Earnings Call: Q4 2020

Feb 26, 2021

Good morning and good afternoon. Welcome to this Frontline's 4th Quarter and full year earnings call. It's been a very volatile year and black swans have become a common feature in our market update. The COVID-nineteen pandemic has affected our business on many levels, but most importantly, our seafarers have been safe and our organization have been spared serious human consequences. Tanker markets have been challenging, but the year as a whole has been solid business wise. And we recorded our best full year result in 2020 since 2000 8. Let's move to Slide 3 and have a look at the highlights. Frontline came into the Q4 of 2020 on a soft note, expecting some degree of normal seasonality to kick in as the Nordic Hemisphere usually stock up for winter. But this time around, the Q4 proved to be softer than Q3, actually for the first time in 10 years. On a low to discharge basis, we made $17,200 per day on our EOPS, dollars 9,800 per day on our Suezmaxes and $12,500 day on our LR2s. So far in the Q3, We have booked 78% of our available VLCC days at $22,600 68% our available Suezmax days at $17,800 65 percent of our toaffromised days at 12,200 Oils per day. I think it's safe to say our markets in Q4 were challenging, thing, but I will come to that later in this presentation. I'll now let Inge take you through Frontline's financial highlights. Thanks Lars. And good morning and good afternoon ladies and gentlemen. Let's turn to Slide 4 and the catty income statement. We achieved Total operating revenues, net awards expenses of $101,000,000 in the 4th quarter and adjusted EBITDA of $31,000,000 We report a net loss of 9 point $2,000,000 $0.05 per share and adjusted net loss of $20,000,000 or 0 point dollars per share in the 4th quarter. We had some adjustments in the 4th quarter, which Where the gain on the sale of Citi of $6,900,000 also a 2.5 gain on derivatives, a $1,900,000 unrealized gain on marketable securities, a 1.3 Income in the 4th quarter decreased from the 3rd quarter by $76,000,000 and that was primarily driven by a $75,000,000 decrease in our time earnings due to the lower reported TCE rates in the Q4, which Lars went through. Frontline reports a full year 2020 net income of $413,000,000 or 2 $0.09 per share and adjusted net income of $422,000,000 or 2 $0.13 per share. And this is the strongest year result since 2,008. Then Let's take a look at the balance sheet on Slide 5. At the end of December 31, 2020, Frontline has $413,000,000 in cash and cash equivalents, including the undrawn amounts under our senior unsecured loan facility, the marketable securities and minimum cash requirements. In November 2020, we entered into 2 term term loan facilities in a total amount of SEK 351,500,000 to refinance 2 existing term loan facilities, which matured in the Q2 of 2021, which had total balloon payments of SEK 324 €400,000 And we also entered into a loan facility in an amount of €233,700,000 to partially finance the CapEx requirements as of the FX requirements as of the end of 2020 of $142,400,000 for the 4 LR2 that we have under construction. Further, in February 2021, we extended the terms of our senior and secured Golden Credit Facility of up to $275,000,000 by 12 months to May 2022. 60,000,000 and of this extended facility has been recorded as long term debt as of December 31, 2020. 215,000,000 and remains available and undrawn under this facility. And following the concluded financing and financing. We have no material debt maturities until 2023 and the newbuilding program is fully funded. Then let's take a closer look at the cash breakeven rates and OpEx on Slide 6. We estimate average cash cost breakeven rates for 2021 of approximately 21,600 dollars per day for the VLCCs, dollars 17,800 per day for the Suezmax tankers and $15,600 per day for and our 2 tankers. And the fleet average estimate is about $18,200 per day. These rates are the all in daily rates that our vessels must to cover the budgeted operating costs and dry dock, the estimated interest expenses, T and C and bareboat hire, installments on loans and G and A We recorded OpEx expenses in the Q4 of 2020 of 7,000 dollars 800 per day for the VLCCs, dollars 9,700 per day for the Suezmax and $8,300 per day for the electric tankers. The OpEx expenses were impacted by drydocking of 4 Suezmax tankers and 1 electric tanker in the 4th quarter. We will drydock 1 Zoosbek tanker in the Q1 of 2021. In the graph on the right hand side of the slide, we have shown from January 1, 2021. As an example, with the fleet average cash cost per breakeven rate of $18,200 per day and assuming $30,000 on top of top, the average fleet TCE rate would be $48,102 per day. And Frontline would generate a cash flow per share after the service of $3.46 With this, I leave the So let's move on to Slide 7 and recap the 4th quarter tank market. So during Q4, oil inventories drew at a record pace to the tune of 2,600,000 barrels per day according to EIA. As oil demand continued rise to levels near 10,000,000 barrels above the Q2 levels. Oil prices continue to and further. And the structure of the oil market incentivized players to empty tax, both floating and on as the future price was increasingly lower than the prompt price, making it economical to hold stock. A significant number of tackers were employed in storage in the second half of last year, particularly outside China. And this inventory and in the spot business. Asia, and in particular, China, has been the key driver in the recovery so far. This supported the VLCC market for a while as they source their returning oil demand from the Atlantic Basin. In the latter part of last year, we saw China also draw on inventories, muting their demand for accrues. By December 2020, Chinese oil consumption reached all time high at 15,600,000 barrels according to the IRIA. Let's move to Slide 8 and look at the crude fleet and order The argument that ships older than 20 years struggle to trade in the conventional oil market is undisputed. Oil majors, traders and national oil companies all practice a hard of the 20 years. This means that we have a very limited amount of options once the vessel gone through the 20 A Class. And with freight rates at 0 to negative for non expect for this portion of the fleet for alternative use. The conversion market for FSOs and FSOs is not very hot at the moment. There is a limited demand for storage as all the curves are in steep accreditation. We also believe the upcoming regulatory changes with regards to GSG emissions will challenge to fleet going forward. This indicates a limited lifespan even for vessels of 17.5 years of age. Ordering activity is muted and does not match the current age profile of the fleet. We did see some orders towards the end of last year, and that has lifted the order slightly. 30% of the overall tanki fleet is about 15 years. And as the regulations on energy efficiency or the famous now EEXI kicks in in 2023. The potential for carbon tax regime and the potential for carbon tax regime kicks off. This whole portion of the fleet either need to invest heavily or retire. Let's move to Slide 9. We're going to talk about our clean product tankers. We normally don't mention our clean trading capabilities in these presentations, but we do have 18 modern LR2s and 4 more to come, which makes us a significant owner in this space. The reduction in jet fuel demand as travel got restricted in 2020 hit refinery margins Refinery margins in Europe and U. S. Have been under pressure for years. And due to bleak prospects, little investments have to permanently close or convert refineries to storage plants or in some few examples, biofuel plants. Asian, in general, and in particularly, Middle East and China, have over the last 3 years expanded refining capacity significantly. Modern refineries can process a wider range of crews more efficiently, and I could give you an entire presentation on the topic. But the key is that they outcompete local wineries in especially Europe, but also to some degree in the U. S. We can see on the slide here that the refining capacity that permanently closed. In Europe, it's to the tune of 500,000 barrels per day. In U. S, close to 700,000 barrels per There have been some closures in Asia of 705,000 barrels a day, but the new additions are 1,400,000 ounce per day. In nets, we see that or we expect the trade flows to be affected by this. As product demand normalizes post COVID-nineteen pandemic in Europe and U. S, we have to assume we return to some level normality over the coming years. Jet fuel and other products are far more likely to be sourced by Asia, and this will incur longer return miles. Our LR2s offer great economies of scale for the expected developments in the product trade flows. Let's move on to Slide 10 and discuss the market outlook as we see. I'm focusing on the short term drivers in this presentation, as that's probably the interesting part considering where the markets are. Saudi Arabia has signaled the reversal of their voluntary 1,000,000 barrels per day cut to come in April 2021. That comes in addition to wherever they read. Unusual cold weather in the Northern Hemisphere distorts usual demand patterns. Gas, LNG in Asia, unknown capabilities to sorry, the gas and LNG spike in Asia and the unknown capabilities to how oil for heating dynamics work as we haven't really seen oil for heating in 10 years creates a lot of uncertainty around how oil has been incremental oil has been consumed during this period. The spike in LNG prices implied oil prices at $2.60 per day, making great incentives to burn oil for heating. We episodes of our situation where skiing suddenly became popular in Madrid. And most recently in Texas, we've seen how the cold weather has affected production. Goldman Sachs estimated this production loss to be close to 700,000 barrels per day for February. Oil demand continues to recover despite extended lockdowns. Oil prices indicate tightening markets. The floating storage is no longer a significant factor weighing on the tanker market as we see it. And in April alone, oil supply is expected to increase by 3,000,000 according to EIA. So let's move to Slide 11 and sum all these things up. So the global tanker markets have corrected sharply during second half twenty twenty after significant retraction in world growth. All the leading commodity markets are pricing a strong recovery in 2021. And the global GDP is expected to grow by 5.5% during this Oil demand is recovering and to what pace is a little bit unknown. We all know that the The analyst agencies are slow to react, both on the downside when demand disappears, but also to the upside when demand is recovering. The global oil production is expected to increase by 5,300,000 barrels during 2021. When this recovery starts for increase is unknown, but we are very low in the cycle as the chart on the bottom right side indicates. OPEC plus is expected to ease cuts from Q2 2021 onwards. And with All the above, we believe Frontline is very well positioned for a recovery in tanker markets with our modern spot host. With that, I'd like to open up for questions from the Thank you. And our first question comes from the line John Chappell from Evercore. Please ask your question. Your line is open. Thank you. Good afternoon. Lars, as I was reading your press release and your presentation, it struck me that Frontline has a history of being nimble And acquisitive when others kind of can't. And now that you've been very prudent with your dividend, Inger has done a great job of pushing out the maturities. It seems like you're in a position of financial strength at a time when the market's really still kind of struggling. So how do you think about these next 6 months And Frontline's willingness and ability to acquire ships before there's The optimistic upturn starts maybe late in the year or early next year. Or do you sit back and wait to see the whites of the eyes on a recovery Before you get more aggressive. Well, it's a good question and it's an expected Edwan. I think I would like to emphasis on our capabilities and as you mentioned there. Whether if we sit back or whether if we're looking at something right now or whether if we'll do something in Q2 or later. I'm not going to comment on, to be quite honest. But the standard answer, I believe, is we're always looking. And our financial show, we're also ready to move when we see the opportunity. Okay. And then second question, more of an industry one, but one I've also been thinking about. I think scrapping is kind of important on the margin. It's not the most important part of recovery in this market that's going to be demand driven. But it seems like a lot of Companies have been talking about the new emission standards and the terrible market environment and older ships being discriminated against and why that's going to drive scrapping And you had a whole slide on that yourselves. It just seems like there hasn't been much in the form of scrapping in the last 12 months where rates were Pretty much as bad as they could be, at least the last 6 to 9 months. And now there's this kind of consensus optimism that OPEC starts producing again and the world's recovering and Everything is going to get better. So why would we see scrapping accelerate when the view is that things can only get better from here when there really wasn't much to be done at the absolute trough? Well, I must admit, and I think I mentioned or at least indicated in my presentation. The lack of scrapping in this market is a bit of a mystery to me. I think I pointed out for all economical reasons. And we should be scrapping a lot during this month or the last month, and we haven't seen that yet. I think scrapping will accelerate throughout the year. With regards to the challenging kind of or the somewhat hazy outlook with regards to regulatory changes and so forth. I think it's going to be a very important to our market going forward. But I wouldn't be I won't join like the doomsday predictors think that every vessel that's above 10 years needs to scrap and all that stuff. There's a lot to be done for the tankers to actually improve the GSG emissions with the existing kits. And but for sure, it will affect our market going forward. But I think it has to be a little bit kind of critical of all the various kind of analysts' predictions on the outlook for the and the outlook for the tank fleet. Yes. That makes sense. Okay. Thank you, Lars. Thank you. Our next question comes from the line of Chris Tang from Weber Research. Please ask your question. Your line is open. Good afternoon. How are you, Lard and Inger? Good afternoon. So I just want to start Kind of following up on what John was talking about regarding strong balance sheet and you guys pushed out your debt debt and Instead of asking about acquisitions and understanding the fleet, what about is there any appetite to kind of increase your operational level and possibly turning in charters at what could be the trough of this market and just the notion of what sort of relations are we working I'm so sorry, we can't really hear you too well. I'm sorry for that. No, can you hear is this better? Yes, this is Perk. Hi. So I guess I was just following up on what John was saying and commenting. I'm noticing that you guys have incredibly strong balance sheet. And you've done a great job pushing out the debt maturities at the 2023. And instead of just taking a look from this period from What about your appetite to increase your operational leverage, like terming in new charters of any sort of duration? Yes. So if I got you correctly, basically Our appetite to increase our operational leverage. The thing is that let me answer the question in a different manner. So we right now, we're really happy with the situation in because we have a fleet that's spot exposed to a very large degree. Apart from the 5 Suezmaxes. We have a long term time charter out. We are nearly 100% spot exposed. So basically, We are in a position where we want to reap the benefits. Whether if we want to increase kind of our ability to more money. I think that's potentially a few months out. And back to The previous comments, we are looking, but I can't really confirm anything. Yes. No, that's fair. And I guess if you're looking are you able to share sort of color if you're looking at These specific propulsion tags or maybe Sorry, I'm really struggling to hear you, but did you mention propulsion? Is this sorry, is this better? Yes, you're not breaking off. You're breaking off, yes. But whether if we are looking at the various propulsion type. Yes, we are. But we're not ready to invest on that yet. We think the jury is to some degree As I mentioned in our Q3 presentation, with our modern fleet, we're actually in a pretty good shape, at least when it comes to emissions towards 2,030. Obviously, for us to make an investment in propulsion. And with that, I mean retrofitting or ordering kind of ships with a different propulsion and the traditional one. We actually need to see it's a little bit like the scrubber discussion. Kind of We and others started to invest in scrubbers when it was obvious the economical case for it. On propulsion, It's not yet. We don't know well, we're pretty sure there will be a carbon tax. We don't know how much it's going We don't know how it's going to be applied. But so basically, the proposal discussion It's still something we have. I could easily say that both LPG and LNG and then eventually ammonia looks Probably the way to go, but or one of the ways to go. I think we'll end up in a situation where There are various propulsion types depending on what kind of trade you're doing. But I think it's very important to keep in mind That ship owners, we can't be paying for this ourselves. So it's basically the market needs to tell us what is willing to pay for. Yes, part of it. But I mean, I'm going to just try to reconnect And Our next question comes from the line of Randy Giveans from Jefferies. Please ask your question. Your line is open. Howdy, Lars and Inger. How are you? Howdy. That's fine. Very good. Good, good. All right. So just asking about the dividend. You bought that back last year, haven't paid a dividend now for the last two quarters. So if earnings return As expected, I guess, here in the coming quarters, is there a formula for the dividend to return? Or is it kind of fully discretionary? And if so, what will Rami, I think it's like we stated in the earnings release. It's we are in a way dedicated to return on dividends to our shareholders, where the Board is. But we will have to look at both Positive results. First, we had to have a positive result and then obviously also Look at the market expectations. So that's the same wording in a way as we have in our press release. Got it. And then as you operate in both the crude and the products tanker market, which of those or maybe which asset class, VLCC, Suezmax, LR2s, are you most bullish on here in the coming months? Well, I've been asked that a couple of times today actually. And so we are our company It's like a 4 cylinder engine, where we have the VLCCs, Suezmax. We have LR2s that are trading clean and dirty. So right recently, we've had at least some spark in the Suezmax cylinder. Not to any excitement at all, but at least recovering from negative returns. Right now, we have the Aframax space where there's some excitement due to weather and disruptions in the U. S. Gulf. I I'm unsure which segment will be hit the first, to be quite honest, when the recovery It starts to kind of come true. Potentially the VLCC market because eventually you need refinery runs to increase for products to flow. But The start of any return on volume will probably come from the Middle East, which would firstly benefit Got it. All right. That's fair. And then quickly here on asset values. How have those been impacted kind of in this current market weakness? However, there's also an optimistic outlook, right, for the back half of this year. So it seems like the share price rally has maybe outpaced the increases in asset values. Is that accurate? Or what are you seeing on that front? I agree with your analysis. I believe share price the share market is pricing the recovery a little bit further out. So obviously jumping over the security in the frontier. But we have seen a few transactions that kind of underpin the values, at least if you look at the 5 year old We're also about to get some price transparency, I believe, on resales and newbuilds. But I wouldn't say it's an upward movement, but I would say it's we're at least firmly up to What might be the floor? Sure. Good deal. Well, that's it for me. Thanks again. Thank you. Thank you. Thank you. Ladies and gentlemen, we have no further questions at this time. Please go ahead. We have no further questions at this time. Please continue. Okay. With that, I would like to thank you all for listening. We are excited for the time to come in tankers, and I wish you all a great weekend. Thank you.