Q2 2022 Frontline Ltd Earnings Call
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release and hold the mode.
After this speaker presentation there will be a question and an answer session. To ask a question you will need to press star 1 and 1 on your telephone. I would now like to end the conference over at the CEO , Lars Pärsta. Please go ahead, sir.
Thank you very much.
Good morning and good afternoon to everyone. Welcome to Frontline's second quarter earnings call.
As mentioned in our release, this is the quarter where the alert choose to extend this stage. The market tends to forget that close to a third of our vessel days come from this asset to the cost.
We started to see the displacement of Russian crude and products also affecting the SUSE maxes during the second quarter and finally the VLC-C got a pulse as the second quarter it came to an end.
Before we get to the Q2 financials and what lays ahead, let's have a look at the highlights on slide 3 in the deck.
So in the second quarter, Frontland achieved $16,400 per day on our real system.
$6,500 per day on our SUSMAX fleet and a very impressive $38,600 per day on our LR2-AFRA MAX fleet.
So far, in the first quarter of 2022, we have booked 73% of our VLCC days at $28,100 per day.
73% of our SUSMAX dates at a solid $45,000 per day, and 62% of our LR2 slash AFRA MAX dates at even more impressive $46,200 per day. All numbers in this table are on a low to discharge basis and may be affected by the amount of ballast days we end up having at the end of Q3.
This is more relevant to the VLCCs that normally tend to go on the longer voyages. It occasionally affects tooth masses and for less than degree LR2s.
With that, I'll now let Inir take you through the financial highlights.
Thanks, Josh, and good morning and good afternoon, ladies and gentlemen. Let's then turn to slide 5.
and look at the income statements.
This quarter, frontline achieved the total operating revenue of 159 million dollars.
I just did a data of $98 million.
We report net income of 47.1 million or 23 cents per share and adjusted net income of 42.5 million or 21 cents per share in this quarter.
On the right hand side of the slide, we show the adjustments made this quarter, which consists of a 8.9 million gain on derivative, a 6.1 million share results of associated companies.
1.3 million amortization of acquired time charters, 0.8 million gain on insurance claim, 12 million loss of marketable securities, and 0.4 million loss on termination of leases.
The adjusted net income in the second quarter increased 44.1 million compared with the first quarter.
And the increase in interest in net income was driven by an increase in our time chartered equivalent earnings due to the higher TCE rates in the quarter. But it was partly offset by an increase in ship operating expenses of 7.5 million, mainly as a result of higher dry docking costs and other movements in income and expenses.
Then let's take a look at the balance sheet.
On slide six.
Total balance sheet numbers have increased with 304 million in the second quarter compared to the first quarter.
The balance sheet movements in the quarter are primarily related to taking delivery of the two new buildings VFC Front Auta and Front Street.
together with the acquisition of urinal shares in exchange for frontline shares in addition to ordinary destiny payments and depreciation.
As for June , Tunde, Sunfline had 351 million in cash and cash equivalents, including undrawn amounts under our senior unsecured loan facility, marketable securities and minimum cash requirements.
Let's then take a close look at slide 7.
Keeping costs down has always been in frontline's DNA and core values of the frontline platform is keeping it simple and focused and maintain lean and efficient management teams.
This slide shows the frontline of
If form here?
on oopex, DNA and interest expense.
And this together with outperformance of pairs on revenues for at least two out of three segments this quarter explains the appearance of operational performance of frontline in the second quarter of 2022.
Then I think we should look at slide 8.
That is the cash break in the cash generation potential.
Slide.
We estimate average cash cost break even rates for the remainder of 2022. Of approximate date $24,900 per day for the V2C's.
$20,000 per day for the ZUSFAC tankers and $17,200 per day for the LRQ tankers.
This gives a fleet average estimate of about $20,700 per day.
The fleet average estimate includes drydock of six vessels in remainder of 2022 with an impact of about $530 per day.
Distribution of these six vessels is two VLCCs, one Swiss Max tanker and three LRQ tankers.
In the second quarter, we recorded effective expenses, including dry dock of $8,100 per day for the VCCs, $10,400 per day for the suicide tankers.
and $8,400 per day for the LRQ. Thank you.
And in the second quarter, we have drug-obs, six vessels.
four SEWS bank tankers, and two LIFU tankers.
The graph on the right hand side of this slide, this shows the free cash for auto share after debt service and free cash for yield basis current fleet and share price August 24 at alternative TCE rates.
Based on historic Clarkson TCE rates for non-Echo vessels in the period 2000 to 2021
Adjustable premiums on scrubber and equal basis.
Frontline has a free cash flow per share of $2.34.
and a free cash for yield of 20%.
Three cash for yield potential increases with high resume TCE rates and on a fully delivered basis.
With this I leave the floor to Lars-Hegel. Thank you Ingrid. So let's move on and have a look at slide 9.
And the recap, the second quarter.
I've basically made a title here called the P-bottle point for tankers. Q2 is normally a softish quarter, also referred to as a shoulder quarter. But as we see on the graph at the bottom left, something happened as we went into Q2 this year. So global oil demand came in 700,000 barrels per day lower in Q2 compared to Q1, averaging up to 98.4 million barrels.
Supply came in at 99.1 mB per day, up a model of 0.2 mB per day in a quarter.
It's basically the volatility we've seen in the market in Q2 and first and foremost on the LR2s is a TomMow story.
And we're currently reading the benefits of that story that started during the second quarter. We're seeing highly inefficient trading patterns developing and this to the benefit of oil in transit and utilization as we can see on the graph at the bottom right.
Towards the end of the second quarter, we saw all frontlines asset classes, including the VLCC, start to move up.
Asian and in particular Chinese demand was still subdued.
but current level of activity paints an interesting picture for future staff to come.
Let's move down to slide 10.
So global exports and what we're looking at here are two charts where basically it's the tracked output of oil and products split from basically every producing country in the world and every producing or products producing region in the world.
We've seen a dramatic change in demand and trading patterns for refined products developing during Q2 this year. I think people tend to forget and it's a bit overshadowed by the situation in Ukraine that most of the Western world has actually fully come out of the COVID-19 pandemic with the effects that have had on demand. And at the same time refining capacity, particularly in Europe and to some extent in the US.
was reduced quite dramatically during the pandemic, where these regions experienced horrific refining margins.
In addition to that, we've had the situation with the sanctions on Russia, making Russian oil and products more difficult to move. So basically, what we see is that global clean product exports are actually approaching the highest we've seen. And this takes us back to 2017. If we go further back, AIS tracking is not as efficient as it has been in this period. But we are reaching all time high on clean product exports. And globally.
Global crude oil exports.
It's improving, it's lagging though on the product side, but the appreciation in the global crude oil exports is primarily caused by US SPR releases and US production and their export capabilities growing. US production has increased by 1.4 million barrels to date according to EIA and as most of you would know, the US are releasing what's equivalent to almost a million barrels.
And the order book continues to dwindle, in particular on the crude side. There have been no orders for VLCCs or SUSMAXs in the last 12 months.
I have to correct myself there a little bit because I saw reports this morning that there were VLCCs ordered or a rumor to be ordered in Japan. But we'll get back to that. In order to get a significant change to this picture, we need far more.
Yeah.
On the VLCC side, we have seen 27 vessels delivered year-to-date, and there's still 21 to come. Some of those will obviously move into 23.
But the total order book is at 41 vessels. We have a fleet of 861 vessels, of which 81 during this year will be over 20 years old. Once this order book is finished delivered, 114 VLCCs will be above 20 years old.
On the SUSMAX, it's even more pronounced. We've seen 25 SUSMAXs delivered this year. There are eight more to come, six next year and two in 2024.
That's the 16th total in the order book.
And we have 65 SUSMAXs that will pass this 20-year threshold this year. And looking at the time the order book delivers, it's a total of 111 SUSMAXs that would effectively be disqualified from the commercial trading oil market. On the LR2s, we have in fact seen some orders placed this year. Broker reports vary, but we've landed on...
products, no, it's a more relevant yardstick. You have more than 70 LR2s built prior to 2008. So basically, when this order book has been delivered, this will come to age. So we're not really that alarmed about the development on 902's BRM Amos either.
I think if we look at the chart at the top left side here, and this has become quite repetitive over the quarterly presentations that we have. The blue line is the absolute dead weight, the size of the tanker or the book.
and the yellow one is the percentage of the fleet.
And as we can see in absolute dead weight, we're back to 2000, 2001 period. And we all know that the oil market is much larger now than it was in 2000. In a percentage of a fleet, it's even more pronounced, where we need to go back to 1996 and even before. I actually don't have history prior to 1996 on this, so it's difficult for me to gauge whether we are early 90s, mid 90s or in the 80s.
So this is an alarming development, I would say.
And we're starting to see the early signs of that tankers could become a bottleneck in the energy logistical chain.
I'd like to add though, for those of you not that familiar with freight and tankers, these apps…
Not every country in the world is blessed with oil. And there's also an asymmetrical relationship between population growth and oil resources. So this transportation need is actually real. So let's see how this develops.
That's the new order slide 12.
And I find this quite exciting. The time structure market has almost erupted over the last month. The time structure or the period market is an old school bellwether for large oil transport expectations. These are, as we referred to, the big guys, the Shells, the Equinors, the BPs, the Chevrons, the big boys in the game that have equity crude.
substantial transportation needs are in the market, all of them.
for up to three-year commitments on time chapters.
And to them, even for them, a three-year commitment is significant. We have seen earlier kind of in the reporting season even five-year shelters being concluded. And this is extremely interesting and extremely encouraging.
This is obviously in line with the spot, but it's not that often that you, after a relatively short period of firm spot markets,
see this kind of activity in the long term time chart market. So this basically means that our analysis might be in line with some of these guys' analysis.
Frontline will remain a spot focus owner with the objective to offer our investors spot market returns. However, a certain degree of secure revenue and margin plays a part of our long term vision. And as we have reported, we are actively looking at the top short come out kits for some of our asset customers.
Let's move over to slide 13.
We are, although it's been fairly quiet from frontline in this respect for the last couple of months, or actually not months, last month I would say, the frontline and urinal combination is on rails. We are moving forward. Basically the part of the process we are in now is led by legal and it's more a regulatory job towards the regulators.
and we're working towards a front-line relocation filing for the relocation of the front-line from Bermuda to Cyprus. That will be followed by a tender offer. We expect that to happen in Q4 this year.
There's always also been discussions around the various outcomes of this tender offer. I've left the achieving less than 50% acceptance out of this, but obviously if that should happen we don't believe it will. We think this is an industrial solution the market wants, but I just left that out. If we get above 75% acceptance amongst the year now shareholders, then we'll see what
we will go directly to a merger with you right now.
In the case end up between 50.1 and 75%.
the outcome is more or less the same.
Frontline gains control of Europe .
and a combination of the two complementary platforms will be created.
perform basically as one company, although you will now be theoretically a subsidiary of Frontline. So let's move to slide 14 and do a summary.
So Q222 was the shoulder quarter in terms of oil demand. And in fact, Q3 should have been the same. That's if you follow normal seasonal patterns.
This is currently a turmoil story, with sanctions on Russia being a capitalist.
But we may face a structural capitalist when it comes to products. I mentioned earlier in the presentation the dislocation between refining capacity and the month.
Thank you.
Global crude oil exports are approaching pre-COVID levels and oil in transit is already there.
For the books continue to dwindle and there currently no incentive present to invest.
in new capacity just yet.
Also, there is a question of when this capacity can be ready to the market. Should the ordering start now?
The other question then is are we starting to feel the structural bottlenecks of oil transportation that may come?
Frontline has a modern efficient spot to expose fleet and the stars are looking to align.
And I might add, winter is coming.
I'd like to draw your attention to the chart at the bottom, which is different from the last three quarters. And it's basically a seasonal chart of the average weighted earnings of all tankers. It's not frontline tankers, it's all the tankers, basically all the tanker indices. As you might notice, it's a very unseasonal pattern evolving. And with that, I'll open up for questions.
Ladies and gentlemen, we now begin the question and answer session.
If you wish to ask a question, please press star 1 and 1 on your telephone.
We are going now to take our first question.
question.
Please standby the first question from Junato Chapel from EverCrazy. Please go ahead.
Thank you good afternoon. 2 quick questions on capital allocation. 1st of all, it's good to see the dividend renewed for the 1st time. If we do the math. Looks like maybe a 70% payout ratio. It's just been so long. Just wanted to get confirmation on. A rough range, and then the 2nd, part of that question is, as we're going through the final steps. Of consummating the year and have transactions, are there any restrictions on the amount of dividends or any other corporate actions you can take?
until that process is finalized. First of all, Inger just handed me a note here. I believe it's 79%. Yeah, yeah, yeah because the we need to calculate the dividend basis here 222.6 million shares.
And then you will come to that it's 79%.
Give yourself both.
I'm about the right
Go ahead.
Yeah, I'm back to your other question.
Combination agreement was made public in July and the exchange ratio is set. It's within that exchange ratio that the dividend is being paid. But for future dividends it needs to be basically adjusted either via the exchange ratio, which is very unlikely, and then via the amount of shareholders that Frontpoint will have.
post measure.
post-measure.
Okay.
My second question for you Lars is you mentioned in the presentation that you haven't really seen China come back to the market yet it feels like Russia is still pretty reliant on I'm sorry Europe still pretty reliant on Russian crude and the sanctions clearly haven't gone into effect yet is it any is there any way to quantify or even qualify what's driven this VLCC spike before you really seen the impact of these two potential big catalysts in the market?
Well first I'd like to say that the European and US sanctions on Russian crude has not affected the Russian flows per se, but it's altered the trading pattern. So basically what we see right now is that Russian crude oil and Russian products is selling past Europe and to Asia. And at the same time Europe has had to change their purchase patterns and are importing to a much larger degree.
feedstock and products from Middle East, West Africa and the US. So this is what created this highly inefficient trading pattern. So the sanctions have stopped Russian crude to enter Europe just as far as we see it. With regards to the VLTC, that's a very kind of a recent development. I think it's more related to the US production and the US
crude oil has then priced itself to go far east basically by the share
price itself to go far east basically by the share volume being offered. So that I think is the game changer here. I also think, not to be too technical, in a very steep, equidistant market it's quite expensive to hold large volumes of crude oil over a long voyage. It's basically unhedgable, but obviously with a flat structure in the crude oil market.
You know, it's easy to hedge your exposure over the 60 days you need in order to transport crude from say, US golf to to China. Okay, that's all very helpful. Thank you. Thank finger.
Thank you for your question.
we are now taking our next question
The next question for Chris Strong from Web Research.
Hi, good afternoon. How are you?
Thank you, we're good. We're good now. Good, good, thanks. Just to follow up on that last question, so are you saying that you'll continue, we'll continue to see VLCC's lead sewage masses for the near term?
Is that right?
Basically what we're seeing is that at least we'll see when these large trade lanes open up as we've seen US calls to Asia or to North Asia.
You utilize the vessels for a very long period of time, so it takes away capacity for a long time. So we also see the activity continue. But when we fix the velocities now, we fix them for late September lake ends. So basically the oil will be lifted in September and delivered to China sometime in late October or in November . This we see continue. As October dates are already being addressed.
or maybe even firming.
Thanks for that color. That was really helpful. Just talking to your fleet mix, I know in the presentation you guys are not looking at new capacity just yet, but with the four V's delivering into early next year and the potential merger with your net fleet, which is heavily V-weighted, I just wanted to understand is there a desire to rebalance your fleet mix or how should we think about that?
You're absolutely correct. It is to rebalance our fleet mix. Historically, Frontline has been a predominantly VLC company, secondary having SUSE Maxis, and the LR2 addition to our fleet is actually, in the long term, fairly new. We do see them obviously as very efficient trading vehicles. I think this quarter tells the story of that.
But no, it's the simple analysis which we've repeated a few times, but I'm happy to repeat it again. If you look at the average cash break-even from Plan H per vessel cost, you also then think of the economies of scale in oil transportation. You'll find that the lid on or the kind of where the VLCC peaks.
is so much higher than, for instance, for the VLCC, than an ISU SMAC or compared to an LR2. So it means that you get, to put it very bluntly, more bang for the buck owning VLCC in a good market. And this has basically been front line philosophy all along. We're also quite good at running VLCCs, have a good client base in that segment. So this has basically been where the bread and butter over the years have been.
You're right, we do have some more professional fees, expenses related to professional fees and legal costs in this quarter that are usually related to this merger.
Okay, so it wouldn't be like the run rate going forward. It's just slightly elevated this quarter and maybe into next. Sorry, I didn't catch your question. Okay, I was just saying that this shouldn't be looked as a new run rate for admin expenses and it's just this quarter and next. It's just going to be slightly elevated.
Well, I mean, as long as we are in the process of, let's say, combining the companies, I guess you could assume that we will also have higher professional fees and legal expenses in the next quarters to come.
Right. Yeah. No, makes sense. Thank you, Ingrid. Thank you, Lars.
Thank you.
Thank you for your question.
We are now taking our next question.
Please stand by.
The next question is from Omar Nota from Jeff.
Hi there. Hey guys, I have a couple of questions for you just on the Euronev transaction. Obviously in the second quarter you did a few share deals that took your stake up to around 20% in the Euronev. Is there anything that prohibits you from doing more assuming the opportunity exists to take your position higher ahead of the tender offer? In the short term
It is, in fact. And these two transactions, you can call them, were bilateral, and they were driven by incoming, to put it that way. There is a regulatory mechanism called the queasing tender offer. If you continue to do this.
at least the US legislators will kind of arrest you. Not like physically, but you know, you will, you know, they don't deem it the correct way of going about it. So that's why we kind of stopped there. Also, there are limitations to, you know, when you become a related party and so forth. That's not necessarily the case.
big issue for us as we are very much related through the combination agreement already. But you know, there is no kind of big incentive for us to continue that path.
Or it isn't at all. We'll continue to do more of those transactions.
Yeah, got it. Now that makes sense. I appreciate that. And I guess this is maybe sensitive, so I understand if you're not able to respond, but are you having any discussions with the UNF shareholder that has been vocal in his opposition to the deal, you know, maybe reaching an applicable solution or does it just simply come down to, you know, how the tender offer comes about later in the year.
In the end, it comes down to how the tender offer, what happens when we count the shares at the end of the tender offer.
Thank you.
Understood. Okay. Well, thanks, Lars.
Thank you.
Thank you for your question.
As a reminder, if you wish to ask a question, please press star 1 and 1 on your telephone.
There are no further questions at the moment I will hand back the conference for closing remarks.
Okay, thank you very much for calling in. Again, these are exciting times. We're quite excited both by the market developments and our ambitions with regards to the combination of the euro now.
So with that, I thank you and have a good day.
Thank you for watching.
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