple of years, then we're closer to balance than we might think there. And this is, as I mentioned in the press release, kind of, it's the source of the picture into such an extent That is it needs to be basically addressed. So let me sum up On Slide 11. Demand and supply of oil continues to rise, but we have to admit the delta type infections cloud outlook in particular in Asia. We see asset prices remain firm, steel prices continue to rise, and the activity It's very good on the yards, but for non tanker assets. At the same time, the tanker fleet continues to age, The overall order book shrinks, and the potential delivery window moves further out should demand for tankers OPEC plus plan to add about 400,000 no sorry, yes, 400,000 barrels per day each month To the end of the year. This means in total 2,000,000 barrels per day Of increased supply. And go back to the math, for we then would need 60 to 65 Gaels to see equivalents by the end of the Oil in transit continues to rise and the big question mark is obviously when do we reach the inflection I would like to draw your attention to the chart at below or at the bottom of the slide. I showed you this last quarter as well. And as the orange dots indicate, this is where we were in March So we're basically we're gradually digging ourselves in from negative year on year growth In global oil trade into positive territory. And since last, Frontline has Increased this position significantly, we have secured attractive financing and are ready to capitalize as we sail on towards Thank you very much. And I would then like to open for questions. Thank you. We'll now begin the question and answer session. The question is from the line of Randy Giveans from Jefferies. Your line is now open. Howdy, Randy. Mr. Gibbons, your line is now open. You may ask your question. The question is from the line of Magnus Fyhr from H. S. Wainwright. Thank you. Yes, good afternoon. Looking at the performance on the fleet in the Q3, I mean compared to some of the peers, Looked like you had a little bit better performance. I know it's hard to compare quarter to quarter, but you've been consistently outperforming the peers. So Was there anything else in the quarter? Or is there any other flavor you can give on the performance in the Q3? Well, it's a good question. This is one of the things that we obviously try to analyze. Well, obviously, when you compare to peers, there is an aspect of fleet composition and the age of your fleet And that does play a part, but it doesn't account for all the Kraft outperformance. It's also kind of staying true to the fact that We are ship owners. We have assets we need to protect, and we need to kind of try as hard as we can to get Our clients understand that and not kind of give in. And it's also about a modern fleet, In addition to economics, it also gives you more opportunities to trade Around, you basically have all options. So that's an important fact as well as you try to triangulate Your vessels in order to achieve kind of higher utilization and better returns. I hope that's a good answer to your question. Yes, yes. No, thank you for that color. Also, I mean, you're painting a we're staring into the abyss Your rates are very weak. We're in the weakest part of the year. You mentioned that the fleet growth may not be as Hi. If you adjust for the age composition of the fleet, but do you have any visibility into the winter market? I mean, We're still in August. I know it's a little bit early, but just curious your outlook here for recovery in the Q4. Well, we it's the share volatility of the freight market tells you that we know very little, to be quite honest. But on the other hand, we are we fixed far ahead, so we actually do see the demand quite early. And in that perspective, what we see is that what we basically now we're doing 10 days in the Middle East and West Africa, and it looks quite good through volumes. We've seen rates in Suezmax actually try to hedge up a little bit. We are also fixing October early October dates out of U. S. Gulf That looks relatively busy in the beginning as well. So I won't kind of give you any guarantees, but the picture looks at least better than it did Okay. Well, that's good. Just one last question then. On the S and P market, you've been active buying some re Dales, just curious if you see any opportunities in the secondhand market. There was a vessel, I guess, there was a non ECO 2012 built vessel reported last week at a pretty Big discount. I don't know if that was just a one off transaction or indication of a potential weakness here in the secondhand market. I don't know if you can give any color on that. I think kind of the if there is a curve on values, I think kind of the softer spot It's kind of the middle aged generation, and particularly if it doesn't have a scrubber. So because the older vessels, Like the really old ones, they've been held up by this artificial demand from kind of undisclosed accounts that want to use the vessel for whatnot. And then the modern vessels are obviously the ones everyone wants to own as we go into a tightening regulatory framework and All sorts of efficiency kind of demands going forward. And that keeps kind of these vessels in the middle a little bit kind of out of fashion. So I'm not too worried about that transaction because basically from what I see on, you could You can argue that a very modern vessel or resale or new build is more correlated to the asset prices Themselves and eventually to the steel price. And as long as that is holding up, I'm not too worried by kind of for the modern part of this fleet. Okay. Thank you very much for answering my questions. Thank you. Thank you. Next question is from the line of Jon Chappell from Evercore. Thank you. Good afternoon. Hi. Hi. Inger, so you've lined up $130,000,000 for 2 of the 6 VLCC newbuilds. Should we assume that you're looking Similar percent, it's about by my math, around 70% financing, so another $260,000,000 to be taken down for the remaining 4? Yes, I will be looking for that. You have assumed that. So we take that $390,000,000 plus the Drawdown on the Hemen facility. That's the majority of the payment on this. I think that would only leave like $74,000,000 in cash outlay for the 6 new builds. Is that the type of financing in total you're looking for? When you get the bank facilities for the remaining 4 ships, would you have to pay that back to Hemant facility immediately? So we will use this German facility as a bridge financing At the moment, and then we will continue or we'll consider in a way a bit further down the road our It's on the long term financing for the equity portion of these vessels. Okay. And then in addition to the Hemant facility Expiring in May of 2022, which obviously you've pushed that back several times and it's probably a safe bet to assume you could push it back further if you'd like. Are there any other big bullet payments or amortization profiles coming up in the next, let's call it, 12 to 18 months As we kind of bridge to the recovery that Lars talked about? No. There is nothing until 2023. Okay, great. So generally speaking, you feel good about the liquidity profile. It's now just finalizing the debt on the last four New builds and kind of holding on until the market recovers. Is that correct? Yes, that is correct. Yes. All right, Great. Well, that's all I had. I think liquidity is important to getting me there and, thanks for laying that out from Inger. Thanks. Thank you. Our next question is from Randy Giveans from Jefferies. Thank you. Howdy, Lars and Inger. Can you hear me now? Yes. Yes. Howdy. Excellent. I could hear you earlier. You just couldn't hear me. That's all right. Congrats, obviously, Lars, on the official promotion to CEO. So exciting times for that. Thank you very much. Two questions. Clearly, Frontline has been pretty active in acquiring tonnage. Is this strategy to continue to grow the fleet that way? Or will you now maybe look to sell some Older assets. Well, as per as almost every time we speak, It's difficult to kind of give you the playbook kind of here on the air, If at all. But we obviously keep all options open. So I'm not going to dismiss it nor kind of confirm it, but we will always look at our fleet composition. And We favor the more modern units. So that could be a part of our strategy going forward, yes. Okay. That's fair. And then looking at your quarter to date rates, they are pretty good relative, right? Do those include Any recently signed time charters? Have you signed any of those this summer? And then we start to see some rates ticking up on the product side. Is that maybe the start of a recovery or still too early to tell? The first question is first. So we haven't done any time charters. And it's a very good question because short term time charters, we record as spot and we haven't done any of those. Okay. Secondly, on the LR2 market you're referring to, yes, it's firming out in Asia, and it's actually quite strong. We like to think it has legs, but it's we've been kind of disappointed a few times now when it's had a run for it, Had one back in April as well. So it's let's say the jury is out. What we have done in the meantime is actually cleaning up 1 of our LR2s. So we're kind of the balance is more tilted towards the clean now with 7 of the 20 vessels Trading 30 and then obviously 13 clean and ready to rumble in that market. Perfect. And $30,000,000 $13,000,000 All right. Well, hey, sorry for the difficulties earlier, but thanks for getting me back on. Thank you. Thank you. And there are no further questions at this time. Please continue. I'll go ahead, Magnus, wishes to ask a question again. Would you like to take it? Yes, of course. On the cleanup of the LR2. Yes. Hi, thanks. Just a follow-up question on the cleanup of that LR2. Can you just Tell me a little bit about the process and the length of time and when we were ready to clean use the process of getting it to clean or trade cleaner products. Well, there are different avenues. And obviously, In this case, we found an opportunity to actually wash the tanks and At a reasonable cost and have a voyage following voyage lined up already. But that's more luck That kind of skill, I must admit. But normally, the way you do it is you start kind of you need In order to trade properly at the clean ship, you need to have the last 3 cargoes kind of clean. So the first cleaning cargo could be condensate and then you might move into another product. And then finally, you're actually able To transport like a gas oil or a gas leaking even. And then by that, you basically clean up the vessel. That kind of experience means that you sometimes need to discount freight in order to get to that point. So basically, what we look at If there is a $750,000,000 to $1,000,000 spread between the two markets And we can line something up. We will basically start the process of cleaning a dirty LR2. Obviously, switching the other way, you can do instantly. But in this case, we actually decided to invest some money in doing the physical clean. And that meant that we could depending obviously on the charter and its requirement, we managed to within a relatively short time, in one way, actually manage become appropriately enough. So from the time you wash the tanks to carrying gasoline, what's the timing of that? I would in this case, it's probably approximately 25 to 30 days. So that 3 cargoes didn't apply because you washed the tanks or? No, yes. Yes. Otherwise, it's taken long. Yes. Thanks for that color. You're welcome. And there are no further questions now. Please continue. Okay. If that was all, thank you very much for listening in on a busy day kind of on reporting. And we will soldier on our Frontline. And hopefully, next quarter, we can report a completely different