Frontline plc Q1 2023 Earnings Call
Carl or whatever the expression.
Yeah.
We've had them seasonally strong first quarter of the year.
Russia still has an impact on the market or the sanctions on Russia.
in our kind of fleet modeling is that a ship that passes 17 and a half years will lose about 25% of its efficiency. And if you go beyond 20 years, you lose 50% of your efficiency.
I think kind of the key.
Part of the.
The action in Q1 was related to China.
Sure.
The strong Q1 has given us the ability to book quite strong numbers into Q2 as well as the frontline team relentlessly grind to create shareholder value.
So, so, so utilization wise, you know, or your ability to kind of service the oil market falls by 25 and 50 percent.
Before I give the word to inger.
Okay.
The numbers on slide three in the deck.
In the third quarter, sorry in the first quarter from <unk> $2500 per day on our VLCC fleet 60.
That's really interesting. Thank you. I'll turn it over.
Thank you for your question.
Thank you for your question. There are no further questions at the moment.
$64000 per day on our Suezmax fleet.
$56300 per day on the luxury stuff Aframax fleet.
But if you wish to ask a question, please press star 1 1 on your telephone.
And we are in fact back to somewhat reverted earnings relationship between our segments with the Suezmax is outperforming the vlccs.
There are no further questions. I will hand back the conference over to management for closing remarks, please. Well, thank you very much for dialing in. It's been a pleasure to report yet another good quarter. Hopefully, we'll continue to do that and look forward to what's to come.
Same for LR truths.
We have secured quite firm numbers as we progress into Q2 with 78% of our.
Yes.
$74000 per day.
71% of our Suezmax days booked at 65000 Boes per day, and 63% of our LR two aframax space at <unk>.
Thank you.
And that concludes the conference for today. Thank you for participating. You can all disconnect.
Very respectable respectable 65 seven.
$700 per day.
Again, all these numbers in the table on the load to discharge basis, and they will be affected by the amount of a ballast days, we end up having at the end of Q2 and mind you. This is.
Q2 <unk>.
Supposed to be the weak point in the market.
With that.
Given your deferred.
She will take you through the financial highlights.
Thanks, Josh and good morning.
And good afternoon, ladies and gentlemen.
And.
with effect in May to then suddenly start a additional cut in June is, you know, kind of, it looks a bit strange because you need this, and it's also at a low point in the demand cycle. So, I guess you need to have a little bit of patience when you do such a big move, you know, being an OPEC strategist. I think what's disturbing the situation is that Russia, although claiming to adhere to the voluntary cuts strategy, physically they are obviously not doing that. So, it's going to be an exciting one.
Turn to slide four.
And some highlights.
As already stated Q1 'twenty is the highest first quarter profit.
Anthony.
And Q1 is also the first interim financial information presented by the company.
Yes.
And following that temptation to address.
One important thing is that drydocking costs will be capitalized and subsequently.
Over the period to the next scheduled dry dockings.
Thank you to fine tune after five years.
Q1, 2003 and Drydocking costs.
It was <unk> six.
6 million.
That has been capitalized and three vessels with China.
In the quarter.
I would also mention that the company has revised the estimated useful life of assistance from 'twenty five 'twenty eight.
And that was effective from January 1st 2023.
And which resulted in an increase in depreciation expense of $12 7 million in Q3 compared to <unk>.
Q4 <unk>.
<unk>.
Yeah.
And Sam.
Turn to slide five.
Some balance sheet highlights.
The company has no remaining new building commitments and Q1.
For today.
As the company took delivery of the two lost <unk> from <unk>.
And some time in January 2023.
The company has strong liquidity.
$584 million in cash and cash equivalents.
Including them.
Amount of unsecured facility marketable securities and minimum cash requirements.
Then the company.
Lastly has a healthy leverage ratio of 52, 9%.
Yeah.
I would like to turn to.
Next slide.
And lastly, the cash flow potential of the company.
We estimate industry, leading cash break even.
<unk> 300 feet of it.
And that includes dry docking cost eight suezmax tankers in 2023.
Four of them is to be expected to be dry docked in the third quarter and four is expected to be charged off in the fourth quarter.
The Q1, 'twenty C average opex, excluding drydock bus $7200 per day.
The free cash flow indicates strong attendance in return for the company as you can see from the table on the right hand side.
This quick thing in this scenario, where we assume at least to see rates of $75000 per day.
With five year historic spread to seat for Suezmax and then our two tankers.
Annual free cash flow potential is about $1 $4 billion.
Or $6.29 per share.
Presenting a free cash flow yield of four 2%.
And with this I know the words, you are letting them and us.
Thank you very much senior.
So let's have.
A quick look.
We look back at Q1, 'twenty three tanker market.
So I already mentioned that therefore, some typically seasonally strong.
Normally in the Q1 will be we'll kind of get sober after the Q4 hype.
Markets to fairly quickly start to deteriorate.
Two to February .
What's happened this summer almost as we held the second peak in the market in March.
The whole segment from pharma credits.
We're performing very very strong.
If you look at the charts at the bottom left here.
Find how elevate the average rate market earnings are.
The reason for this is obviously that.
Not only VLCC Suezmax studies also from eczema that true.
Being very very strong if you compare it to the period that we like to look back.
The period from 2003 until 2009.
The most recent times.
We are actually.
Quite high up on the earnings side on the markets are performing very very well.
Chinese imports move to all time high for look at the shot to the bottom right.
We also saw the highest number of VLCC shipments.
China.
As already said restaurant functions continue to yield inefficient trading patterns.
More about China as the situation seems to have found some sort of plateau.
We did however have a very mild winter in the northern hemisphere, both in Q, <unk> Q4 and Q1.
Muted demand to some extent.
If we then move on to.
Slide eight per page.
And we did receive an OPEC cuts or voluntary cuts.
So volume's R&D down for me.
Talk about Pompe mouse.
So Russia continued to export with the current oil price and oil price scenario. We are in the <unk> seven cap is not an obstacle to Russian oil exports.
We see Russia pump real empathy.
This is quite interesting.
Now ahead of the OPEC meeting on June 4th.
Both OPEC plus.
<unk> were down.
But this is something we need to remember this is the seasonal slow point of the year with high refinery turnarounds.
Global oil demand is expected to rise by around 2 million barrels per day in second half of 'twenty than history.
And if we look at the whole picture the global exports overall R&D back to pre COVID-19 levels, but a little bit slow.
It's going to be very interesting to see what the U S. Brazil and West Africa are able to do post summer those are the three candidates too.
Our ability to export more volume as we proceed into winter.
Let's now move to slide nine.
Okay.
So vessel utilization is still high.
Volatile.
We'll see that on the bottom left hand side of this data is from signal Ocean, where they are basically a record every fixture some.
The various asset classes and measure the amount of days the vessels are laden.
And if we look at the chart at the bottom left if you look at the VLCC, we are quite elevated compared to historical patterns.
Have corrected down yes, it might.
A bit muted right now.
But.
The VLCC is probably still affected by the rally in Q1 on the mean, they're all labor just served a couple of weeks ago.
Look at the Suezmax as they choose are high relative to the previous years.
But again I'm corrected over the last couple of months.
<unk> are back to trend I would say, although higher in the trend.
I think the key takeaway from these three charts is to look at the overall direction of the utilization of the ton mile demand throughout the year. It's clearly that we are firstly at the low point in the cycle and secondly.
The direction towards the end of the year.
Well generally on history could be very interesting.
Yes.
Let's now move to slide 10.
Have a quick question on the order book.
And I'm not going to go through all this chart in detail.
I think they tell their own tail.
Clients incredible, but by the end of this year, we will have 111 vlccs still operating in the market.
Above 20 years of age.
That amounts to 12, 6% of the current trading fleet.
The order book stands at 16 associates to deliver and that's one point.
8% of the fleet.
If you look at the Suezmax is about 14% of the fleet will be above 10 tiers. As this year ends on the order book stands at 18, after having grown actually quite a bit in Q1 Q2.
That amounts to 3% of existing fields.
And that's true across the global fleet is only 415 vessels.
25 of those are over 20 years here, it's actually more relevant to look at 15, yes, but just to be.
Conifer Conservative, let's just look at the 20th.
That amounts to 6% of existing fleet. The order book, there is growing and as possible. So it currently stands at 12, 8% of the existing fleet.
If you look at overall for the segment that frontline are exposed to all the asset classes that we are engaged in.
About close to 12% of those fleets are above 20 years of age and the order book stands at four 6%.
It's very very difficult to see a scenario.
On the supply side.
That will kind of the tanker story.
At least until well into 2026.
And then finally to sum up.
So from fund.
Delivered the highest Q1 profit since 2890 3 million.
On a cash dividend of seven 2%.
We continue to capture value long term short term necessity.
Relevant point in the cycle.
There are new orders being seen for Suezmax and <unk> with.
For 2025 is now firmly sold out you can build in 2026th in China.
Korea, you probably need to look to 2807.
On VLCC only two orders are rumored ear to date, although more are being discussed.
And 12% of the tanker fleet that we are exposed to.
Going to be about 20 years by the end of this year.
The OPEC transactions have had limited impact so far in may.
It looks like it's counted.
And again, China will be the X factor as we grind through the summer months Hello.
Lastly, I'd like to explain a little bit on the chart below.
Just had a presentation for a group of students from Denmark.
Basically explaining the long term picture in oil tankers, and what you see the Blue line is oil demand, which tends to grow.
Population growth.
And on the right hand side.
The yellow graph is annual.
Fleet growth.
We get into 2025.
And although this is a bit of apples and pears.
It just doesn't add up.
And with that.
I would like to open up for questions.
Ladies and gentlemen, well now begin the question and answer session.
If you wish to ask a question. Please press star one on your telephone.
We are now taking the first question.
And the first question from Julien <unk> from Evercore.
Please go ahead your line is open.
Thank you good morning Lars.
Good afternoon.
First question is on strategy.
Some interesting developments since the end of the quarter with the sale of the vessel and the two time charters on the LR twos are you at the point in the cycle now where youre looking at harvesting some of the older tonnage, which may not be core I think theres 10 ships that are over.
Eight years old and then also are you at the point, where Youre looking to do more time charters, maybe on the LR twos and keep the bigger crude ships available for spot.
Okay.
Yes.
First of all when we look at the fleet.
With vessels that could be.
<unk> Patel.
Potential sales candidates.
We look at the efficiency primarily.
We are preparing for.
To a regulatory framework with Cri.
Etfs and whatnot. So so its basically with that in mind, we look at it and obviously the value of stuff are achievable.
As it's been so far.
On the time charter side, we've seen elevated values on the Aframax the special luxury.
And we're seeing a lot of kind of.
This action on the second hand Suezmax size.
So I think it's just natural but yes, we will kind of tap into the markets when we see value.
Values are basically able to with we call it internally.
When they can achieve unicorn numbers on certain asset classes for a sustained period of time, we basically just have to take it.
Average close to the average kind of average cash breakeven on Omar.
Aframax.
Hello <unk>.
Keep in mind when you can achieve 46.
At a half thousand dollars per day.
Against the cash breakeven of 16800.
It's basically it's something you can't pass on.
On the asset side, we're not you know.
Publicly offering all our vessels.
Rarely a good strategy.
The less efficient.
Therefore.
We will be prone to take advantage if the opportunity is there.
If I could just follow up on both of those topics with just kind of a more recent update there seems to be a lot more skittishness on the OPEC cut global recession oil prices weak et cetera, Although you know you've laid out a framework where the next two years should remain quite robust have you seen any slowdown in.
Transaction activity and the older vessels, which seem to be pretty parabolic over the last 12 months and at the same token have you seen any.
Slow down and the willingness for charters to lock in for that two to three year period.
I would lie if I didn't say, yes.
And as you know <unk> been in this industry for a long time, we we tend to be more focused on the big deals when the spot market is as strong rather than the opposite.
Now with the volatility we also have some weakness.
In in this segment and that's.
Basically it changes sentiment somewhat so so.
I can say.
I see this as a seller.
Ebb and flow a.
Short term.
Kind of event.
I don't foresee unless we end up in a situation where global oil demand falls out of bed.
I don't see that being sustainable. So so it's very typical for Q2 to be cloud on us.
Yes that makes complete sense. Thank you Lars.
Thank you.
Thank you for your question.
We are now taking the next question.
Yeah.
Please standby.
And the next question Jordan capsule Deutsche Bank. Please go ahead your line is open.
Hey, good morning, and good afternoon. This is Chris Robertson on premise. Thank you for taking our questions.
I just wanted to touch on the <unk> fleet for a moment.
How many of those are currently trading dirty.
At the frontline level, but also do you have a general sense, maybe across the fleet of how many.
Allergies are engaged in a dirty trade at the moment.
Well. Thank you Chris that's a very good question because the switch between clean and that has become increasingly effective over the last half year. So it's actually very difficult to follow.
Not obviously not on our own fleet.
Got comfortable.
With what happens kind of out there in the world.
Just to explain to you can turnaround authority a vessel into clean and the middle East fairly quickly.
Doing a couple of short trips with condensate.
At least up till now the market has been willing to pay a price a hefty premium for that stability. So basically motivating the.
The owners to do exactly that but at least on our.
One of the vessels that we still control that are not.
On time charter out so that would be <unk>.
Therefore.
Is that a trend.
Okay.
Got it.
Switching gears here just looking at shipyard capacity you mentioned the limitations.
The Chinese yards, maybe for 2025 delivery fee in 2026.
Do you have a sense of how much mothballed capacity could come back online over the next few years and is the limitation out there right now more of a labor issue or is it more of the.
<unk> themselves the real estate aspect of it.
I think we have seen.
New kids on the block that we've seen.
Called the mothballed, but yards in China with very very much reduced capacity there that are kind of getting a revitalized.
Uh huh.
We're linked to take orders this is always the risk exercise.
But if you're an owner.
Your classes yards, but there are a few I think it's difficult.
To quantify it but if you look at.
Some of these new kids.
You can't get a ship before.
25.
Or you're confident we added before 2006, and that's basically because it takes time to get these yards up and running I think on the labor side I don't it doesn't seem like China as much of a problem.
Jim.
In Japan and Korea.
Unitil.
A factor.
Also in Korea, what we see is that.
Although.
A tanker is fairly complicated ship.
Tend to focus on.
More labor intensive or more technical.
Technical technology.
<unk>.
Chip types. So so they are actually not really well, they're offering better and pricing themselves out of the question.
Hi.
2007, but with regards to kind of the overall potential.
Volume there, it's very difficult to gauge and there's not a potential volume until well it starting in 2026.
Okay, Yes, that's great color last question for me. This just relates to I guess your expectations around the OPEC meeting coming up here in a few days.
The Brent prices are trending well below $80, a barrel, which we kind of see as the threshold price some market commentary out there.
Around the speculators.
Oil pricing as you fear that there could be additional platform the table going into this meeting or how are you thinking about that.
Well I.
I can't really do much more than that I'm reading.
I think it will do you guys read.
I read in the press.
Must say Hello.
<unk>.
When you do a cubs with.
With effective may two them suddenly starts a additional cups.
June .
Is.
Kind of.
It looks a bit strange because you need this and it's also at a low point in the demand cycle. So so I guess you need to have a little bit of patients. When you do such a such a big move coming being an opex strategic.
I think what's disturbing this situation is that Russia, although claiming to her to the voluntary cups strategy.
Physically.
Obviously not doing that so so.
Yeah.
It's going to be an exciting one.
It's.
It's almost impossible to two two.
Yes.
Give a qualified the kind of guess what one has to do with I will say, though that any kind of demand increase since this is a voluntary cuts it's going to be reversed very quickly once demand kind of shows the Tom.
Yes, I think Thats fair it seems more like a compliance enforcement issue in the short term.
And then they can ramp back on over time as we said okay. Yes. Thank you very much for taking the question.
Thank you Chris.
Thank you for your question.
We are now taking the next question.
And the next question from Omar Knockdown from Jefferies. Please go ahead.
Thank you.
Hi, Good afternoon, just wanted to just check back on the new building discussion clearly I think that the.
Slide 11, there are simple chart with probably just says it all in terms of oil consumption growth in the fleet growth I remember Lars on the last call. You had mentioned I think it was the last one you had mentioned new buildings, but interesting.
Mine.
Just wanted to see kind of if you have an update there. Obviously you just highlighted in your comments about how we're looking at firmly into 'twenty six perhaps 27 to take delivery.
Just in terms of how youre seeing the opportunity to get into the new building market. I guess, one is that something youre, perhaps revisiting and then two how would you maybe compare the opportunity when it comes to maybe placing VLCC orders versus Suezmax is an LR twos.
Yes.
It's a good question.
Congrats flee they'll not regretfully I think the answer is the same.
Sure.
Three things that we need to consider when we look at the new building market.
Number one is.
It's obviously.
Technology, we're going to go for let's say you were looking for a conventional.
The delivery time until we can actually get the cash flow from from that investment and then lastly.
The price of oil.
The asset itself.
No.
Basically what we're seeing is.
I hear arguments.
Inflation has kind of yet to hit a set prices because if you look at if you look at asset prices adjusted for inflation.
Long dated.
A 2008 2009, VLCC equivalent would be $70 million today, so so but in order for that to be true in need.
And also to hit the rates and so forth and then we need like the long term time charter market to be to be far higher.
And what we see in confluence yourself in the last couple of quarters.
So I think kind of.
With that in mind. It just doesn't look very interesting to frontline I also note that some of the orders that we're seeing it's either against long term charter commitments.
Which is not something frontline, where they gave to our.
Our proposition to our shareholders is to give spot exposure.
Currently.
The ones that are not connected to a long term shorter.
At least to me is a somewhat opportunistic so basically you pay a 20 or 25% down payment on a call option for a market that could be.
Quite interesting insight 26, so we are not in that business either. So this is why we obviously will look at it we observe it.
We're not that Rhopressa bubble.
Yeah.
Okay makes sense. Thanks for that I guess as we think about that clearly you do need inflation in terms of the impact on charter rates to really introduce some ordering how do you then think about I mean, obviously frontline you guys have been very acquisitive over the years, but in general when you think about deploying capital.
Obviously, you have in our capital allocation policy of paying a meaningful dividend.
Or where maybe there is an opportunity or the value or whatnot.
New buildings clearly off the table.
How do you then think about whether doing stuff in the sale and purchase market that there are opportunities in the younger tonnage are there opportunity to taking the older tonnage where people have maybe ignored because of the.
Transmission here towards a greener future any kind of thoughts about.
Where there could be an opportunity to plug some assets on the cheap.
Whether it's age range or perhaps.
Vessel class.
Okay.
Yes.
And then kind of resource side.
We would be.
Kind of.
Studying closely.
Luxury.
Suezmax or VLCC, but is below five years.
But or after five or below.
If you look at the visibility on the offering in that.
Kind of proportional to market it is virtually zero.
So it's.
A lot of the modern Vlccs you can say that that have been delivered over the last few years are actually on time charters.
Uneven relapsed again to two top writers or traders or oil measures. So these guys are not really sales candidates.
So there is basically a vacuum for four vessels in that kind of age group that would be interesting to us.
So I think that's basically the answer.
With that in mind, we would rather sit tight.
Now the best return on rig count from the assets, we hold until we make kind of a.
And investment.
So yes, it makes sense to you already have that critical mass.
Maybe just one if I could.
Obviously very sensitive, but just wanted to check in and see since you're in the <unk>.
Since we haven't you are having this call in any public comments that youre, making you are willing to make.
Arms of the situation that your NAV.
With the shift in management and the board.
And then.
Also I know, it's probably more sensitive and not necessarily directly related to frontline, but any comments to make about the.
The back and forth.
International Seaways yesterday.
Yeah.
I understand the question.
It's not really for me to comment to the cloud and as Tom and observe it just like you are on both the earn out situation, while we're shareholders.
That's a basic as far as it go and international Seaways is the same.
I read what you read.
I have limited visibility.
Visibility.
Yes.
That's good enough. Thanks, Thanks, Lars figured I'd ask.
I'll turn it over.
Thank you.
Thank you for your question.
We are now taking the next question.
Okay.
And the next question from Chris Shaw from what their research. Please go ahead. Your line is open.
Hey, good afternoon, Lawrence how are you.
I'm good thank you and yourself.
Good good thanks.
Wanted to just ask Rick in your deck you highlighted.
Sanctions and glad to be inefficient trading patterns, which that's obviously been a tailwind for a lot of tanker owners do you believe these inefficiencies could be worked out or are they more structural in nature until the war is over until the sanctions are removed.
Well, what I'll say is I was contemplating adding up to this deck.
Hi, I wanted to.
Yes.
Further checking but but.
Basically.
Paul.
Whatever that's called.
Basically what I'm observing and what we are observing is that if you look at the Suezmax and Aframax fleet and you look at.
How many are calling on Russia.
To do that study for the last three months youll find that approximately 30% of that.
30% of the Suezmax fleet.
It's still at one point, calling on restaurants.
So this is kind of the interconnection between the grave fleet they should call it that on the wide fleets, if we use that word.
It's actually very very high so it means that.
They are obviously inefficiencies, but maybe not as pronounced as one would expect because it's not so.
We've lost 2% of the ships in the.
Non Russian trading market.
So so I think.
It is a bit more balanced picture.
It is true though is that.
A vessel of lesser quality.
Kind of outside of the age restrictions and so forth or may be operated by a company that.
How is it red flag atop spreads.
They will obviously not payable taxes, the compliant market but.
It seems like.
The Interconnectivity is it's actually quite sufficient.
As you would.
Expect in the tanker market.
This half actually some positives to it because it actually means that the.
Rick.
<unk>.
Is there room to call to risk whenever the situation reverses maybe the negative impact on the tomahawk won't be done.
Kind of a grave.
Thank you.
And maybe just one follow up on the arbitration I just wanted to ask if there are any notable milestones that we should be on the lookout for from now through June 2024.
No not at the moment.
Okay Fair enough I'll turn it over thank you guys.
Thank you.
Thank you for your question.
We are now taking the next question.
And the next question is from <unk> from BTG. Please go ahead. Your line is open.
Good afternoon, and thanks for taking my question.
First I wanted to do a quick follow up on an earlier question about the clean or Dirty LR twos.
How long does it take to switch and LR to back to the clean trade and what are the costs associated with doing so.
It's.
Obviously, it depends a bit on how you do it but.
If you do three very short condensate calls across a GSA.
Can be partially cleaned up within.
21 days.
And then you will just do a manual cleaning to get the remaining whatever is left.
I have a few more days so so so somewhere between say 25 days.
That's helpful. Thanks, and then.
And given the limited fleet growth you highlighted on slide 10.
If demand holds up could ships over 20 years see retrofits to extend their life or maybe slip into the Russian trade.
Or are there other factors that are going to push them to the scrap yard.
No.
I think your.
You're hitting the nail.
There.
Obviously in the more opaque.
Tanker markets there is a lot.
<unk>.
That's more or less past 20 years of age, but I have to say, though that what we've seen.
Over the last month or so is that certain.
Kind of in China, you have the Shandong Princess.
Hum.
The province, which is home to a lot of the independent refiners in China.
So it's a huge discharge port for all types of crude.
The fact that they have started to.
Clamped down on some of the older kind of less maintain vessels is actually a positive sign.
People are starting to have a proper look at this also if you you probably read about this umbrella I think it was called an aframax sitting outside Malaysia, Singapore.
It blew up.
I think this is kind of racing.
And then turn their attention from regulators on the risks in this market.
So.
Well approved.
And there are probably many.
And well maintained.
No reason why it shouldnt be extended.
But this again with the kind of covenant.
Come under scrutiny with with.
The vesting of the various.
Kind of.
Vetting departments.
In the short periods on the chartering side.
Basically assuming in our modeling is that ships are caucuses.
Yes.
17, and half years to lose about 25% of its efficiency and if you go beyond 20 years, you'll lose 50% of your efficiency.
So so utilization wise.
Or your ability to kind of service the oil market force by 25 and 50%.
That's really interesting. Thank you I'll turn it over.
Thank you for your question.
There are no further question at the moment.
But if you wish to ask a question. Please press star one on your telephone.
There are no further questions I'll hand back to the conference over to management for closing remarks. Please.
Thank you very much for.
For dialing in.
It's been a.
Sure to report yet another good quarter, hopefully, we will continue to do that.
Look forward to two weeks to come.
Thank you.