Q3 2024 Frontline PLC Earnings Call
Policy changes on Middle East and with the maximum pressure which uh Trump has been calling for, um, going forward, uh, this will be very interesting, uh, space to watch.
The order the growth has stopped and modern asset values remain firm.
On a small note on that, uh, with the order book now kind of moving into 2028. No shipyards or in any urgency of discounting tankers.
As they are
Or they continue to be busy, uh, uh, contracting.
Or getting interest or contracts on the container ships and all the rest of the.
And also some, some some fact at the end of the presentation.
oil trade is now serviced by the oldest fleet in more than 2 decades. You need to go back to 2002 to have an average tanker fleet of this age, which is somewhat surprising considering
Um, that firsts in trying to reduce emissions and to uh and and the tightening kind of scrutiny around the world where observed.
So with that, uh, I'll, um, open up for questions.
Thank you, sir. As a reminder to ask a question, please press one and one on your telephone and wait for your name to be announced to withdraw your question, please press one and one again. Once again, please press one and one on your telephone and wait for your name to be announced to withdraw your question, please press one and one again. Thank you.
We are not going to proceed with our first question.
The questions come from the line of Jonathan Chapel from Evercore. Please ask a question.
Thank you. Good afternoon.
Um, and I wanna start with you, uh, I know you've done a lot with the capital structure this year, um, refinancing paying down debt, etc. um, as the market becomes a bit more volatile, um, and maybe, you know, lower lows that people are concerned about. Maybe just the leverage by appearances looks still a little high. So has there been any thought about taking the strong market that we've had for the last couple of years, some of the strong asset values, and the, the fleet older fleet that you've sold and even though you don't have.
Any, um, you know, near term big debt maturities to be a little bit more proactive in deleveraging the balance sheet in this part of the cycle.
I, my, my thinking is that uh the loan to value that we have currently it's uh just below 50%.
Uh, and we don't really see any modern fleet will decrease in value. So we don't really see that this is the
High leverage that you probably are.
We, we are comfortable with that, uh, debt level.
OK, um, Lars, you touched on a couple times, narrative, geopolitics, watching what's gonna happen from here. Maybe we could just tease that out a little bit because sometimes the narrative, uh, kind of dominates the view of the market, um, I think there's probably 2, well, one thing that people are really focused on and, and one thing maybe a little bit less so, so, um, maybe a short answers to both, but if there were to be a resolution in Ukraine, but the sanctions and the pressure
were to be ratcheted up on Iran, what would be the puts and takes of those two things happening somewhat simultaneously.
Um, well, you know, if um,
So let, let's do the Russia, Ukraine first. Um, the sanctions that are imposed on Russia or, uh, I would argue somewhat flaky. So Europe is buying record amounts of gas from Russia.
Whilst they're having this price cap on, on oil and products. Uh, we're also, you know, just as a coincidence buying a record number of um of fertilizer from, uh from Russia as well.
So this kind of leads me to the thinking that any kind of long-term solution to the conflict or the from Russia and Ukraine. Uh, I think the, the sanctions may be reversed fairly quickly. The political cost of holding these sanctions in place, particularly now coming into or what's expected to be a cold winter in Europe.
could actually motivate politicians to to actually walk back on on these sanctions fairly quickly.
This would almost immediately put a lot of oil, which is locally belongs to Europe back into Europe.
And that would push a lot of the Atlantic Basin barrels to find another home, and that's more likely to be priced into Asia, incurring longer term loans.
If you're on top of that,
Do something about Russia.
Sorry, I, um, and he, he mentioned it numerous times that I ran or, or having, you know, very, very great success in in exporting huge amounts of oil, despite.
Uh, and if one is able to limit that, that oil also needs to be replaced.
And, and they're the likely replacement is from OPEC. It's quite surprising to me that OPEC are happy, uh, kind of cutting, uh, them up about they are watching Iran growing their exports.
And, and, uh, so if something happens there as well, this, this means that the Iranian flow needs to go in compliance on it. And, and uh that will, that will kind of give an exponential effect on our markets with regards to the Russian fleet, basically what's happened over the last couple of years is that the uh Russia is now more than closely self-sufficient on how much they required to 300 vessels, uh, you know, split, you know, kind of major or, or.
For the most part it's uh it's from Max and Max, meaning that they can keep it for their own volume, so you're not going to have this massive shift. Of course, some of these shifts are.
They're coming back to the compliance market, one sanctions are lifted, but we have to consider that the average age of this fleet, more than half of these vessels are north of 20 years old. And those, uh, we, we, we don't believe uh kind of compliance structures are gonna change of their age, uh, age restrictions yeah.
OK
That's very helpful. Thank you, Lars. Thanks singer.
Yeah.
We are not going to proceed with our next question.
the questions come from the land of Omar Octa from Jeffreys, please ask your question.
Thank you. Hi Lars, uh, and, uh, good afternoon. It's just a, yeah, a bit more kind of discussion uh from my end, on the, on the market itself and wanted to ask you, just in terms of how the VLCC market specifically how that's been developing, you know, it seems, and I think largely touched on this early in the presentation, you know, rates tend to be drifting at unexciting levels in a run up and charging activity takes rates higher, but then that activity kind of slows again and you're back to where we were and it just seems that rates are in this narrow range of call it, you know, for modern ship.
Um, as you know, Omar, that's a very difficult uh question to, to answer. I think kind of the fact that we are actually in fact raging, uh, is a sign that, uh, that the market balance is not that completely awful. It's basically we're just missing kind of those incremental barrels that, that we need to push the scale further.
Uh, I would say though that the market has to change characteristics a little bit. We have the Middle East, uh, or the Asian market as we call it, uh, which, um, you know, it's kind of.
You know,
The Asian interests in more than 80% of those cargoes, um, and the Asians again are, are friendly with each other, meaning that, that you don't really get pressure out of those negotiating. So basically, it's the Atlantic Basin that needs to price the market. This TV3C, which is the the benchmark index for, for Middle East to China, uh, have kind of, you know, it's like the Dow Jones for freight, but it has the least um kind of.
interest to, to use the term from mark. So, so, uh, you basically need that actbain to to to price because uh the mechanism then is that the vessels which will just shun it I mean it just go straight to you. It's called Brazil, uh, or West Africa.
Yeah, because, uh, that offer a better return. Um, and, and for that we'll basically lacked uh the, you know, the, the expansion in Tomout from the basin East. I mentioned that in my, in my presentation that that volume has been more or less flat.
So, so we need some dynamics to change here in order for that to occur. Um, uh, uh, you know, basically to force Atlantic basin barrels to, to not force them but the, but attract them to Asia to a great degree but we we have.
So, so I'd say, you know, if you ask me right now, it seems like we are in this range bound uh kind of.
Um, uh,
Well promotion, but, but, uh, again, the balances are still tight, you know, we're we're, we're actually making black black numbers uh on, on the pictures we make here. So it's, it's something absolute disaster.
But it's very difficult to put beyond.
This sophisticated per per day as you described.
Yeah
Yeah, thanks Lars. I appreciate that and it's so difficult uh definitely difficult question to answer and I maybe I'll throw another one at you. That's probably, you know, perhaps just as difficult or or or uh we'll see, but I guess maybe just in terms of, you know, 2025, um, and I talked before with John, uh, there's so much going on between the, you know, the Middle East conflict, Russia, Ukraine, the Red Sea, Iran, OPEC changes, there's just a lot of different variables. How, how in general would you see uh uh from your vantage point heading into.
2025, what do you think is the base case next year for VLCCs in terms of earnings potential. I know it's obviously very difficult to define but maybe just in relation to how 2024 is averaged, how would you say from your, from your perspective what 2025 will look like relative to this year.
Uh, you know, I, I was actually hoping that um you know, 2024 would be, uh, what we now probably have to wait until 2025 to see.
Um, it's um
You know, uh, kind of, we've completely underestimated to which extent uh this uh you know, the current state of the market can extend. Um, I think if somebody told me.
that we will have the 70% of the tax will be above that there. So, um, you know, 6, 7% of the world to the function system and so forth, and everybody would be happy to trading, uh, you know, I, I would say that and that's impossible. But uh it's not, uh, I think in part is that uh the, the incoming, um.
Uh, kind of the government in the US uh or arguing for a hard down on, uh, you know, the functioning, uh, I think it's, uh, it's obvious to to most, uh, what, uh, kind of these exports is financing. I think it should be also even at some point here obviously to I know that they should maybe focus on, uh, you know, what's going on, uh, in the, uh, unregulated shipping markets rather than talking.
About the conversation, uh, a return.
So, so, um, I'm very hopeful.
Uh, I'm also, you know, I, I think kind of.
We are, we are extending ourselves there, not, not by way of from we're, we're very happy. But the market itself is extending itself here. So any adverse events in this market, say, after the, you know, I also, you know, we discussed if something happens with Russia, Ukraine, that shifts the balances if something happens to Iran and they miss their ability to export, uh, you know, we're extremely sensitive to these changes, which obviously would, would, would put the
market in a, in a, all of a sudden, um, you know, in a, in a very, very, very strong position.
Yeah.
Yeah, I understood. Well, well, largely appreciate it. I'll, I'll turn it over.
Thank you.
We are not going to take our next question.
The questions come from the land of Sheriff and Magabi from BTIG. Please ask the question.
Hi, thanks for taking my questions, um, I hope I, I was hoping you could give a little bit more color on the sale and purchase markets, uh, it seems like asset values have softened slightly in the last month or two and I'm wondering, you know, is that due to more sellers coming to the market, maybe less appetite for vessels for the Dark fleet, any color would be helpful.
I think it's a combination of
Less appetite from the sanctioned trade I mentioned previously that Russia are are, you know, themselves, uh, more or less saturated, uh, in respect of the fleet and need in order to try the, their markets, the margins of, uh, I believe we mentioned a little bit in our Q2, uh, presentation of the margins in this, uh, market is under pressure. We're even seeing that the discounts on Iranian crude are getting smaller and smaller, meaning that there's less, uh, kind of for.
Right
So, so, so there is hope that these markets are getting saturated with the effect that, you know, the latter or the, the older parts of the pan fleet uh will lose that kind of bid and you'll have an adjustment in values. This is exactly why frontline has been so focused on selling address basically because we've seen that gap you could say or over performance um
Home asset values on the, the, the more older, uh, to, to, to be extremely risky. Um, so, so, um, so, but, but I think kind of.
From what we're seeing, it's not, it's not many weeks ago that we saw fairly good prices on modern secondhand vessels. Right now, the market is a little bit paralyzed. There's nobody really exchanging.
Um, kind of numbers more, uh, trading ships firm, but, but, uh, you know, we're, we're quite comfortable that uh for the modern part of this fleet, it hasn't actually grown at all, uh, for the last couple of years and, and, uh, and that's the downside is, is very limited, but, uh, but for the older part of the flat on the tail end of, of the curve. I think we'll need to kind of recycling paracetam is too.
Thanks, and then, um, regarding this phenomenon of, of uh larger tankers that are trading products.
You know, hearing some industry reports that
They're coming back into the dirty trade. Uh, my question is, what keeps them in the dirty trade once they switch back, uh, especially, you know, kind of.
You highlighted what what's going on with the great momentum, uh, heading into December.
Well, it's, um, you know, this is just pure mathematics or economics to build it that way. If you have the builders say, you know, when, when the, when the crude market is subdued and you have a, uh, a vessel and a cargo history that gives you the opportunity to within a reasonable cost to clean up. You will do that. But, uh, you know, none of these ships of the, on the crude tanker side are really designed to, to carry products. So it means that they can't do it for the next.
the period of time, but I think kind of the key motivation here is, is, um, is uh the economics and obviously now the clean market is not offering the the the economics to compete with crude um the basic that you, you, you rather than switch back uh um.
But I think what this has showed us that thiswo kind of in May June this year.
Is that the efficiency between asset classes has increased, uh, you know, we were ourselves surprised to see how quickly, uh, kind of, uh, these e-coms, uh, put the crude tankers into the clean trade, but that was obviously also due to the fact that the credit market was challenged at the time.
You know, so, so, so, uh, you know, this will
It's all, you know, kind of in a scenario, say if the key market suddenly raties now, you would get uh crew vessels to clean up, but in a case where both rallies, uh, you know, you won't have that kind of interconnectivity between the classes.
Yeah, that's very helpful. Thanks for taking my questions.
Thank you.
As a reminder to ask a question, please press the one and one on your telephone and wait for your name to be announced.
We are now going to proceed with our next question.
The questions come from the line of uh Devin Sanroy fromage Investment. Please ask a question.
Hi large. So I have a couple of questions. One on the China demand, which because I asked you last time, so there's been a massive shift and, and significant downgrade in the consumption pattern, uh, they do shift to LNG and to more cleaner, uh, EV.
How do you see that demand going back into 25 and how much difference does it make to overall bank of demand.
No, you, you're absolutely right. There is a particular on the heavy duty trucks. Uh, there's heavy subsidizing going on in China in order to, to, to, um, uh, kind of get that fleet with
Of the he was the 16 million vehicles or something to, to get them to, to go into, uh, you know, uh for East, let's call it the gas propulsion. It's, uh, it's LNG and LPG.
Uh, where, with, with staggering sales numbers where where 50% of new sales are actually, uh, you know, on alternative fuels.
Um, you know, that is being reported to have reduced diesel demand uh in China by somewhere between 50 and 700,000 barrels per day. This is out of 3.5 million barrels per day, uh, with, with kind of, you know, the, the current population of alternative fuel, um, uh, kind of heavy duty drugs.
Having said that, uh, you know, what we, uh, uh, we're actually at a very good position to having observed this, uh, kind of developments ourselves, particularly from, from Norway, because Norway has had the highest penetration of, or the highest news sales for TVs in the world, uh, for a long period of time there were more specialists sold in Norway than in the US.
And, uh, due to heavy subsidizing.
And basically surprisingly, uh, we've seen that, uh, you know, fuel demand has not fallen, uh, as expected.
Uh, which, uh, basically, you know, leads us more to the point that
It's more
Activity and consumer driven that actually the penetration, you know, even though you have 2 or 3 million alternative fuel trucks or, or maybe more 6 million, I guess.
So you, you, you you get to fairly soon in China.
Uh, you still have that existing fleet that is also driving and on increased economical activity, uh, this tends to drive longer, at least, or, or further. This is at least what we've experienced here, uh, on the EV side,
Uh, there's a huge population of cars in China. Uh, I think we are still some years away from, from that market getting to tipping points we're actually uh petrol demand, uh, you know, starts to, to, to decrease materially.
But I think kind of we have to expect that in most markets around the world except the US, uh, we are actually getting to stages where at least
Uh, you know, for personal cars, uh, the mom is not expected to grow, uh, materially, uh, and it's actually we've reached peak or a peak uh gasoline demand in, in many countries already.
Um, but kind of on that note, what we haven't seen peak demand is on petrochemicals.
So, uh, so if you look at the, the various agencies and how they report on petrochemicals, uh, there is a tremendous growth. So this means that, uh, you know, although transportation is a huge part of the demand picture. We're also seeing, uh, quite sustainable growth on demand coming from the pet cam markets. So, so, uh, I, I think kind of it's a little bit too early to, to call the doom to Omon uh basically due to a high numbers of sold EVs uh in
in Asia or in China.
The second question is on the OPEC. OPEC has kept on, uh, you know, pushing back the production increase, so.
What's your view going back, uh, in going to the 2025 year, how do you see the production, uh, will they focus on market share or they will they focus on uh uh pri ability.
That's uh 10 or the $20 in the internet, um.
You know, we, we read the same narrative as you, you do, you know, one month, uh, we, you know, it's said that the OPEC will, will look, uh, or particularly so how they will, will focus on market share rather than, than uh than absolute price.
Uh, and, you know, kind of a month after it's, uh, the narrative is completely the opposite. What, what surprises me is, is that.
You know, we, we are actually, uh, in this territory, um, for such a long period of time.
Uh, and, uh, and it's quite impressive to see OXO disciplines, uh, you know, as they see, uh, you know, normal production numbers increased to, to, I'm taking market share to to to this uh to this extent, um, so, uh, you know, it's, it's, it's logically for me, um, you know, I, I, I, I can't really understand why, why they're so disciplined, but, but, uh, but that's only, uh, you know, kind of how, how, how I see it, but
But I think kind of.
Uh, it, it's a very, it's a very difficult to understand what what's happening in the hallway of Vienna. Well, actually online now on Sunday, but, but, uh, you know, when, when they discuss these matters.
And how do you see the current season current quarter, which is typically a very strong we haven't seen that, but as we go in December and January, how do you see the season going forward.
Sorry, I missed that, uh, uh, seeing what the
We
How do you see that typically this quarter is the strongest quarter for the rates, but we haven't seen that. So have you see the rates going forth in December and January.
winter. Well, well, it's, uh, it's actually been noted by a couple of uh kind of market analysts that um maybe Q1 will be the new Q4. We've seen that on a couple of occasions that on the event of Q4 failing, Q1 must come back with a vengeance.
I, you know, it's, it's uh impossible to call. Uh, there are many factors, uh, that, that, um, is, um, uh, you know, affects this, uh, but, but I, I, I think kind of um, you know, I what's the point in, in, uh, our, our presentation here. I think this kind of maximum pressure to all on IAM is far more interesting coming into next year um the potential kind of seasonal slip where we're actually we, we, we see incremental.
on the coming in, in, uh, as we start to, to, to
Move into the new year. So I think kind of, I'm more excited about, uh, you know,
Political events coming into the new year, uh, or in the near term than, than, uh, then, uh, you know, whether if, if the seasons have have shifted, but it is a fact, you know, we have actually seen seasonal demand increased into, into Huon, um, you know, there's, uh, there is kind of increased degree of, of refoundry turnarounds basically putting more oil uh available for trade.
Uh, that's what makes you so, uh, confident about the Iran. Is it the change in the political scene in the US with the Trump administration coming in.
Uh
That Iran, uh, sanction will become much more tougher.
Audit something else.
No, no, so we're, we're, we're completely apolitical, but uh it, it is a fact that uh Iranium barrels are sanctioned by most of the countries in the Western world. Uh, the way they're able to, to evade this uh sanctions is by engaging in ships that are not uh kind of regulated by, by, uh, or adhering to any of the IMO, uh, kind of principles, so, uh, and, and I don't think, you know, or I hope that's not a long term uh.
uh situation.
So, so something has to give her at some point. Uh, you know, actually the most bullish scenario you can paint is that all sanctions are lifted, lifted them around, um, that, that would be a fantastic, um, scenario.
Thanks love.
All the best.
Thank you.
We have no further questions at this time. I'll hand back to you for closing remarks.
Well, thank you very much for, uh, for listening in. Um, and please don't forget, uh,
Let's say in 2004, we also thought it was a dreaming room, and then only a month after we were rallying for the sky.
So, um, you know, hopefully we'll, uh, uh, this market will develop a bit more excitingly than I expected uh for, for this quarter and, um, you know, I, um, have a good, uh, Christmas presentation.
Thank you.
This concludes today's conference call. Thank you all for participating. You may not disconnect your lines. Thank you.