Q2 2021 Frontline Ltd Earnings Call
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Thank you all for standing by and welcome to you today for Q2, 2021 I'll throw.
One client Ltd earnings conference call.
The presentation for today will be followed by a question and answer session.
Last question.
Press Star one on your telephone keypad.
Advice call's being recorded and I would now like to hand, the call I'll be curious speaker.
It's a wash there thank you.
Thank you good morning.
Morning.
Good afternoon.
Welcome to Frontline's second quarter earnings call.
Different from the third quarter. This year second quarter ended up being quite a bit too well.
As many of you have asked quite a few times now with frontline try and explore exploit the weakness in this market.
Kit to grow further and I guess, we have answer that's now during Q2.
We are in some way at three legged shipping platform with VLCC suezmax in the luxurious our VLCC leg has been a bit shorter than the others now we are amending that somewhat.
Parts of the challenges in the market.
This quarter has been the continuous flare ups of COVID-19 infections in various locations around the world.
Explanation is confirmed in the western parts of the parts of the globe are not so fortunate.
We remain vigilant towards our seafarers wellbeing and are happy to share that our efforts to arrange.
So <unk> so that means going well in addition, I'd like to mention we are very grateful certain ports that are being extremely generous offering vaccines to see first literally for free.
So let's move on them.
So the highlights on slide three.
Q2, 'twenty one performance reflects the challenges the market pace this quarter.
It is however, a further proof that our business model efficient operations modern fleet.
On a very hardworking chartering team managed to outperform the key benchmarks.
To.
And perspective.
Average weighted earnings index checked recently, all tankers came in just over $6000 per day in Q2 'twenty one.
The lowest print and more than 20 years.
In order to outperform this the O&M and in particular.
Therefore, charterers must fight for every cent.
No they are positioned well to be able to play their hands that's possible.
Regretfully. This is not always the case as far as we can observe.
Anyway, our frontline, we do the hard work and managed to achieve 50.
$10000 per day on our VLCC fleet.
$11000 per day on our Suezmax fleet.
$10600 per day on our <unk> Slash Aframax fleet in the second quarter of this year.
So far in Q3, we have booked 70% of our VLCC.
<unk> at $14000 per day.
64% of our Suezmax space at $9800 per day.
63% of our LR twos upper.
My space at $11800 per day.
All numbers in this table are on the road.
Load to discharge basis.
Before <unk> takes you through the financial highlights let me quickly comment on the acquisitions in the quarter.
During Q2, we acquired through resale six latest generation equal type Vlccs currently under construction at Hyundai in Korea.
In addition, we acquired two modern eco <unk> Vlccs built in 2019 at.
At the same shipyard.
We have for a period of time, followed the VLCC asset market closely to look for opportunities as.
So we didn't expect an imminent recovery in tanker markets delivery was a key logging.
We're rallying steel prices and high activity around us for non tanker assets pushing potentially delivery slots way forward.
Two our conviction in making these investments.
I'll now take you through the financial highlights.
Thanks.
Good morning.
Good afternoon, ladies and gentlemen.
Following the acquisition of <unk>.
As Steve mentioned we.
Progress on the loan financing.
And in August.
So, yes, we obtained financing commitments subject to final documentation.
For the city.
Senior secured term loan facilities.
The total amount of debt.
$247 million and corporate finance.
In 2019.
Income tax.
All facilities.
Good finance.
65% the market Diana <unk> carry an interest rate plus a margin of 170 basis points.
And then have an amortization profile of 20 years constant delivery dates from the yard.
We intend to establish long term financing for the remaining.
Going forward, we say.
<unk> been through such a delivery of the vessels.
I think we shouldn't move too.
Slide four.
Sure.
And look at the income statement.
Yeah.
<unk> achieved a total.
Operating revenues that the voyage expenses of $18 million.
And adjusted EBITDA of 28 million in this quarter.
And we reported a net loss of $26.76 million or 13 cents per share and adjusted net loss of $23.2 million or 12 cents per share.
The adjustments.
This quarter consists of a $4.7 million loss on derivatives.
$7.8 million gain on marketable securities and a $1.3 million amortization of acquired time charters.
Lastly, centerpoint, they admit as share of losses of associated companies.
Adjusted net loss in the second quarter decreased 32 million compared with the first quarter.
And the decrease was driven.
By a decrease in time charter equivalent earnings due to the lower TCE rates us that Arthur mentioned.
An increase in ship operating expenses of $9.3 million mainly effort itself.
Hi, dry docking cost.
Offset by gain on marketable securities sold in the quarter of $4 million.
And at this time.
And we've got the balance sheet on slide five.
The total balance sheet Bruce have increase.
<unk> hundred $54 million in this quarter.
The balance sheet movements in the quarter are primarily related to taking delivery of the NFU tanker from future.
On the acquisition of <unk> contracts in addition to ordinary debt repayments and depreciation.
As of June.
<unk> Turkey.
<unk> has 257 million 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.
Six.
And we estimate average cash cost breakeven rates for the remainder of 2021.
Separately $21.800 per day for the disease.
$500 per day for the Suezmax tankers and four <unk>.
And some $400 per day for the <unk> tankers in.
In the fleet average estimate is about $18000 per day.
These rates are the all in daily rates that our vessels must earn to cover the budgeted operating costs and dry dock.
Estimated interest expenses QC and bareboat hire.
Here installments on loans and G&A expenses.
The highly attractive terms on the obtained financing commitments on four of the acquired <unk> disease, which I mentioned earlier decreases the daily cash breakeven rates with approximately 1400 per vessel per day compared to existing.
The financing terms of similar vessels.
Yep.
In the quarter, we recorded fixed expenses.
All of a $7600 per day for Vlccs $8500 per day for Suezmax.
And $9000 per day for Hitachi.
We do.
Do you Suezmax tankers in this quarter.
Poor and that your tankers.
And we expect it to drive up the one VLCC and two <unk> tankers in the third quarter and normally in the fourth quarter.
The graph on the right hand side of this slide shows that if we assume.
$1000 on top of the daily fleet average cash cost breakeven rate of $18000.
Frontline will generate the cash flow per share profit if service cost of $3.51 per year.
And the cash generation potential increased after the acquisition of the eight vlccs.
So at this time, even the virtue of it altogether.
Thank you Inger.
So let's.
Looking at slide seven on a recap.
The second quarter talking to market.
So global oil consumption averaged $6.7 million barrels per day in Q2 of up to.
4 million barrels a day from Q1.
Production averaged $94.9 million barrels per day.
Europe continued to draw about one point.
Thanks, Midland barrels from inventories.
Just to pick up in perspective, when you draw from inventory.
Inventories.
Really using enough restaurants.
And Thats the rule of thumb on tanker utilization you need about TV also see equivalents in order to transport 1 million barrel of oil per day.
So this kind of draw.
<unk> represents a.
Loss of 30 to 35 VLCC equivalents in the malls.
To calculate gradually slipped throughout the quarter and volatility.
OPEC plus did increase supply by more than 1 million barrels per day during Q2 'twenty one.
Key OPEC producers also went into.
Inbound periods typically in the middle East, where summary summer hits and you start to.
Basically burn oil or fuel for electricity generation.
You have some Brazil added another 900000 barrels per day.
Most of the Brazilian additions.
Came off this exports, but for U S. They're also seeing.
Very strong growth in demand, hence less barrels for exports to the U S. Gulf.
Demand growth sharply in North America, and greater Europe.
Asia led the recovery so far more mute to development in the second.
Quarter over the year as I illustrated in the two charts below where our basically isolated North America, Europe and Eurasia, we see that during Q2.
<unk> there rose sharply.
The rest of the world.
In particular Asia, and as I mentioned that led the recovery.
Towards 2021.
Performed kind of.
Performed less.
First half this year.
So let's move over to slide eight and look at the tanker order books.
The new.
Ordering has naturally been muted during the second quarter of 'twenty one.
We've observed that the delivery window footwear during a significant number of Vlccs four suezmax is now firmly into 'twenty before this obviously due to all the ordering activity for our asset classes.
Kind of outside of the tanker space.
The overall tanker order book for VLCC, Suezmax, and <unk> shrunk, 10% year to date.
The overall order book for tankers above 10000 deadweight tons stands at 8% of the existing fleet and this is in fact compare.
Trouble 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 million barrels per day.
Compare normalized market now is closer to 100, if not above.
So it means that the oil market is 30% larger now than in early 2000.
The order book is just.
Just about the same size.
The VLCC order book is now at <unk>.
One units give or take.
At the same time 124, vlccs will above the above or past 20 years in the same period.
For Suezmax.
At 41 units and 123 pulsing 20 years on the same metrics.
Let's move to slide nine 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.
<unk>.
Excluding whatever is on storage.
As you can see on on.
Second in 2020 and a red.
Tangle ahead.
And as you can see 2020 was a very noisy year for oil transportation.
Started off the year.
With the Saudi Russian price war, which distorted Q1, and Q2, where the massive production increase.
The transportation increase.
Then the COVID-19 pandemic hit and we have analyst toward demand shock that suddenly kind of took away a.
A lot of production and also then transportation needs.
In Q3, Q4, the transportation needs of diminished almost back to 2017 levels.
Floating storage did save.
Utilization at the time.
First half of 'twenty.
One.
The tanker market.
Well basically the volume has increased and transportation hub have grown.
<unk>.
We have been facing increased fleet supply by vessels released from storage and delivery of new builds.
Together with seeing deep inventory growth.
Yes.
Now where we are now this is obviously July and August for Q3.
To Q4 2019 levels.
OECD commercial inventories are now down to 2019 level and I believe or we believe that's a fair proxy for global inventories.
There is also another.
The thing to note when inventories are no longer draw transported oil come into play.
As an example of this.
We're currently estimating us to build a million barrels of oil per day for September but then.
Come October were supposed to grow half a million barrels per day from.
Tourists that gives you a delta of one 5 million barrels, which then needs to be transported.
That's the equivalent to the demand for $45 to 48 VLCC equivalents.
This gives you kind of a notion of how quickly Mr return.
Now, let's move to slide 10.
I'll focus a bit on this in our press release and our call at the VLCC fleet paradox. This.
It is almost the same four suezmax expedite.
I decided to point out this for the Vlccs.
We.
Speculate in what all the older generation of Vlccs are doing.
But it is undisputable that a 20 year old vessel will struggle.
It's a very limited number of charter's acceptance and this is purely an H.
With a challenging trading environment, we've had during.
During first half this year earnings achieved on non equal high consuming vessels have been zero or negative.
And mind you.
51 vessels are above 20 is as we speak.
Year to date eight Vlccs are reported sold for recycling.
Average recycling prices in Asia.
70% in the same period and is now close to $25.5 million for VLCC.
One of the typical exits for an older vessel in the tanker world is crude oil storage, while crude oil curves turn into Banco.
Backwardation in Q4 last year and I'm not at all supporting floating storage.
<unk>.
So far this year, we've seen three VLCC spot fixtures reported on the vessel that's either <unk> or.
And this is out of the 660 VLCC.
<unk> we recorded.
So again.
<unk>.
To highlight this because it is important and it is very important looking at the previous slide where we are in the cycle on oil being transported.
If it is so.
The effective tonnage actually hasnt grown over the last couple of years.
Then we're closer to balance than we might think well.
This is as I mentioned in the press release.
No.
So kind of in the sort of the picture to such an extent.
That is it.
Needs to be basically investments.
So let me sum up.
Slide 11.
Demand and the supply of oil continues to rise.
But we have to admit the delta type infections.
In particular in Asia.
We see asset prices remain firm.
Steel prices continue to rise.
And the activity is very good on the odds.
But for non tanker assets.
At the same time the tanker fleet continues.
The overall order book shrinks.
And the potential delivery window moves further out.
Should demand for tankers pickup.
OPEC plus plan to add about 400000 necessary up 400000 barrels per day each month.
Through the end of the year.
Mr Edmonds and totaled 2 million barrels per day of increased supply.
Go back to the math.
Four we then would need 60 to 65 VLCC equivalents by the end of the year.
Oil in transit continues to rise.
And the Big question Mark is obviously when do we reach the inflection points.
I would like to draw your attention to the chart up.
Below.
We're at the bottom of the slide.
I showed you this last quarter as well.
The Orange dots indicate this was where we were in March this year.
So we are basically with.
Gradually digging ourselves in.
From negative year on year growth in global oil trade into positive territory.
And since last frontline has increased disposition significantly we have secured attractive financing and are ready to capitalize as a.
Towards the expected recovery.
Thank you very much.
With that I'd like to open for questions.
Thank you, we'll now begin the question and answer session.
To ask a question.
One on your telephone keypad.
And wafer.
For your name to be announced the Council Euro V question, you were asking Ashkey once again star one if you have any questions.
Question is from the line of Brian <unk>.
<unk> from Jefferies. Your line is now open.
Okay.
Okay.
How are they around it.
Yeah.
Mr. <unk>. Your line is now open you may ask your question.
[noise].
Yeah.
Okay. Once again, if you have any questions. Please press star and one.
The question is from the line of magnetosphere from H S. Wainwright. Thank you.
Yeah, good afternoon and.
You're looking at the performance in the fleet in the third quarter, I mean compared to some of the peers.
It 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.
There isn't any other flavor you can give on the performance in the third quarter.
Hum.
Well, it's a good question. This is one of the things that would be obviously tried to analyze.
Well obviously.
When you compare to peers there is a an aspect.
Specht of fleet composition.
The age of your feet on the desk.
Does play a part but it doesn't account for all of the costs off the four months. It's also.
Kind of staying true to the fact that we are ship owners, we have assets we need to protect.
We need to.
One of the trials.
Cam to guests.
Our clients understand that.
And not just kind of given.
And it's also about the.
Our modern fleet. In addition to economics. It also gives us more opportunities to trade around your basic level.
Hardest machines.
So this is an important factor as well as you try to triangulate your vessels in order to achieve kind of a higher utilization and better it sounds.
I hope that's a good answer to your question.
Yeah, Yeah no. That's good thank you for that color and also I mean.
We're looking at.
We're staring into the Abyss your rates are very weak and the weakest part of the year.
You mentioned you know that the fleet may not be as high as you know.
If you adjust for the age compensation on the fleet, but do you have any visibility into the winter market.
Yeah I mean.
We're still in August I know, it's a little bit early but just curious.
Your outlook here for a recovery in the fourth quarter.
Well we.
The share of volatility of the freight market tells you that we know very little to be.
That's a bit.
On the other hand, where we fix close far ahead. So we actually do see the demand quite early on.
And in that perspective, what we see is that what.
We basically.
Now we're doing September dates in the middle East.
<unk>.
West Africa at Luke.
Quite good upstream volumes.
We've seen rates in Suezmax actually tried to edge up a little bit.
We're also fixing October early October dates out of U S Gulf.
Looks relatively bits in the beginning as well so.
Soon.
I won't kind of give you any guarantees that the picture looks like it's better than it did two weeks ago.
Okay well that's good just one last question then you know in the S&P market you know you've been active buying some resales.
Just curious if you see any opportunities in the secondhand market there wasn't.
I guess there was a non equal 2012 built vessel reported last week at a pretty big discount I don't know if that was just a one off transaction oriented 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 volume.
Values I think kind of the softest spot is kind of the middle aged generation in.
Particularly if it doesn't have a scrubber.
So because the older vessels like the really old loans that have been held up by this artificial demand from kind of undisclosed accounts that want to use the bathroom for.
So and then the modern vessels are obviously the ones.
Everyone wants to own up to go into a tightening regulatory framework and non face all sorts of efficiency.
Kind of.
Demands going forward.
And that keeps.
Well. This these vessels in the middle a little bit kind of out of fashion. So.
So.
Not too worried about that transaction.
Basically from what I see on.
You could.
You can argue that.
Modern vessel or resale or Newbuild is.
<unk> kind of correlated to prices themselves.
Eventually to the steel price.
As long as that is holding up.
I'm not too worried about it for the northern part of the Street.
Okay. Thank you very much for answering my questions.
Thank you.
Thank you. Our next question is from the line of Jon Chappell from Evercore.
Thank you good afternoon.
Hi.
Anchors. So you wind up $130 million for two of the six VLCC new build should we assume that you are looking for similar percent it's about by.
More around 70% financing so another $260 million to be taken down for the remaining four.
Yes, I havent been looking for that yes.
So we take that 390 plus the draw.
Draw down on the Hammond facility. So that's the majority of the payment on this I think that only like 70.
And cash outlay for the six Newbuild is that the type of financing in total you're looking for when you get the bank facilities for the remaining four ships would you have to pay that back to him and facility immediately.
We will.
And use hundreds of sanity.
Yeah.
For Mr financing at the moment and then we will continue.
Considering the way.
Further down the road.
Options.
Financing for the equity portion of these benefits.
Okay.
And then in addition to the Hammond facility expiring in May.
That's a 22, which obviously you've pushed that back several times and it's probably a safe bet and you could push it back further if you'd like are there any other big bullet payments amortization profiles coming up in the next let's call. It 12 to 18 months.
We kind of bridge to the recovery that Lars talked about.
No nothing.
2023.
Okay, great. So generally speaking we feel good about the liquidity profile, it's not just finalizing the data in the last four newbuild and kind of holding on until the market recovers that correct.
That is correct.
Alright, great well, that's all I had I think liquidity is important.
Getting you there and thanks for laying out afternoon here.
Thanks.
Yeah.
Thank you. Our next question is from Randy <unk> from Jefferies. Thank you.
How do you Lars and Inger can you hear me now.
Yeah.
Excellent I can hear you earlier you just can't hear me that's alright, Congrats obviously lars on the official promotion to CEO, so exciting time for that to.
Two questions clearly frontline has been pretty active in acquiring tonnage is this strategy to continue to grow the fleet that way or where you are now maybe look to.
Important OSM older assets.
Well sure.
Almost every time with fee income is difficult to kind of give you the playback playbook.
Kind of.
Here on the air.
If at all.
We.
So we obviously keep all options open.
So so I'm kind of dismiss it more kind of confirm it but we will always look at our fleet composition and we favor the more modern units. So so so that could be a part of our strategy going forward yes.
Okay, that's fair and.
And then looking at your quarter to date rates and 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.
Al.
The first question first so we havent done any time charters.
It's a very good question because you know short term time charters for your record of soft spots on the way.
None of those.
Okay.
Secondly.
On the allergy market, you're referring to yes, it's firming out in Asia.
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 hard to run threat had won back in April as well.
So it's let's say the jury is out what we have done in the meantime, it's actually.
One of our I allowed two so we are kind of the balance is more tilted towards the clean now.
With seven of the 20 vessels trading there too.
Obviously 13.
Clean and ready to Rumble.
That market.
Perfect.
In.
Alright, well, hey, sorry for the difficulties earlier, but thanks for getting me back on.
Well. Thank you. Thank you.
Yeah.
And there are no further questions at this time.
Yes.
Okay.
Yes.
13th I'll ask a question again would you like to take it.
Yes of course.
On the cleanup of yellow.
Okay.
Yeah, Hi, Thanks, just a follow up question on the cleanup of that LR to can.
Can you just tell.
Me, a little bit about the process and the length of time and when you'll be ready to clean.
Just the process of getting it to clear a trade cleaner products.
Well there there are different avenues.
And obviously.
In this case, we found an opportunity to actually.
The worst of times and.
I say reasonable costs hub voyage following voyage lined up already.
But that's more luck on that.
Kind of a skill I missed.
<unk>.
But normally the way you do it.
Yeah.
Stock comp that you need in order to train properly as a clean ship you need to have the last three cargoes.
One of the key so so the first the cleaning cargo could be condensate and then you might move into another product and then finally, you are actually able to two two.
Two.
What a like a gasoline.
Gasoline and gasoline even.
And then by that you're basically picking up the vessel, but that kind of experience means that sometimes need to discount freight in order to get to that point. So so basically what we look at is if there is a.
$752 million spread between the two markets and we can line something up we will basically start the process of cleaning.
<unk>.
Obviously switching the other way you can do instantly.
But in this case, we actually decided to invest some money in.
So doing the physical clean.
And that meant that we could.
Depending obviously on the short run this requirement.
222 within a relatively short time in one way or should we manage to be come out appropriately in muscle.
So from the time, you watched the tanks to carrying gasoline.
In the timing of that.
In this case, it's probably approximately 25 to 30 days.
So that three cargoes didnt apply.
Because he wasn't attacks or yep yep, okay, otherwise they wont kick in Rome.
Thanks for that color.
Hey, you're welcome.
And there are no further questions now.
Okay.
So thank you very much for listening in on a bit today are kind of on reporting.
And.
We will soldier all upfront.
Hopefully next quarter, we can report.
Police have different situations in the markets.
Okay.
That concludes our conference for today you may all disconnect. Thank you all for participating.
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