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Presentation

Lars Barstad: Dear, all. Thank you for dialing in to Frontline’s First Quarter Earnings Call. The first quarter of 2024 was to a large degree, tainted by the security situation for the passage between the Red Sea and the Gulf of Yemen, sorry, the Gulf of Aden, in fact. There are still charters insisting and owners willing region ignoring the security for the seafarers, but we, Frontline, we simply don’t. The highlights of Q1 of 2024 was that all the Euronav vessels are now sailing under the Frontline flag. And as we progress into 2024, we will take the full advantage of having a fleet of 41 modern, low consuming VLCCs in addition to our efficient Suezmax and LR2 fleets. Utilization seems to be edging higher on all asset classes, but again, the LR2s are the ones to shine.

Before I give the word to Inger, please see the numbers on Slide 3 in the deck. So in the first quarter of 2024, Frontline achieved $41,100 per day on our VLCC fleet, $45,800 per day on our Suezmax fleet, and $54,300 per day on our LR2/Aframax fleet. LR2s have been yielding VLCC numbers in the quarter, as this segment have been affected the most by the disruptions in the Suez Canal passages. The Suezmax is actually called out for a reason. Hence, the change in flows has forced that effects to new trading patterns during the quarter. So far in the second quarter of 2024, 78% of our VLCC days are booked at $60,400 per day; 73% of our Suezmax days booked at $46,400 per day and 72% of our LR2/Aframax days at a very firm $64,700 per day. Again, all these numbers in the table are on a low to discharge basis, and they will be affected by the amount of balance days we end up having at the end of Q2.

I’ll now let Inger for financial highlights.

Inger Klemp: Thank you, Lars, and good morning and good afternoon, ladies and gentlemen. Let’s then turn to Slide 4 and look at the profit statement. In the first quarter, we report profit of $180.8 million or $0.81 per share, and we also report an adjusted profit of $137.9 million or $0.62 per share. Adjusted profit in this quarter increased by $35.8 million compared with the previous quarter, and that was primarily due to an increase in our TCE earnings. That was also again due to delivery of the 24 VLCCs from Euronav in the previous quarter and also in this quarter and also to higher TCE rates. Again, this is partially offset by an increase in ship operating expenses, depreciation and finance expense as a result of delivery of the 24 VLCCs from Euronav.

Let’s then look at some balance sheet highlights in Slide 5. The balance sheet movements this quarter are related to taking delivery of the remaining 13 of the 24 VLCCs acquired from Euronav last year. Frontline has a strong liquidity of $404 million in cash and cash equivalents, including the undrawn amounts of the senior unsecured revolving credit facility and also the marketable securities and minimum cash requirements to the bank as per March 31, 2024. We have no remaining newbuilding commitments and no meaningful debt maturities until 2027. If we then look at Slide 6, let’s move to that one. Following the delivery of all the 24 VLCCs that we acquired from Euronav and also the sale of the seven older vessels in the first and second quarter of 2024, our fleet consist of 41, VLCCs; 23, Suezmaxes; and 18, LR2 tankers.

The fleet has an average age of 5.9 years and consist of 99% ECO vessels, where 56% is scrubber fitted. We estimate average cash cost for the breakeven rates for the remainder of 2024 were approximately $31,200 per day for VLCCs, $23,500 per day for Suezmax tankers and $22,200 per day for LR2 tankers. And the fleet average estimate is about $27,100 per day. This is slightly up from the previous quarter as a result of the financings and refinancings done. The fleet average estimate includes dry dock of two Suezmax tankers and five VLCCs in 2024, where over two Suezmaxes and two VLCCs will be docked in the second quarter, one VLCC in the third quarter and two VLCCs in the fourth quarter. We recorded OpEx expenses, including dry dock in the first quarter of $8,100 per day for VLCCs, $8,800 per day for Suezmax tankers and $7,400 per day for LR2 tankers.

And this includes startup of two Suezmax tankers. The first quarter fleet average of OpEx excluding dry dock was $7,700. Then we can move to Slide 7. Frontline has about 30,000 earnings days annually, where about 28,000 are spot base. The cash generation and potential at current fleet and spot market earnings from Clarkson Research as on May 29, of $55,900 per day for VLCC and $50,000 per day for Suezmax tankers and $65,500 for LR2 tankers is $835 million a year or $3.75 per share. If you look at this slide to the right-hand side, you can see that 10% increase from the current spot market will increase the potential cash generation with about 19%. And with this, I leave the word to Lars again.

Lars Barstad: Thank you very much, Inger. Let’s move to Slide 8 and have a look at the current market narrative. We’re still in a situation where the situation between Israel and Hamas and [Technical Difficulty] between Israel and Iran. We are in an environment with growing political risk. We’re also seeing increased sanction evasion scrutiny from the U.S. and EU. And this causes kind of what I refer to formally as a grey fleet to move further into the [Technical Difficulty] environment, which is growing as we move forward. On the very positive side, the global oil demand is now estimated according to EIA to reach all-time high in June at 103.76 million barrels per day. I think we need to kind of recognize that, although we are in a transition mode into greener fuels and we’re part of the green transition, but as the overall energy demand globally is growing, oil and hydrocarbon plays a part and continues to grow.

What’s kind of very interesting in Q1 and following into Q2 has been that the period markets have really started to show some strength. On the chart on the right-hand side, we basically used the Clarksons Indices to [Technical Difficulty]. We’re looking now about VLCC a three-year time charter for ECO’s over VLCC is closing in on $55,000 per day. This puts the time charter market actually in almost like a contango where one-year, two-year and three-year time charters for VLCC, are actually that differently. Also, you should note that the LR2 and the Suezmax market is more or less priced equally. Another exciting kind of development is that the TMX pipeline is now kind of the expansion is coming into to the reality. And we’re starting to see or will start to learn how that oil will do.

We’re talking about 650,000 barrels per day when the expansion is finished into the Pacific Basin. And that will have an effect on basically utilization in that region. They basically report where the TMX pipeline comes out can only cater for Aframaxes. It cannot cater for [STS] operations and there is virtually no storage there. So we’ll see trading patterns where depending on where the oil is heading, where you’d either have Aframaxes taking down the cost to a suitable STS location or going into the U.S. refining system. And lastly, on that note, the Dangote refinery, which I know that the market has kind of speculated how that will affect. Not going forward. It’s a significant refinery starting up in Nigeria, finally after [Technical Difficulty].

It’s quite interesting to see that they are also then taking feedstock from U.S. Gulf, Which is not expected, sitting next door to Nigerian crude supply. The order books continue to grow. But as the order books grow, they delivered further interrupting time, and I’ll get back to that later. We see that on the chart at the bottom of this slide, you see that the VLCC, I’ve said it many times now, it seem to be in this kind of grind, positive grind, where the bottoms are higher for every cycle. We go [Technical Difficulty] that still seems to hold. The Suezmax, I mentioned it in the introduction, Suezmax and Suez Canal are connected. So Suezmax has seemed to be very range-bound around the $40,000 per mark and doesn’t really seem to have legs to go anywhere.

But the LR2 are the ones to shine. They are most affected by the disruptions in the Suez Canal passage, and we see the volatility is increasing. We’re also seeing examples and Frontline has participated in Suezmaxes cleaning up in order to kind of compete in [Technical Difficulty] particularly gasoline going from the Middle East Gulf to West part. So let’s move to Slide 9 and look at some of the kind of developments in flows. I have kind of talked about this earlier. OPEC is maintaining its cuts, which is predominantly located around the Middle East Gulf. Non-OPEC supply has been given kind of the opportunity to grow, and this growth continues. So on the top left-hand side, you can see ton miles generated from Americas oil exports. Americas is basically the whole continent included, and we see that continuing at a very, very kind of high level.

And we also see VLCC are starting to get favored, particularly so in May. And this basically is an indication that a lot of this volume is going long-haul. We also see that Europe continues to draw oil from a kind of longer distances, on the bottom left-hand chart. So the ton mile generation by Europe avoiding Russian crude is continuing. But I think lastly and very interestingly, we’re seeing that in a [better results] to the short it could be in Middle East, its [accelerating] towards course growth are much in larger in the [indiscernible]. Let’s move to Slide 10. The order books [indiscernible] to continue to grow. We’re now [Technical Difficulty] is ready to perform [Technical Difficulty]. So I think that this will grow. [Technical Difficulty] in the last couple of years have been coated tankers has now reached a level of 26.6% of the existing LR2 fleet.

But I think one has to take into the consideration here that as LR2s passed 15 years, they tend to turn into Aframaxes, and I think kind of to truly reflect the picture in the Aframax size class one should actually include the overall Aframax number, which would drastically reduce this percentage. But anyway, we continue to see this order books grow, but to a lesser and lesser degree in 2027 and actually now, we’re talking about 2028. And let’s move then to Slide 11. And I think if there is one slide that’s important in our quarterly presentation this time, it’s this one. And I have a look at the bottom left-hand chart. So from 2024 onwards, we are, in fact, hitting a wall of replacement needs. Based on tonnage that has to be phased out at the age between 20 or 25 years, depending on asset class, there is a monster of vessels that were deadweight tons that was built between 2004 and 2011, that basically come to age.

2011 was the absolute peak year of new building, and this is again all asset classes included. And at that point in time, we had 519 shipyards in the world. Now we have 247 shipyards in the world. So in the amount of shipyards globally, the number of yards has been reduced by 52%. [Yard capacity] tons capacity as some of these yards are bigger, the reduction is somewhat less being 40%. We’re seeing that in South Korea and in Japan, they’re struggling basically to be able to expand this – the existing yard capacity basically due to demographics, being able to attract workers and so forth. I’ve said it on a few presentations, in South Korea, we – they actually need to take in the workers from Philippines to get basically the capacity need.

In Japan, one is saying that the average age of a welder is 56 years. So this is a demographic challenge. It’s not that many kids in South Korea and Japan that really, really wants to work in a shipyard. China has potentially a lot of capacity. This is a structural supply story. In order to replace all this tonnage that needs to be replaced over the next 10 years, we have an issue. If you look at on the tanker replacement alone, we’re actually – if you put a long goggles, the big googles on, from now until [’30s] we need more than close to 400 VLCCs built, we need 300 Suezmaxes built, we need 187 LR2s built and close to 400 Aframaxes. So this is kind of massive and it’s a structural problem. So it’s not easily sold. And as all market intelligence agree on oil demand to continue to grow, although ton miles may contract short to medium term if Ukraine, Russia is resolved and if the Red Sea passage is opened up, One cannot escape the fact that shipping supply growth looks to be challenging.

With that, let’s move to Slide 12 and go through the summary. So again, the highlights of Q1 from Frontline is that we have a fully delivered VLCC fleet selling under the Frontline flag. We have completed the sale of [indiscernible] and it’s given Frontline one of the most fuel-efficient fleets in the market. We finalized and inked the expansion in financing, completing our strategy of releveraging the existing fleet. The security situation in Red Sea, Gulf of Aden and Middle East in general, remains. There is continued contraction in the tanker markets with building capacities coming into question as delivery dates now move into 2028. Short- and medium-term oil demand picture remains firm and we’re also kind of being alerted by the market that the OPEC+ [Technical Difficulty] second half of 2024.

There is increased liquidity in the period market with long-term time charter rates moving up, and this is in all fairness, the intelligent money coming into the market. So with that, I would like to open up for questions.

Operator: Thank you, sir. [Operator Instructions] The question comes from the line of Omar Nokta from Jefferies.

Omar Nokta: Thank you. Hi, Lars and Inger. Good afternoon. Thanks for the presentation. Always very detailed and informative across different elements of the story in the market. I guess a couple of questions from me. Maybe just first on the financing. As you just highlighted, you finalized and inked the expansion financing. You’ve unlocked a good amount of cash here recently. And it looks if I’m just telling the numbers, $417 million has been unlocked, and that’s going to basically repay the Hemen Holding borrowings of $395 million, which was used initially on Euronav deal. But what about the seven tankers, the seven older ships you just sold. Those unlocked $275 million after you paid down the debt. Is that cash? Is that earmarked for anything in particular? Or will these go into further debt reduction?

Inger Klemp: You have to remember that we used more to finance the Euronav [indiscernible] now they still spend $395 million that we drew under the Sterna facility and also the Hemen shareholder loan. We spent some cash from operation until we sold the vessels – the older vessel. So that’s the answer to your question.

Omar Nokta: Okay. Yes. So just as simple as that then. Okay. And I guess just more kind of sticking with Lars, you talked quite a bit about the market and the LR2s being the sector that’s shining and you also talked about TMX. How are you thinking about the LR2 fleet in the way it’s trading currently the – or how are you balancing, say that the LR2s between dirty and clean given the strength in the – outside the Suez market and then also with the potential pull into Vancouver?

Lars Barstad: Yes. No, it’s a good question. This is a time where we probably would have wanted to have some Aframaxes in our fleet to be quite honest, uncoated. But so basically, related your question with regards to LR2 shining. Now this is obviously related to the fact that, with the Suez Canal virtually closed, products from East to West, the [yards] work periodically, but West to East there is little [material] growing. You need to incentivize an owner to actually balance the ship going East, and that means that the rates actually have to go up. So the utilization of the LR2 fleet is simply increasing quite a lot, basically by this inefficiency. And also to the point where great efforts have been done in order to clean up Suezmaxes for this trade.

Suezmaxes can obviously clean. Suezmax can obviously not cater for all the cargoes. Basically gas, oil is probably as far as it goes. But this is basically what’s driving this market. Dangote, I don’t think, we’ve necessarily TMX. I don’t think we’ve seen that fully affecting the Aframax market. But at least as we can see now as with the markets developing or evolving, it looks like a lot of these barrels are actually going for rest. It’s the other side of the world. And so basically, what we see is trade emerging where Aframaxes will go up and down the coast, you have certain STS locations in – we have some in U.S., we have Mexico, and you have Ecuador. Ecuador, you also have tankage, and we see [this to be] we collect the oil from TMX on [Afras].

So increasing utilization in fact on Afras to some extent, but not necessarily to the extent as if the Aframaxes were going all the way west to China. And then STS activity and then put into VLCCs that takes it over to our clients there. So I think we still need to have a look at this trade for a few more months until we understand how it’s going to work. But you could say that the worst case scenario, which is obviously the best case scenario for a ship owner is that all this – you need to load an Aframax every day. So [Technical Difficulty] and if they need to travel for 40 days before the discharge, you have eight days until they’re back. It’s going to take a lot of vessels. But as far as we see it initially is that it doesn’t – you don’t use that amount of days because you’re basically just going down the coast to a possible STS location and then it’s a larger vessel.

And so far, it looks like going into VLCCs.

Omar Nokta: Okay. Thanks, Lars. That’s helpful. And just a final one for me, just kind of on the VLCC performance in the first quarter, the repositioning of the Euronav ships is obviously, there’s a big divergence between what your initial fleet earned and what those ships have done. Should we think about further repositioning dynamics in the second quarter? And then is 3Q really the first kind of true quarter of ongoing operations on the deal?

Lars Barstad: Yes. I think you have – there are a few points I want to make. Number one, is one has to remember that Euronav fleet has a lower scrubber penetration than the former – the existing Frontline fleet prior to the transaction. But that obviously affects the earnings you can get. Secondly, initially, all the vessels were delivered on basically all the vessels were delivered around Singapore. So we have chance of introduction trade that may be then yield what we would have wanted. It’s also a timing issue when this enter the market. We got them very concentrated in time. It meant that we hit basically a very narrow window in the Middle East, which just to top it was the weak spot in Q1. But anyway, I think you’re absolutely right.

As we move forward here, we’ll spread the fleet more evenly around the globe. And we will see that the Euronav vessels will just blend in. And we’re probably not going to comment on kind of distinguished between the two fleets going forward as you report. But also, you have a very good point, these ships have done long voyages. So it takes a bit of time before everything is kind of – we fully acclimatized or whatever the word is, into the total fleet. So Q2 will maybe, to some extent, be effective. The Q3, we should be running a normal show.

Omar Nokta: Okay. Very good.

Lars Barstad: But obviously, to a lesser degree in Q2 than Q1, obviously.

Omar Nokta: Okay. All right. So 2Q will be better and then 3Q is full on. Okay. Excellent. Thanks, Lars, thanks, Inger.

Operator: [Operator Instructions] The question comes from the line of Greg Lewis is from BTIG. Please ask your question.

Gregory Lewis: Hey. Thank you and good afternoon. And thanks for taking my questions. Lars, it looks like the depth of the time charter market is picking up. I mean, obviously, you’re taking advantage of that. As we look at the back half of the year and the outlook for rates and the spread between, I guess, the curve and spot market, I guess, kind of curious what you’re seeing and how you’re thinking about the opportunities to continue to put some vessels on some term charters.

Lars Barstad: We’re constantly [Technical Difficulty]. But I think keep in mind that our view is that we’re in for a longer one here. I hate saying it, because we used the expression stronger for longer back in 2020, and that was absolutely not right. But there, we were actually quite aggressively chasing charter coverage. But now we are watching it, and we want to kind of – it makes sense. We want to lean into the market, but we’re not going to kind of – we have like a rule of thumb in Frontline that we try to cover 30% of our largest exposure being revenues, interest rates and the bunkers. So that’s kind of the rule of thumb. We’re very close to that or fairly close to that on interest rate swaps, fantastic timing. On the bunker side, we’re a bit below.

On the revenue side, we have virtually apart from on the LR2s, we have virtually zero revenue kind of secured going forward. But we will lean into this, but we are absolutely not hurry because we believe this size gradually getting into here. And back to the – I mentioned this structural issue we have in the supply side and oil demand looking to be very, very resilient. It’s going to take us a little bit of time. So – but we want to actually – when or – well, it’s also when we get out of the circle. We want to have some proper coverage. But we are not aggressively pursuing this right now.

Gregory Lewis: Okay. Great. And then just – I did want to ask a little bit about – you had those asset sales, I guess, looking at the maybe, you have two more Suezmaxes that are in that 2010, 2011 range. Like we kind of agree with the outlook for the market where generally in previous cycles, older vessels have, have outperformed, the spread is converged for older vessels versus modern tonnage, and it’s typically made sense to own the older vessels in bull markets. And just kind of curious, I mean, I guess, since the Frontline acquisition was announced, we sold 16 vessels. And so I guess my question is, do you see this cycle playing out differently where there’s that much more discrimination against older vessels that maybe that spread that traditionally converges during these multiyear up cycles doesn’t play out the way it has historically has?

Lars Barstad: That’s a big question. I think kind of in our analysis and looking at this market, we – as I’ve said numerous times, to subscribe to this kind of notion about the events of the old economy. So the way this is going to play out is – which obviously it hasn’t yet, but oil prices and everything is going to kind of go – commodities being that we’re facing going forward. And with that, we’d rather have the most efficient tools. We are seeing some scrutiny preference from clients for more efficient tonnage. We cannot forget the regulatory framework we’re facing [Technical Difficulty] benefit kind of disappeared a little bit in the narrative over the last year, 1.5 years. There is still this thing about CII and there’s still this thing about kind of energy efficiency and so forth.

And we basically, we subscribe to that a lot, and that’s a part of our strategy. So I think kind of, it could be that looking back in two, three years’ time, that what you should have done is focus on 12 to 15-year-old vessels and where you get more bang for the buck. But we continue to kind of build long-term to [Technical Difficulty] it will be in the 20 to 30 years, and that’s basically the plan we’re aiming for.

Gregory Lewis: Okay. Super helpful. Thank you very much.

Lars Barstad: Thank you.

Operator: The question comes from the line of Petter Haugen from ABG Sundal Collier. Please ask your question.

Petter Haugen: Yes. Good afternoon, guys. Thank you for taking my question. Just on the final sentence in the summary here, Lars, you talk about the longer-term time charter markets. And I guess the question is part in two. Firstly, in terms of the requirements, is it the traders? Or is it sort of the fundamental cargo owners, which are asking for longer period? And the second part of the question, have we seen an interest for sort of five to seven years charters for new builds with 2027/2028 deliveries as of now?

Lars Barstad: Thank you, Petter. First one, absolutely, yes. Sorry, this is the oil majors, the guys who have transportation needs. So this is basically the big boys entry in the market, oil majors, national oil companies and so forth. Secondly, yes, there is interest for longer-term business in the market. So maybe not 10 years, but five to seven years, definitively and seven years charters, absolutely. So but this is kind of a little bit different market than – just to remind everybody, our proposition to our investors is to give you spot exposure. These kind of deals, we might – we’re very likely to pass on. We don’t have an order book either. So – but it is absolutely starting to merge market around its longer-term use as well.

Petter Haugen: And if I could just follow up on that. What sort of rates would you expect, let’s say that if you had a new build with 2027 delivery, what sort of rate would you expect to get for a five-year time charter deal from there?

Lars Barstad: That’s a big question. It’s a difficult question to answer actually. But it looks like the curve is pretty flat, and it’s [Technical Difficulty] what gives the owner a decent return on equity. So you’re talking somewhere around $50,000 per day regardless, how much of the deal we see that is but that doesn’t really give you – that – sorry, the $50,000 per day doesn’t really make – it makes some excited, but others maybe not. It’s the 2027 delivery, depending on when you ordered it, setting you back $110 million, $215 million, $220 million. So it’s a big number. But I think at least for now, that’s where these prices are.

Petter Haugen: Okay. Thank you. Just the final one from me in terms of dividends going forward here. I know that you have this discretionary policy, but this time you pay out everything, which I think is appreciated by well, most. How should we think about the payout ratio going forward here? And I’m thinking perhaps in particular in next quarter because, next quarter and potentially Q3 with a summer market, it could be, well, less, I suppose.

Lars Barstad: Yes. I think you should – kind of the rule of thumb, which is, again, not a policy is 80% of adjusted net income. And I think you – that’s what you should have in the back of your head. [Particularly] this, that’s what happens. But I think also why we chose to go for 100% this time is that we have good visibility. We are in a good kind of liquidity position. And our job is to give our shareholders the money we make. But obviously, depending on how the markets evolve forward, you can speculate whether if we want to do 100% again or if it’s going to be 80%. But I think it’s going to be linked to kind of the general market temperature. And this is what we’ve tried to do all along is kind of when the market corrects sharply downwards, we’re not going to drain the company’s cash.

But then again, if the market stays firm and maybe even improves, we have room to – unless we’re doing something structurally that – where we rather reinvest the cash on behalf of our shareholders [Technical Difficulty] you should be handsomely rewarded.

Petter Haugen: Thank you for that, Lars. That was all from me.

Operator: We have no further questions at this time. I will now hand back to you, Mr. Barstad for closing remarks. Thank you.

Lars Barstad: Thank you very much, and thank you all for listening in. These are exciting times still, although we’re still missing some of the volatility we wished for. But let’s just monitor how these markets develop. And thank you very much.