Frontline Ltd

NYSE:FRO

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Q1 2021 Frontline Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation there will be a question and answer session [Operator Instructions] I must advise you that this conference is being recorded today on Thursday, the 27 of May, 2021.

And now without any further delay, I'd like to hand the conference over to your speaker today, Lars Barstad, Interim CEO. Please go ahead.

[Lars Barstad, Interim CEO]

Thank you very much. Thank you, and good morning and good afternoon to everyone. Welcome to Frontline's first quarter earnings call for 2021. We're obviously quite content to being able to provide black numbers, maybe to the surprise to many of you. Q1 '21 was a fairly quiet quarter corporate-wise, as we are in a good position financially and no major transactions were concluded during the quarter.

We continue from trying to have a high focus on the well-being of our seafarers as they are out there being exposed to the global ebb and flow of COVID-19 infections. Our technical and operations team are doing a fantastic job in mitigating the challenges that arise. And I'm very happy to report that we are well underway in vaccinating our sales.

Let's now move to Slide 3 and have a look at the highlights. The Q1 '21 performance is very much a testament to keeping true to our strategy, being mostly spot exposed and not expecting an imminent recovery in the market, our chartering desk remain true to trading the ships in a month where we allow our vessels to commit to long voyages, securing income but potentially giving away upside. Our modern fuel-efficient fleet is built for this purpose. And there, it also gives us this flexibility. This proved to be the right pool.

In the first quarter of 2021, we made $19,000 per day on our VLCC fleet; $15,200 per day on our Suezmax fleet; and $12,000 per day on our LR2/Aframax fleet. So far in Q1, we have booked 70% of our VLCC days at $18,100 per day; 63% of our Suezmax days have 13,600 per day and; 59% of our LR2/Aframax days at $14,200 per day. All these numbers in the table are on a load to discharge basis.

Before Inger takes you through the financial highlights, let me quickly comment on the fleet development as well. We took delivery of two of our 4 LR2s coming this year from Fusion and from Future in March and April, respectively, bringing our number of LR2s on the water to 20. Further, subsequently, we confirmed acquisition through resale of 6 high-spec ECO scrubber-fitted VLCCs to be delivered from Hyundai Heavy Industries in Korea, 5 in 2022 and 1 early in 2023.

I'll now let Inger take you through the financial highlights.

[Inger Klemp, CFO]

Thank you, Lars, and good morning and good afternoon to all of you. And let's then turn to Slide 4 and look at the income statement. As Lars said, we are happy to report numbers in black. And Frontline achieved total operating revenues, net award expenses of $107 million in the first quarter. We also had an adjusted EBITDA of $59 million. And we report net income of $28.9 million or $0.15 per share. Further, we have an adjusted net income of $8.8 million or $0.04 per share.

The adjustments consist of $15.7 million gain on derivatives, a $3.1 million unrealized gain on marketable securities, a $1.2 million amortization of acquired time charters and a $0.1 million share of results of associated companies. The adjusted net income in the first quarter have increased $21 million compared with the previous quarter. And the increase was driven by a decrease in ship operating expenses of $11 million, mainly as a result of $6.4 million lower drydocking costs. We also had an increase in time charter equivalent earnings of $6.8 million, and that was due to the higher TCE rates as well as we had a $11.2 million decrease in other costs.

Let us then take a look at the balance sheet on Slide 5. The total balance sheet numbers have increased with $10 million in the first quarter. The balance sheet movements in the quarter were primarily related to taking delivery of the LR2 tanker Front Fusion in addition to ordinary debt repayments and depreciation. As of March 31, 2021, frontline had $380 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 closer look on Slide 6 on the cash breakeven rates and the OpEx. We estimate that risk cash cost breakeven rates for the remainder of 2021 of approximately $21,500 per day for VLCC; $17,700 per day for the Suezmax tankers; and $15,900 per day for LR2 tankers. This gave a fleet average asset of about $18,000 per day. These rates are the all-in day rates that our vessels mature to cover budgeted operating costs and drydock, estimated interest expenses, TC and bareboat hire and installments and on loans and G&A expenses.

In the quarter, we recorded OpEx expenses of $7,300 per day for the VLCCs; $7,100 per day for the Suezmax tankers; and $7,200 per day for the LR2 tankers. We did drydock 1 Suezmax tanker in the first quarter only, and we expect to drydock 2 Suezmax tankers and 4 LR2 tankers in the second quarter.

Let's then look at the graph on the right-hand side of the slide. As usual, we show the incremental cash flow after debt service per year and per share, assuming $10,000, $20,000, $30,000 or $40,000 per day achieved rates in excess of our cash breakeven rates. The numbers include vessels of time shares are adjusted from newbuilding deliveries. And we're looking at a period of 365 days from April 1, 2021.

So in this graph, as an example, with a fleet average cash cost breakeven rate of $18,100 per day and assuming $30,000 on top of the average fleet earnings that the TCE rate would be $48,100 per day. Frontline would then generate a cash flow per share after the service of $3.45.

With this, I leave the word to Lars again.

[Lars Barstad, Interim CEO]

Thank you very much, Inger. Let's move to Slide 7 and have a look or a recap of the Q1 '21 tanker market. And it goes without saying that it's been somewhat demanding. So total oil consumption rose by 4.3 million barrels from January to March and reached 96.5 million barrels per day. On the other hand, supply fell by 0.5 million barrels. This was mostly fueled by the actions from Saudi Arabia and their volunteer cuts to -- that ended up at 93.5 million barrels per day at the end of the quarter.

As we continue to draw on inventory, tanker demand remained basically unchanged. We did, during the quarter, see return of Libyan volumes. And we also had towards the end of the quarter the U.S. cold snap that created a lot of volatility. So tanker rates firmed towards the end of the quarter, and this is a time quite positive because it actually is indicating a thinner balance than what may be perceived.

So basically, to wrap up Q1, we see demand or consumption is running ahead of supply, and the drawn inventories is kind of mitigating that volume. If you look at the chart on the right-hand side, you see what I refer to as ripple rather than a very strong market, but we see how quickly rates react where we saw, firstly, the Aframax market move in line with Libya opening up. And secondly, the Suezmax market reacted, and that was mostly fueled by the U.S. Gulf cold snap or the U.S. cold snap affecting the volume side of U.S.

So let's move on to Slide 8 and look at the tanker orderbooks. On all asset classes, we are observing delayed recycling. We see very little support for keeping older tonnage in this market, but they remain in the fleet list. Recycling prices are up 30% year-to-date and are now kind of being negotiated around $550 per long ton or $23 million for a VLCC. This is, to some extent, being outcompeted by the fact that we continue to see demand for vintage tonnage from undisclosed price buyers at a relatively firm prices.

The overall tanker order book has shrunk year-to-date by approximately 4%. This asset vessels deliver and new ordering has been fairly muted. We've seen on the VLCCs 20 new -- 28 new orders placed. But as 25 vessels are delivered at the same time, the order book remains to be fairly flat. The VLCC order book stands at around 9% of the existing fleet, and the overall order book for tankers is up or around 7% of the existing fleet.

Let's move to Slide 9 and look at what's going on, on the asset prices. So the prices are on the move. We have, over the last 6 months, seen more than 170 new orders for containerships. We've also seen quite firm ordering on LPG and also seen confirmation of LNG orders, which has further contributed to the activity. And in line with the entire commodity space, steel prices have depreciated sharply. The fundamentals of the tanker market suggest the tightening of capacity over the coming years, and the regulatory tightening in respect of greenhouse gas emissions further supports the case of investing in modern fuel-efficient ships. So propulsion is yet not the driver. Right now, it's the yard capacity or rather the lack of it which is driving prices together with this deal.

So let's move to Slide 10 and look at the short-term outlook. So we're currently right in the middle of OPEC plus production increasing. They are increasing somewhat slowly, but they are adding to transportation demand. Currently, Asia and in particular, China, are coming out of refinery maintenance. And oil demand continues to recover. Now it's the U.S. and European focus as we're coming out of lockdowns. Inventories, both on land and floating, are now normalized and at pre-COVID-19 levels. From where we are now and according to EIA, oil supply is expected to grow by 6 million barrels by year-end. And if you look at the graph on the left-hand side below, we see that most of these increases are expected to happen basically from where we stand now and over the summer.

The key to the demand balances in 2021, you can find on the right-hand side. And we know that gasoline demand fell by 3.3 million barrels per day in 2020 and is now expected to grow by 1.8 million barrels per day in 2021. For jet, it affected the crude oil balances by 3.2 million barrels per day negative in 2020 and about 1.3 million barrels per day is expected to return this year. For diesel, we're actually adding more than we lost, 1.2 million barrels per day. And for fuel oil, we're keeping at level. Other kind of uses of oil is also adding to this at 0.7 million barrels per day.

Let's move over to Slide 11 and my summary. So basically to wrap this up, all key macro indicators point towards a firm recovery. And global GDP is expected up 6% this year. As the prices are on the move as the capacity is tightening and steel prices are increasing. As I've just mentioned, Global Oil surprise is expected to grow by 6 million barrels by the end of 2021. The COVID-19 vaccination pace in the developed countries is very encouraging and countries are opening up. We can see on the graph below, which indicates activity within the various key segments of the shipping sector that the cyclical recovery run has started. All key shipping sectors are firm, the tankers are lagging. Frontline is ideally positioned to capitalize on the anticipated recovery in tanker markets with our modern spot exposed fuel-efficient fleet.

And with that, I would like to open up for questions and answers, please.

[Operator]

[Operator Instructions] Your first question today comes from the line of Jon Chappell of Evercore. Please ask you question. Your line is open.

[Jon Chappell, Evercore]

As I'd say that's a pretty balanced outlook on the market, maybe a bit more balanced than some of the optimism out there. Yet, obviously, the press release last week on the 6 new VLCCs indicate, I think, a lot of optimism about where the market is going. I think I asked this 3 months ago, but at this stage in the cycle, based on what you see for the next 12 months or so, do you think you're a more aggressive acquirer of assets? And if so, how much of this fuel propulsion question play into whether you're doing more new builds like you announced last week versus maybe the traditional Frontline activity in the secondhand market?

[Lars Barstad, Interim CEO]

Well, it's all a question on -- well, first of all, I would say that we're always aggressive, but the right opportunity has to kind of come our way. But our overall view of the market has kind of firmed over the last couple of months. And we have more conviction now that we are moving in the right direction. With regards to resale versus modern kind of vessels on the water, we obviously have to look at the current kind of spot markets when we weigh to take a ship that's sailing in this market or taking a ship that will be delivered at a point in time where we're expected to be on full throttle again. So that's obviously a part of the consideration.

Secondly, it's actually not that many vessels for sale that kind of fall within where we want to invest. So you could say that although the activity in dry bulk has been tremendous and the activity on ordering containerships and LPG has been so fantastic and so forth, the VLCC kind of asset market has been fairly muted year-to-date.

[Jon Chappell, Evercore]

Okay. Now that makes complete sense. And then just a follow-on to that as far as the financing is concerned, like I understand you're going to almost certainly get financing for these ships ordered or announced last week. I was a bit curious to me that for the down payment, given the cash you have on your balance sheet, you still drew down $50 million from the Hemen facility. So what's kind of the thought process around the amount of liquidity you want to keep, taking debt to pay down payments, not resuming the dividend despite a profitable quarter. I understand that the second quarter is weak and we have a kind of near-term choppy outlook, but should we think about just drawdowns of debt to finance new builds going forward and maybe retain the cash for a stronger market than you can think about capital returns again?

[Inger Klemp, CFO]

I think we have flexibility with respect to this facility that we are drawing on. We will establish the, let's say, debt financing. We intend to do that, I guess, probably in the second half of 2021, at least for the first vessel. And maybe also for all of them, depending upon the opportunities that arise when look in -- or start to work on that. So with respect to equity and repayment of this facility that we're drawing on, we will have flexibility going forward to decide how to do that and when to do -- so if we would like to use the ATM. That depends upon the share price and when we would like to raise equity, it also depends on that. So I think we will keep that a bit open a bit.

[Operator]

Your next question today comes from the line of Randy Giveans of Jeffries. Please ask your question.

[Randy Giveans, Jeffries]

I guess, question, you talked a lot about the crude markets. Just looking also at the product tankers, maybe how do you view those two and maybe the timing of an inflection where you really start to see some rate improvement? And then with that, are you using any of this kind of soft patch to clean up some of your LR2s that were trading dirty to start trading clean going forward?

[Lars Barstad, Interim CEO]

Well, to start with the first one, we are obviously in a recovery phase. And I think we've probably just finished kind of drawing on inventories. That's at least some of the stuff I'm seeing, which is relatively live, which means that -- and we're also in a refinery turnaround, a relatively heavy one. So actually, I was quite hopeful for the product market to start to run kind of already in March. And -- but kind of faded. I think in order for the product market to start to properly move, we need a bigger portion of the lost jet demand back. And -- but there is always a product market to be had around arbs kind of opening up. And for that, we need to see the refineries coming out of turnaround. So it's like a chicken and egg kind of discussion. And to be quite honest, I'm still kind of not 100% sure which would come first. So whether if it's going to be a pull or a push or whether if we're going to see increased demand for crude oil first pushing the VLCC market then wrestle into the LR2s as product is transported or the other way around. So it's difficult to say, to be quite honest.

With regards to cleaning up, we have cleaned up 1 vessel and use kind of this opportunity in the market. It's not really an opportunity because it always comes kind of with some degree of cost. And we always have to remind ourselves that we actually had a lot of incremental income birthing up when we're doing this. But I think it should be expected that we gradually will look at utilizing our vessels as LR2s because that's what they are rather than IFRS.

[Randy Giveans, Jeffries]

Yes, that makes sense. All right. And then, I guess, second question for me. You've shown some impressive expense control here with the market downturn, specifically more recently, a sharp production in vessel OpEx and G&A. So going forward, what's a good run rate for those 2 line items?

[Inger Klemp, CFO]

As I mentioned, for this quarter that we are into now, we will have a drydocking cost which is higher than we had in the first quarter. We only had less than $600,000 of drydocking costs in the first quarter. And I guess for the second quarter, we estimate around 7% or probably a bit more as well. So in that sense, of course, the R&D expenses will increase in the next quarter. But it will vary a lot between quarters depending upon how much vessels with dry dock. In the third quarter, we are planning to drydock 3 vessels instead of 6, meaning that it will be kind of half again of what I said for the second quarter around cost, I mean. With respect to the admin expense, I would say that G&A would that what we have now in the first quarter is not the going rate. I think it's probably a couple of million dollars on top of that would be a going rate going forward.

[Randy Giveans, Jeffries]

A couple of million on top of the $6 million, okay. So $9 million, is that a good run rate going forward?

[Inger Klemp, CFO]

That's probably a bit too high, but a couple of dollars on top of what is in the report. That this gets something then 8.3 or 8.5, whatever, something in that respect.

[Operator]

Your next question today comes from the line of Magnus Fyhr of HC Wainwright.

[Magnus Fyhr, HC Wainwright]

Yes. Just most of my questions have been answered. But just kind of going back to Jon's question regarding your thoughts on ordering or buying more ships. Do you think there's an opportunity here? There seems like a lot of the operators are a little hesitant to buy ships or order ships at these levels given the uncertainty regarding propulsion technology. But just curious to see if you think there's further opportunities there, new building versus acquiring resales.

[Lars Barstad, Interim CEO]

Well, we -- I think we will remain true to kind of our word and try not to add to the order book. And to be quite honest, where the current order book is, is quite difficult to gauge. Because I think you would struggle tremendously to order a VLCCs for delivery in Q4 2023. And if you should locate a slot there, I think the prices are probably north of 100. So it could be that we would rather than focus on acquiring either resales or modern ECO vessels on the water. So -- but I think it's important to note here that there has been a frantic activity with yards. And Inger and I'd like to compare some of the outlook going forward to the period we had in 2002, 2003. And at that time, we had a lot more yard capacity coming. Right now, we don't have that. So we even have yards starting to look at 2025 just to give you a color on kind of the situation out there.

[Magnus Fyhr, HC Wainwright]

And you guys have a really modern fleet, and you mentioned the scrapping prices are picking up. What do you see out there as far as actually some of these older ships finally heading to the scrap yards? I mean, current market prices -- I mean, current spot prices are very challenging for these older ships. And I was just curious if you expect to see that scrapping finally start to increase here during the summer?

[Lars Barstad, Interim CEO]

I think it will kind of our count stands at 8 VLCCs sold for scrap year-to-date. And I think it's 3 Suezmaxes. We have to remember, though, that there have been disruptions in the capacity for the recycling yards to actually accept office due to COVID. So the pandemic has affected kind of efficiency there as well. I think where the prices are now on recycling steel, we should definitely see some action. But having said that, we still have this competition out in the market for vintage secondhand tonnage coming from undisclosed kind of parties, which most likely are involved in what the trade that I like to refer to as the dark web of oil, basically transporting either Venezuelan or Iranian sanctioned crudes.

[Magnus Fyhr, HC Wainwright]

So I guess, with the ongoing -- yes. I guess for the ongoing talks -- I guess with the ongoing talks with the Iranian and potentially those sanctions being removed. What's your thoughts about those vessels finally, maybe not being able to compete in an open market?

[Lars Barstad, Interim CEO]

I think that could be a tremendous kicker to the conventional law-abiding tanker market. And it's basically -- we all talk about the Costco moment in the tanker industry and I think you could have that. Because suddenly, at least with the nuclear deal between U.S. and Iran, you're going to have quite a lot of volume that needs compliant ships to trade kind of within the compliant market.

[Magnus Fyhr, HC Wainwright]

And just one final question, if I may, to Inger or you, regarding the drydocking schedule. What's -- are you trying to do all the dry dockings ahead of the fourth quarter? Or you think you will have some ships in the fourth quarter as well, just kind of positioning yourself for a market recovery?

[Inger Klemp, CFO]

We will not do any dry dockings in the fourth quarter. It's only in the second and the third.

[Operator]

[Operator Instructions] We do have one more question at this time. This comes from the line of Chris Tsung. Please ask your question.

[Chris Tsung, Webber Research]

I wanted to kind of dig in just a little bit more to a question that was asked it earlier regarding the OpEx. Saw that it kind of came down significantly from Q2 -- from Q4, roughly around 20%. And just looking back at your previous presentation of the OpEx. The daily OpEx for the Suezmaxes like around $9,700 a day. And in this presentation, it's down at like $7,100. So maybe if you can help explain how that is received.

[Inger Klemp, CFO]

So the OpEx will vary between the quarters, as I said, due to the dry dock of the vessels, whether we are drydocking or not in a way. And in this particular quarter you are referring to with the Suezmaxes having a high OpEx, that was due to that you had dry dockings of Suezmaxes in that quarter. While now, you only have a small drydock in costs, which don't really affect the OpEx.

[Lars Barstad, Interim CEO]

But I think to further clarify, we actually take the actual dry docking costs in the quarter.

[Inger Klemp, CFO]

We expense the dock. We don't capitalize as many of our peers do.

[Lars Barstad, Interim CEO]

So that's why we get that volatility in that.

[Inger Klemp, CFO]

Yes.

[Chris Tsung, Webber Research]

Right. I see. Okay, understood. I guess just following up on another question is for your -- the 6 VLCCs resales that's going to starting delivery in 2022. Could you perhaps expand on the cadence of the delivery? Is it more front-loaded or back-loaded? I know 1 is delivering in 2023. Just wanted to know if it's going to be smoothed out -- any color would be appreciated.

[Lars Barstad, Interim CEO]

Well, it's going to be fairly smooth to be quite honest. The first vessel delivering very early in 2022. Obviously, we have a little bit of flexibility in the deliveries at this stage. So -- and then coming like pros on the string. And the last one coming very, very early in 2023.

[Chris Tsung, Webber Research]

And just the last question, I noticed in the presentation or in your press release, there was a purchase -- there's a decision to purchase shares in Golden Ocean, just I think, only around $400,000, so it's not material. It's not big, but I wanted to kind of see if you can go into your details on decision to purchase shares Golden Ocean.

[Inger Klemp, CFO]

Yes. This is related to that, we have a forward contract where we -- for Golden Ocean shares where we then throw that contract in a way, got the possibility to take part in that right issue, which Golden Ocean happened. So it was not a huge amount. It was few shares. But anyway, we did it because it was in the money anyway.

[Operator]

There are no further questions at this time. Inger, Lars, back to you.

[Lars Barstad, Interim CEO]

Yes. Well, thank you very much for hosting. And also thank you very much for listening in. Thank you to the entire Frontline team for fantastic efforts in Q1 and stay safe, everyone.

[Operator]

That does conclude our conference for today. Thank you all for participating.