Q2 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to todays second quarter 2019, Frontline Limited earnings conference call.
At this time, all participants are in listen only mode.
That will be a presentation, followed by a question and answer session.
At which time, if you wish to ask a question you will need to Prescott and one on your telephone keypad and wait for wanting to be announced I must advise you that this conference is being recorded today on the 27th of focus 2019.
I would now like to hand, the conference conference over to your first speaker today Robert Macleod. Please go ahead. Please go ahead Sir.
Thank you very much and good morning, and good afternoon, everyone.
Thank you very much for dialing in to what is front launch second quarter earnings call.
There are very exciting market dynamics in play now aftermarket looks to look set to improve further from the recent recovery.
Last week, we announced the purchase of 10, Suezmaxes and we hold options for further fall.
We view this at a time, we believe this ideal more on that very shortly.
This call will conclude by taking questions.
Let's get started and look at the company highlights for the quarter.
Net income was $1.1 million.
Adjusted for non cash items, we made $4.2 million in the quarter.
For the deal to cease to spot TC was 25600.
Q3 bookings so 83% of the days booked at 28.
This number will likely decrease.
As stated in the press release due to accounting treatments of voyage charters.
Suezmaxes came in at $16200 and 70% of Q3 is done at 18000 straight.
On the Aframaxes or low twos low 18, thousands in Q2 and similar guiding for 68% of Q3.
We recently obtained financing commitment at very attractive terms on our 2020 suezmax delivery in may.
And we have been continuously able to secure attractive financing.
Let's look at the right side of the slide on the Trafigura Suezmax deal.
As I will discuss later, we have a very constructive view on the markets and we believe you are right. The steps of the market upside that could be the start of a strong tanker cycle.
This view gave us a conviction to acquire and too fast and 19 built suezmaxes all of which are facing with scrubbers from trafigura.
Five vessels will be chartered back to Trafigura for free is at 28400 with a profit sharing scheme, where we will receive 50% of all profits.
We find this to be a very attractive elements of the deal and it also protects our downside.
Importantly, we don't have to wait for the acquisition to close to get access to the vessel earnings we will take the ships on time charter within the next few weeks or months.
Five vessels will immediately be time chartered to trafigura.
We are very pleased with trafigura, becoming a strategic shareholder of front line and we see potential synergies going forward given the significant presence in the Gogo oil trading markets.
We've also which is independently from this deal formed a joint venture with Trafigura to establish a global supplier of marine fuels.
We believe we are exceptionally well positioned ahead of IMO 2020 through this joint venture and other steps already taken by the company, including our investment in scrubber manufacturer SMS line.
Hi, My 2020 looks to us to be the biggest events in the shipping market and the tanker trade for decades, and we believe it will play out very positively for our shareholders.
With that I'll hand, the call over chewing to take us through the financials in detail. Please.
Thanks, Alex.
Thanks, and good afternoon, ladies and gentlemen.
Let's turn to slide four and five.
And look at the financial highlights and the income statement.
Total operating revenues net of voyage expenses.
On the $19 million.
And EBITDA adjusted for certain non cash items of 56 million in the second quarter.
Reported net income of 1.8 million equivalent to one cents per share and then I think adjusted for certain non cash items of 4.2 million equivalent to two cents per share in the second quarter.
The non cash items. This quarter consisted of 7 million unrealized gain on marketable securities.
Okay, and 1 million shares so southern service company.
$6 million on the news.
The second quarter shows a decrease of 40.7 million negative adjusted EBITDA of 96 million and please know 41.
Philomena against adjusted net income of 45.5 million in the first quarter 2019.
The decrease in net income in the second quarter is mainly explained by a decrease in underserved on time charter basis due to the reported Tc rates in the second quarter compared to the first quarter.
Lets then take a look at the balance sheet.
The changes to the balance sheet.
As of June 30.
Compared to March 31st 2019, mainly relates to a decrease in cash and cash equivalents of $5 million.
Which is the net effect of capex payments to the payment of debt total debt to cash from operations and proceeds from issuance of shares under the ATM program in the quarter.
An increase in vessels of $17 million due to the linear from fiscal Vinay pill and depreciation in the quarter a decrease in vessels under finance leases 19 million due to depreciation.
Next increase index with $31 million in the quarter. Following if you can on making payments and 89.5 million until about.
A decrease in obligations on the finance leases with paper 30 million due to amortization of profit share expense and Easter panel.
Finally, an increase in equity of 10.9 million, representing the net income in the second quarter.
9.3 million shares.
Issuance proceeds information today Kim program.
As of June 30 from 257 million in cash and cash equivalents, including gains on amounts under the unsecured loan facility marketable securities and minimum cash requirements.
Other remaining newbuilding capex requirements amounted to 225 million.
You take it to one suezmax tanker and Ronnie.
Which are both expected to be delivered in May 2020, and two election tankers, which are expected to be delivered in January 2020.
We estimate approximately 164 million in depth capacity for these new buildings.
We have no near term debt maturities to service the authorities in November 2020, and our senior unsecured loan facility to Vincent 5 million matures, we have drawn down 120 million on the specific.
And well go to the 55 million remains available and Undrawn as of June 32 cents.
Then, let's pick AUTOSAR look at cash breakeven rates.
Consternation pension on slide seven.
We estimate average cash cost breakeven rates for the remainder of 2019.
Approximately $24500 per day for the disease $21300 per day for the Suezmax tankers and $16200 per day for the other two thank you.
These rates are the all in daily rates, our vessels must earn to cover budgeted operating costs and Drydock estimated interest expenses TCM may require installments on loans and DNA expenses.
We have included Drydock costs for for VC, four Suezmax tankers, and one and after tanker in the second half of 2019.
The potential cash breakeven based offers a strong downside protection against rate environments and at the same time creates a great upside potential and the strengthening tanker markets.
Every $1000 per day in achieving in excess of a cash breakeven translates to approximately 22 million in incremental net income per year or 12 cents per share.
Which shows in at the high importance of amazing painting of a low cash breakeven events.
In the graph on the right hand side of the slide we have shown incremental net income per year and per share assuming 10000 20030 thousand per day in achieved based and access or other cash breakeven respectively.
The operating expenses per day in the first quarter of 2019 with $10500 for Bdcs that are the cost of $500 for the Suezmax tankers.
And $7100 today like two decades.
But it dried up to this disease in the second quarter and four.
Steve and one Suezmax tanker are scheduled for tied up in the third quarter of 2019.
And with this I leave the HVOR turnover together.
Thank you so much.
Let's look at the key market developments.
We are once again seeing the market behave in a counter seasonal manner. This year as we also saw in the first quarter when us exports began to search.
In Q2, we witnessed the largest decline in global global refinery Throughputs seen this decade due to extended maintenance ahead of limelight 2020 .
Looking back I would actually say that rates kept up pretty well given what was going on with the refineries.
Recently, a deal to see rates has again moved up sharply.
Refineries on our restoring capacity and throughput looks to be rebounding quickly.
Crude oil demand growth is forecasted to be stronger for the balance of the year of the softening through the first half.
For the balance of 2019, we expect the tanker markets remain volatile due to crude oil supply concerns and Geo political tensions we continued to trend higher.
Importantly, U.S crude oil production is growing year over year, while OPEC production is declining falling production caps.
This is leading to increased exports from the Atlantic, which we expect to continue.
This expectation is supported by both increasing use production and export capacity, which has been coming online steadily.
A large portion of incremental production is turning to Asia supporting strong growth in ton mile demand.
Next slide please.
We'll have a look at deliveries decline off to 2019 and older vessels will face costs.
The growth of the crude oil tanker fleet is a key factor for our markets. So far in 2019 41, Vlccs have been added to the global fleet compared to three vessel demolitions.
An additional 33 Vlccs are scheduled to be delivered in 2019 with 43 more to follow in 2020 before the order book declines sharply.
Despite continued deliveries of new building vessels in the short term effect to crude tanker fleet growth is expected to slow as vessels are taken out of service for regular dockings scrubber old ballast water installation and other property preparations for the IMO 2020 regulations.
While the pace of recycling has slowed significantly compared to last year through our still 170 vlccs that are greater than 15 years of age and we believe a large number of older vessels will be taken to the market and had to be recycled or go on floating storage as part of the regulation driven facing out of older vessels.
Let's move to the summary slide please.
There are obviously various factors to supports our positive market outlook and we constantly monitor developments in the short time, we've already seen in the market rebound.
Following the extended refinery maintenance, Adam Im going 2020 .
Although global demand growth is forced forecasted to slow down the pace of growth remains positive.
The fact, the incremental production is coming from the U.S. and a good deal of it is heading east is a clear positive for ton mile demand growth.
Replacing barrels from the Middle East with both from the Atlantic is widely viewed as positive for tanker markets given the increase in distance travels.
Finally, the vessel supply picture looks very positive after new vessel deliveries have put pressure on our market for the last two years.
As we just looked at there is still a fair amount of vessels to be delivered over the next 18 months, but this number is eclipsed by the number of vessels greater than 15 years.
We should also see some effective reduction in capacity as vessels are temporarily taken out to the trading markets.
On the other hand, the risk of a global slowdown in GDP growth is dominating the news headlines on a real risk that has added volatility to the equity markets.
Finally, this always the chance the IMO 2020 implementation will not proceed as expected and although we believe in fuel spreads to widen as we approach 2020 . It could of course narrow and diminish scrubber economics.
To conclude we expect the markets remain volatile we continue to trade higher crude oil tanker demand will continue to receive a significant boost as crude demand increases in the second half of this year.
Although there are always risks related to slow and good global demand multiple possible market drivers should result in a strong time grew earnings for the balance of the year and we expect this strength to kick off 2020 positively for us.
We believe that run is well positioned going forward.
Now with even greater earnings potential.
With that I would like to turn over to questions. Please.
Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if wish to ask a question. Please press star one on your telephone keypad and wait for a name to be announced.
The first question comes from the line of Randy Gibbons from Jefferies. Please ask your question.
How's it going how are you doing this morning.
Okay. Thanks.
Excellent all right. So what about your fleet in recent months Youre a few new buildings acquired some resales. Most recently bought those 10 suezmaxes from Trafigura. So how are we thinking about kind of further fleet growth from here or are you pretty satisfied with the fleet. Following this this most recent large acquisitions.
Thank you and looking at the Frito rules here over the last three four years Weve.
We've transformed from a little the terms of the average age we really brought it down we've got a lot of ships deliver.
We sold off a lot of the old ships. So I think the president and the processor has been very positive for the company.
We've been looking actively at.
Gross.
Fruitful for Paris Air and we have to say, we don't results and last week with the Trafigura deal.
We overall as you look at our fleet, we've had product exposure through the LR twos for some time, which in terms of size, we were pretty happy with we like the as a preference we like the crude segment in terms of growth. We found that that growth on suezmaxes, but I think it's fair to say the way. Our fleet is structured now than then in terms of future growth than Vlccs will we'll have our special attention.
Sure that makes sense and then looking at your investment in the joint venture with Trafigura was there a monetary cost to this to acquire your percent ownership and also will there be financial risk from either profitable or unprofitable bunkering for trading or is it solely kind of an operational play for your fuel requirements. Then turn associated with this we will purchase a small amount of working capital into it and that's it. So this there's no investments.
Such and in terms of risk profile, we will be very conservative. So so we kept the locks.
All right and then I guess last quick question do you have an updated kind of cadence four off hire days any kind of capex spend on the scrubber installations like how many scrubbers do you expect to have by January 2020 in the next three or four months here.
So weve been Quinn so the simple numbers have been added about one third of our our fleet will will have been stalled by Q1, given the trafigura deal with fast forwarding.
The the amount to add with that deal. So by Q1 next year, we'll we'll be just below half the fleet.
You don't have any extra well hey, thank you so much for the color and congrats on the deals.
Thank you.
Our next question comes from the line of John Chappell from Evercore. Please ask your question.
Thank you good afternoon guys.
Robert on follow up on the on the other question in the fleet. So you obviously made a pretty big transaction.
You talked about maybe focusing on the vlccs going forward at what point do you feel that you're in kind of harvest mode and you're done spending you already have a fleet that is under four years of age.
And you kind of transition to the frontline of old where capital return takes priority over continuing to build the size of the fleet.
No I think we are in terms of interest earnings power on our seeing it just draw it took us through the side, where we have we have substantial so I think the focus now will be to possibly do something and you will see we certainly don't have to if this market takes takes office, we expect and we have greater earnings potential after this.
As for for our strategy coming into this.
Then we've repaid now spot for for quite some time, because we've had we've had a belief that we will see a strengthening market coming into 2020 . So hopefully this plays out and then we will take the opportunity set like we did when doing the trafigura deal too to lock in some charters and we will to do some of that and and have have a conservative approach to the cycle.
And I know, it's not kind of the legacy emo a frontline to did lever.
But after this trafigura deal, let's say about 80% leverage if we take the high end of the cost range.
Just for this deal alone, which which brings frontline back above 60%. So how do you think about using cash flow from operations at the cycle plays out as you and I, both expect to de lever the balance sheet, a little bit as opposed to maybe jacking up the dividend.
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I I guess and this is something that the board will have to discuss going forward how are we going to pour stats.
So, but according to hover at a dividend strategy that remains.
Unchanged in a way and Thats good sense to US you know that the excess cash flow from from the company settlement be use the more or less.
For David going forward.
Okay.
The last one Robert it's kinda fresh so I don't know if you've had a chance to assess it yet but the addition of crude oil to China is a retaliatory.
Tariff list you know you mentioned yourself the importance of the Atlantic in the long haul trade and you know we're of the belief that that's what's really been supporting the market in the face of these OPEC cuts have you have you assessed either operationally what it potentially means for your fleet or financially from a supply demand perspective, or if these tariffs were to be enacted in the U.S. became uneconomic U.S. crude became uneconomic in China, what that what made that do to your outlook on the tanker markets.
No no.
The next question, but.
On this call then oh refrain to compute.
Okay. Thanks, Robert Thanks, <unk>. Thanks.
Thank you.
The next question comes from line of Gregory Lewis from BTI G.. Please ask your question.
Yes, Thank you and good afternoon.
You don't Robert I guess, you know thanks for providing the kind of the guidance for Q3, but you know I guess at this point what we are almost in September I'm, just kind of curious you know we've seen a nice run up in VLCC rates over the last couple of weeks [laughter] do we have any kind of visibility at this point into what Q4 bookings already look like have we started to get anything on the books for Q4.
No for the for the Q4, we've done a little bit, but it's a very little when we seeing sales you will see you know last few weeks. This this element that's going to market. The disease. It moved the Suezmaxes are on the move so I think the due to look at the quarters I'd say that Q3 is to say we were already booked a lot when the market started turning something we should look at look at Q3, its as being a big not a great quarter. I believe we have you see do you see in the guidance, but the good thing is that were starting to move market moves. So that did the Q4 bookings day started low percentage, where we're seeing the numbers. So hopefully we would see it teed off it to to get a really good Q4, but they are the next month will show.
Okay, and then and then with that with that track traffic or an acquisition I guess congratulations on that that's suezmax guidance that you gave I'm on that slide does that does that include the than those vessels or is that was that more like the end of Q2. So prior to the acquisition of those vessels.
So that that the spot guns I've met us that's excluding a dose.
Okay. So so that's excluding those okay, great and then just then just one more for me.
I guess as we look at.
You know the decision to go in the Suezmaxes. It seems like over the last couple of years, there's no you've mentioned that yourself. The <unk>. The order book for the Suezmaxes is come down you know strategically like how should we think about suezmaxes in the crude market now I'm. Jonathan mentioned, you know clearly there's been a lot of oil moving from the U.S. to Asia. You know that's not really your Suez trade just kind of how you're thinking about the Suez market given that you've just you know that made a pretty substantial acquisition into the space.
We we like with the the Suezmax segment, we already had a 18 ships an assignment Oh all modem.
And the thing about the Suezmax you can triangulate them. So if you look at our earnings Wendy's the real see saw down in the low teens. For example, then normally the Suezmaxes trade just above and that's due to the triangulation and they're doing a lot of West Africa. They're also doing a lot of a lot of the Atlantic outgoing he said that doing some long long haul trades also short season is a very very flexible invesco ship unit, which.
Also with the relationships we have in the market. It's a it's a very good segment for us. So I think in terms of commercial performance over the last four or five quarters. Then a suezmax stands out is probably our strongest.
Okay perfect. Thank you, but thank you for taking my questions have a great day.
Thank you.
The next question comes from the line of Robert to learn from each other there. Please ask your question.
Yes, Hello, Robert Thank you for doing a good job.
How do you see that horizon as far as coming back to a dividend first quarter of 2022nd quarter could you give us some color on when that might occur.
I think.
The only this rule this rule us as Ingo said and the other other question that it will be down onto the ball, but the way I see this is that we're we're coming into positive territory.
And in terms of the facility payable to Mr products, and we have drawn out 120 million and.
Overall overall.
Companies switching looking good in all I would always say, it's a it always fair to say that we'll we'll return to to paying paying out dividends sooner rather than later.
Oh, thank you.
Could you give us some color on whats going on these days in the straight of Hormuz, where you had problems in the past do you see it coming down or is it still very tenuous.
We are very much on the alerts though.
Okay.
It is it is it affecting your bookings from that area. Some companies have actually decided to stay away.
You have not decided to do that right.
No we've not to start this I'll stay away with the so we are we are doing business there but.
We have have chose some of the other trades.
Due to the situation. So obviously the different than say it was which was a was a very very stressful situation and we were gone down in terms of bookings that we are still trading in the area, but with heightened security and we were keeping keeping a very close eye on everything that's going on.
Yeah again could you give me a little color on how you see Brazilian production and how that May balance for instance, what's going on in the United States with tariffs with China et cetera et cetera.
Will it change things very much and how is Brazil coming as far as adding one it takes what I'd like to go to a question. It's it is a difficult one to two to be that precise inconclusive on but if you look at the exploration in the plants in the country and the investments being brought and also from our states in which in company equity. No. Then I think it's fair to say that it looks like it's going to be a growth area in terms of exports.
Okay, Okay, well that's it for me. Thank you very much for taking my questions.
Thank you. Thank you.
The next question comes from line of Lukas Daul from ABG. Please ask the question.
Thank you good afternoon, Robert running or just a quick one on the tons Suezmaxes you are adding how shouldn't be phase them in a in terms of a startup, but its a et cetera.
So the first one was delivered so its just back to the deal we.
We take exposure on these ships as soon as we can so the first one actually delivered at the time of signing and then we're about to take delivery of the second one.
So they could they don't come at the same time, the the delivery is connected to a cooling various ports but.
Someday I don't think we should be we should have it all the ships.
Within September .
Okay went in September good and then online you sort of mentioned in the press release or when you announced that Oh, we're looking at different options of how to finance. It could you sort of a shed a bit on why than that.
And we're going to be the ideal financing structure.
Well well bring it being two plus one on what we what will go focus we have various options now what we can say is that.
Since that deal was absolutely we don't pre checking the finances is definitely available to front line and it is a very very attractive terms. We will aim to conclude finance as soon as we can we will then lower the cost that we are we are currently paying so it's a top priority for us to to close the transaction and undo the finance has it.
Okay sounds good thanks.
Thank you.
Participants once again, if you wish to ask a question. Please press Star then one on your telephone keypad and my training to be announced.
The speakers there are no further questions at this time please continue.
Okay.
Thank you very much.
Just thank everyone at frontline for all their hard work and great efforts and thank you all for calling into his presentation.
All of us.
[noise].
That does conclude teleconference for today. Thank you for participating you may all disconnect have a nice day.