Frontline Ltd

NYSE:FRO

Earnings Call Analysis

Frontline Q2 2024 Earnings: Strong Performance and Future Outlook

Frontline reported a strong Q2 2024 with a profit of $187.6 million, or $0.84 per share. Despite market volatility, average TCE rates were solid: $49,600 for VLCCs, $45,600 for Suezmaxes, and $53,100 for LR2/Aframax. The company completed significant refinancing and divestment moves, freeing up $548 million. The divestiture of older vessels is now complete. Going forward, no major refinancings are expected until at least 2027. Although geopolitical risks and sanction scrutiny present challenges, Frontline's strong balance sheet and strategic vessel management position it well for future growth, with anticipated seasonal demand increases driving optimism.

Introduction and Overview

The latest earnings call from Frontline plc for the second quarter of 2024 offered insights into the company's performance, ongoing strategies, and market dynamics. CEO Lars Barstad highlighted a quarter marked by volatility and the impact of geopolitical tensions in the Middle East and sanctions against Russia. Despite these challenges, Barstad expressed optimism for the fall, emphasizing the importance of the upcoming winter season, which historically offers more potential moneymaking days.

Financial Performance

CFO Inger Klemp provided a detailed financial overview. Frontline reported a profit of $187.6 million or $0.84 per share, with an adjusted profit of $138.2 million or $0.62 per share. The company's financial health benefited from several factors: the disposal of certain fleet assets and a corresponding decrease in TCE earnings by $12.4 million was balanced by lowered operating and administrative expenses, decreased depreciation and finance expense, as well as a rise in interest income of $12.6 million. These adjustments led to an overall increase of $0.2 million in profit for the quarter.

Strategic Fleet Management

In the second and third quarters of 2024, Frontline undertook significant strategic moves, including the sale of four vessels and the re-leveraging of part of its fleet. These actions freed up capital, resulting in the repayment of $395 million in debt, which was partly used to finance the acquisition of 24 VLCCs from Euronav. The company's fleet now includes 41 VLCCs, 23 Suezmax tankers, and 8 LR2 tankers with an average age of six years, 99% of which are ECO vessels with 56% having scrubbers fitted. Importantly, Frontline estimates average cash breakeven rates for the next 12 months of approximately $29,600 per day for VLCC, $22,300 for Suezmax tankers, and $21,200 for LR2 tankers.

Market Dynamics and Future Outlook

Barstad discussed the seasonal market trends, noting that although the third-quarter bookings were slightly below market expectations, the overall market displayed binary characteristics typical of post-summer activities. The global oil trade patterns are evolving, with a notable 23% of the global fleet involved in sanction-related trades. This shift has created a two-tier market and increased scrutiny on compliance versus the dark fleet. Despite these complexities, there is a positive outlook for the winter season due to historical trends and tightened oil inventories globally.

Cash Generation and Dividends

Frontline's cash generation potential remains robust despite softer market conditions. With about 30 earnings days and spot market earnings projected at $33,500 per day for VLCCs, $36,600 for Suezmax tankers, and $28,700 for LR2 tankers, the potential cash generation stands at $242 million or $1.09 per share. The management emphasized their strategy of paying out large dividends unless they identify high-yield investment opportunities that offer better returns for shareholders.

Risk Factors and Geopolitical Impact

The call highlighted significant risk factors, including geopolitical tensions in the Middle East and volatility in oil trade routes like the Suez Canal. These factors, combined with anticipated seasonal weather changes, could affect trading dynamics. Additionally, the potential impacts of reduced Libyan oil exports and shifts in the global oil supply chain were discussed, indicating that replacement sources could come from various regions, thereby altering VLCC and Suezmax trade routes.

Conclusion

Frontline's leadership reiterated their satisfaction with the current fleet composition and the completed strategic initiatives for fleet optimization. Although there is caution around future asset acquisitions in the current market, the company is well-positioned financially and operationally to navigate the upcoming quarters. With a strong balance sheet and favorable market conditions expected in the winter, Frontline is optimistic about its earnings potential and the continued payout of dividends to shareholders.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Second Quarter 2024 Frontline plc Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Lars Barstad, CEO of Frontline management AS. Please go ahead.

[Lars Barstad, executive]

Thank you very much for that introduction. Dear all, thank you for dialing in to Frontline's quarterly earnings call. The second quarter of 2024 ended up very much in line with the first with volatility, but ending up on softer notes as we entered the seasonal summer level. Complications around war risk in the Middle East and tightening sanctions against Russia has regretfully become the [indiscernible]. And I will be touching on that later in the call.

It's important to remember though that we are at a seasonal low. And I would like to say that all shareholders have a very exciting fall ahead as Frontline has not had this number of potential moneymaking days going into the winter for decades.

Before I give the word to Inger, I'll run through our TCE numbers on Slide 3 in the deck. In the second quarter of 2024, Frontline achieved $49,600 per day on our VLCC fleet, $45,600 per day on our Suezmax fleet and $53,100 per day on our LR2/Aframax fleet. So far in the third quarter, 79% of our VLCC days are booked at $47,400 and 85% of our Suezmax days are booked at $49,900, and 65% of our LR2/Aframax days are booked at $50, 100 per day. Again, all these numbers are on a load to discharge basis, meaning they will be affected by the amount of balance days we end up having at the end of the third quarter.

Although Q3 bookings came in somewhat short of market expectations, please do keep in mind the binary characteristics of our market, especially as we come out of the seasonal loss.

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

[Inger Klemp, executive]

Thanks, Lars, and good morning and good afternoon, ladies and gentlemen. Let's then turn to Slide 4. I look at profit statement and highlights. We report a profit of $187.6 million or $0.84 per share this quarter, and adjusted profit of $138.2 million or $0.62 per share. The adjusted profit in the second quarter was comparable to the first quarter, as you can see from the slide, and the decrease in our TCE earnings with $12.4 million as a result of the disposal of TVC fleet and Suezmax tankers was offset by a decrease in ship operating expenses, administrative expenses, depreciation and finance expense, as well as an increase in interest income of $12.6 million, making up the $0.2 million increase in the quarter.

Let's then move to Slide 5 and look at the balance sheet. The balance sheet movements in this quarter are mainly related to sale of 4 vessels in the second quarter. Over to 1 VLCC fleet was held for sale in the first quarter and also to releveraging part of the existing fleet used to repay debt drawn to partly finance the acquisition of the 24 VLCC from Euronav. Frontline has a strong liquidity of $567 million in cash and cash equivalents, including undrawn amount of the senior unsecured revolving credit facility and the marketable securities and minimal cash requirements to the bank as per June 30, '24. We have no remaining newbuilding commitments, and there are no meaningful debt [indiscernible] until 2027.

Then we can look at Slide 6. In the second and the third quarters of 2024, we completed our strategy of freeing up capital by deleveraging part of the existing fleet and also divesting older vessels, which enabled us to repay an aggregate of $395 million, which was strong under the [indiscernible] shareholder loan and also under our revolving credit facility with an affiliate of Hemen to partly finance the acquisition of the 24 VLCC from Euronav earlier.

From this slide, we have made up here, we can see that this has involved optimizing the capital structure through refinancing of 36 vessels and divesting 8 older vessels. Total recent and ongoing refinancing in a total amount of $1.55 billion, have secured long-term financing at highly attractive terms with a maturity of about 8 years and had improved debt margins with about 30 basis points on a weighted average basis. The net expected cash proceeds from the refinancings is $548 million, sorry, and $311 million from divesting older vessels.

Let's then look at Slide 7. Our fleet consists of 41 VLCC, 23 Suezmax tankers and 8 LR2 tankers. It has an average age of 6 years and consists of 99% ECO vessels where 56% is scrubber-fitted. We estimate average cash breakeven rates for the next 12 months of approximately $29,600 per day for VLCC, $22,300 per day for Suezmax tankers and $21,200 per day for the LR2 tankers, with a fleet average estimate of about $25,700 per day. It is slightly down from previous quarter, mainly as a result of the financings and refinancings loans.

The fleet average estimate includes dry dock of 2 Suezmax tankers and 4 VLCC in the next 12 months. whereof 2 VLCC in the third quarter of '24, one VLCC in the fourth quarter of '24, one suezmax in the first quarter of '25 and one VLCC and one Suezmax in the second quarter of '25. We recorded OpEx expenses, including dry dock in the second quarter of $8,600 per day for VLCC, $9,300 per day for Suezmax tankers and $7,600 per day for LR2 tankers. This includes startup of 2 Suezmax tankers and 2 VLCCs in the quarter. The Q2 '24 fleet average OpEx including [indiscernible] was $7,600 per day.

Then let's move to Slide 8. And look at cash generation potential. Frontline has about 30 earnings days annually. We have about 28,000 are spot base. Even in this week spot market that we experienced now, the cash generation potential at current feed and spot market earnings from Clarksons Research as of August 29 over $33,500 per day for VLCC, $36,600 for Suezmax tankers and $28,700 for LR2 tankers is $242 million or $1.09 per share.

The sensitivity is high from this spot to market levels that you see now and 30% decrease from current spot market will increase the potential cash generation with about 116%. Note that the spot market earnings at the 30% increase is only $43,600 for VLCC, $47,500 for Suezmax and $37,300 for LR2 tankers. And the upside potential should be much higher going forward when the party begins.

With this, I leave the word to Lars again.

[Lars Barstad, executive]

Thank you very much, Inger. Let's then go to Slide 9 and start the discussion on the current market narrative. You will notice that there is a new theme we're focusing on at Frontline as we've been trying to kind of explain the developments in the current market. We all sit on more or less the same S&D models. [indiscernible] The unknown is basically how oil trades. There is a development of a 2-tier market between what we would refer to as a compliant among compliant market. And this divide has grown over the last 12 to 18 months. Currently, and this is quite surprising to some, I would assume, 23% of the global fleet is expected to be or involved in sanction trade. And in these numbers, it's not necessarily a ship that has lifted Russian crude because the molecule is still not sanctioned, but its vessels that have adverse activities surrounding their trade, whether if it's with Russian crude or other sanctioned crudes.

And so basically, what these numbers tell you is that 17% of the VLCC fleet is currently under some service scrutiny, either by OFAC, [indiscernible] or they have red flags attached to their activities. And likewise, if you move to the Suezmaxes, you have 21% of the fleet is under the same kind of -- in the same kind of situation. And we have 28% of the LR2 fleet having the same characteristics. This is obviously related to the rise in sanction scrutiny and also the volumes trading, and I'll come back to that later in the following slide.

Geopolitical risk linked to the Middle East is ever increasing. It's also quite surprising to us to see the somewhat moderate oil movements of volatility considering this explosive backdrop. Chinese imports are in question after soft July. But as far as we can see it, August tracking imply an increase of 1.2 million barrels month-over-month to China. So although that doesn't really make this story fantastic is at least you should not base China on the July observation.

Global oil demand is on track, at least looking at the numbers we see. Oil and transit is in a rising trend. World inventories are at historical lows. And there is a limited cushion for adverse events, which also could be related to weather. The order book expansion in our industry is slowing the available delivery window for tankers has moved into 2028 for any substantial order that is and other asset classes are starting to take the center stage.

Let's move to Slide 10 and discuss a little bit more of the sanction exposed trade growth. So there has been, over the last months an increased scrutiny on the Russian trade, basically exposing more and more vessels to being sanctioned by either G7 or EU in their operations surrounding the Russian trade. We've also seen a steep growth in Iranian exports, which basically has increased the need for tonnage for transportation.

What we've ended up seeing is that we have a 2 tire market, which is kind of developing in Frontline arise. We have what we would refer to as a compliant market, which involves 80% of the tanker fleets or thereabouts. And then you have the dark grey fleet, which involves 20% of the tanker fleet or even up to 23% of the tanker fleet. The interesting part here is that you're not building vessels to enter the dark or grey fleets. So basically, they get their fleet supply from the compliant fleet. So the compliance fleet is shrinking whilst this kind of darker gray fleet is growing. It's applied by the aging of the overall tanker fleet basically. And over 20-odd vessels still do not trade in what we regard the conventional market.

It creates an interesting dynamic because unless nonconventional trade continues to grow. The illicit market will soon be oversupplied as the fleet aging accelerates. So basically, vessels moving from the compliant market due to age and basically because we have 0 scrapping, will, at some point here, start to overcrowd the darker grey fleet and one should expect scrapping to start to happen in the end. The parallel all trade carries an increasing risk to a reversal of sanctions as well, and that needs to be kept close to mine.

Kind of implication here, and we can question where is sanctions enforcement in this picture. And also where is IMO in respect of safety and reducing emissions, et cetera. I can assure you this fleet is not spending too much CapEx on reducing their carbon footprint.

At the bottom right-hand side of this slide, you will see kind of how this development is and the red arrows basically indicate this divide. So basically, the overall feed continues to grow, as basically no ships are being recycled, but the compliant fleet vessels under 20 years of age is gradually shrinking as we proceed. This includes the new buildings coming into the market.

So with that harsh message, I'm going to move to Slide 11, and let's look at the upside potential here in the compliance market. We have tanker seasonality, and it's extremely pronounced. 90% of the global population lives in the Northern Hemisphere, basically where most of us on this call live and EIA does expect the oil consumption to increase by 1.5 million barrels by December, basically due to temperatures turning.

On average, looking back, the winter market sees an increase of consumption by 1.5 million to 2 million barrels in the period from August to December. This is a long-term pattern, and we see it both in oil in transit and then obviously in freight earnings. If you look at the bottom right-hand slide chart, that's -- we were basically just taking the last 34 years and looked at the seasonal trend. And we're basically in the weeks where this market starts to come to action.

It's also quite encouraging to see oil in transit, actually dipping out of the long-term trend. And to top it we have to keep in mind that the inventories within OECD and we added China and India as well to this, is at historical lows. And again, I would like to emphasize, it offers a very limited cushion in the event of an unexpected events. OPEC is still supposed to be increased up to increase supply from October. The question is whether if they will do it where oil is currently trading, but 2.2 million barrels is said to be returned between October and the end of 2025.

And again, as from the previous slide, the shrinking compliant tanker fleet capacity to serve conventional or demand growth makes this a very interesting picture. And also, I think we need to keep in mind that although the market is sluggish currently, the balance is fairly thin. Only 2 weeks ago, we had VLCC rates moving up 25%. And it doesn't take much to move the needle.

Let's then have a look at the order books. And the overarching theme here is that the ordering we saw in the beginning or the first half of the year has been muted over the last month, 1.5 months. Basically, virtually 0 tankers have been ordered in the last 1.5 months and basically, at the same time, we've seen other asset classes move in to contract vessels and in particular, we've seen big orders being placed on the container side for 2028 delivery.

We think that for VLCC and Suezmax, the order book looks -- still looks low. Very low for VLCC, medium low for Suezmax and high for LR2. But with LR2s, as I mentioned before, we need to consider that there are virtually no Aframaxes on order, so if you take that percentage and apply it -- or sorry, take that number of ships on order, apply it to the overall LR2/Aframax fleet, we come in at 13%, which is still not alarming.

We also need to keep in mind that we're heading into a generation of ships that came post '28 -- sorry, 2008 for VLCC and Suezmax post 2007 for LR2s, which are sizable generations of vessels, which will come to age in 2027, 2028 and onwards.

So to sum this up before we open up for questions. Frontline has been high earnings capacity as we move into second half. We have a strong balance sheet with sensible leverage on our modern fleet. There is, as mentioned, a growing divide between the compliance and the sanction trade, which can create interesting volatility going forward. The security situation in Red Sea, Gulf of [ Fed ] and Middle East is ever increasing, as delivery slots for new building moves into 2028. We have seen that container ordering has accelerated again.

Short and medium term oil demand looks on track, but China is, of course, a question. The seasonal play is on. And I know a few people below this, what I say it again, winter is coming.

So with that, we will open up for questions.

[Operator]

[Operator Instructions]. We will now take our first question. And the first question comes from the line of Jonathan Chappell from Evercore ISI.

[Jonathan Chappell, analyst]

Inger, first question is for you. Slide 6, says you've completed the re-leveraging and the divesting of older vessels. So I just want to be clear, there's no more big refinancings that we should expect before 2027 and the divestiture of the older vessels is mainly complete at this point?

[Inger Klemp, executive]

Your first question was that there were no more refinancings until 2027. Was that correct?

[Jonathan Chappell, analyst]

Correct.

[Inger Klemp, executive]

Well, not any material ones. We have a few smaller ones, which will come in 2025. Apart from -- yes. And your next question or your second question was, sorry?

[Jonathan Chappell, analyst]

Was around the divesting of the older vessels. Is that process completed as well?

[Inger Klemp, executive]

Yes, that is also completed, yes.

[Jonathan Chappell, analyst]

Okay. Good. And then just a follow-up question on this latest refinancing with the sale and leaseback. It's interesting sale and leasebacks were kind of a thing of the prior tanker markets where rates were weak and maybe financing wasn't as available or attractive. And you've done most of your refinancing through traditional credit facilities. What was the thought process of doing another sale and leaseback at this point in the cycle to refinance that prior one?

[Inger Klemp, executive]

Well, actually, it's this new sale leaseback arrangement is refinancing a current sale leaseback arrangement. So we are not actually doing more. That's the same type 10 vessels that we have today, which we just are replacing and it's not a standard sale-leaseback arrangement in a way, you can look upon it more like a kind of bank facility because it's a leverage is only 60% loan to value and the terms are like a bank facility in a way. So that's why -- yes.

[Jonathan Chappell, analyst]

Okay. That's very helpful. Thank you for that, Inger. And then, Lars, just 1 for you. I mean I think the seasonality slide is pretty clear and many of us who've been around understand this very well. I guess there is some concern about China, you noted in your prepared remarks, let's not extrapolate July. But is there any way to take that inventory slide that you did for Slide 11, and isolate China? And is there a reason that China may be a lot more aggressive in the back half of the year? Or is it more of an OECD depleted inventory and maybe China doesn't have that type of panic going into the winter season where they need to be more aggressive on the imports.

[Lars Barstad, executive]

It's a very good point. And if we did that chart with China isolated, although it's implied inventory builds because the strategic part of their inventories is not public. It would look a bit different, whereas China has been more or less stable, running a fairly high level of inventory ever since we came out of COVID and as you might remember, they used that period with extremely weak oil prices to replenish their inventories. But with regards to China, it's not a mystery, but it is apparent that China is not going at the speed that we would like to see. However, if you just look at our neighbors in this building being in the dry bulk market, there is somewhat a different story.

So I think it's just very important to -- or it's very difficult to kind of read China right now. We also need to keep in mind that of the imports China do, they take close to 20% of their supply is coming from either Iran, Venezuela or Russia. So it's kind of difficult to monitor these flows accurately. So also, we know that they're taking more crude coming from Russia in the north. So I would say China is the dark course.

And right now, it doesn't look too good to be fair. But there are other countries in the region that are historically hired consumers during the winter. And the most notable one is, in fact, India. So -- but I actually think that -- I don't believe we'll have a mutual China into Q4 or towards Q1 that I doubt whether if we're going to have a year-on-year growth, that's more questionable. But I still think that with the rest of the situation, the rest of the countries that normally grow their demand during winter, I think we should still be okay.

[Operator]

[Operator Instructions] The next question comes from the line of Omar Nokta from Jefferies.

[Omar Nokta, analyst]

Just -- I've got a couple of questions on the market, but I also wanted to touch about -- touch on the VLCC performance you've booked thus far into the third quarter. You've got 79% of 3Q booked at just over $47,000, which obviously a little bit down from the first half, but still, I would say, quite impressive when we look at what the market has averaged since the start of, say, June, whether you take into account ECO and scrubber premium. So I just wanted to ask what's driven that perhaps outperformance in your view?

[Lars Barstad, executive]

Well, first of all, Omar, you need to keep in mind the fact that we report on a load to discharge basis. So that has to be highlighted. It's not all our peers and it's not always clear how our peers report. So you should not expect us to be able to book too much towards the end of the quarter here, basically because we can't account for income until the vessels actually load the cargo. But what has happened to Q1 is that we received a fairly big new fleet from Euronav, almost all delivered in the Middle East.

What we've done over the quarter has been able to kind of put this fleet into the trade reflecting the rest of the frontline fleet, whereas we try to keep -- limit our exposure to -- or to kind of to try and avoid having too much exposure to one particular base. And more recently, it's been the Middle East that is [Technical Difficulty] soft spot, kind of the kind of ironic that the VLCC benchmark or S&P 500 or Dow Jones Index is based on [Technical Difficulty] into the trade in Atlantic Basin, West Africa, U.S. Gulf, Brazil, regretfully a lot of short hauling because oil hasn't really gone far during -- well, the latter part of Q2 and into Q3. This is also explain some of the weakness in this segment in particular, and also how it's been cannibalizing on Suzmaxes and to some extent, but I'd say that there is no magic portion here is probably the word yes. But also keep in mind that this performance is we're quite okay or proud of it, considering also the fact that we've reduced our scrubber penetration in the fleet.

Having said that, you probably also noticed that the spread between high and low sulfur has been fairly narrow. So you could say that the scrubber benefits in the more recent months has not been as pronounced.

[Omar Nokta, analyst]

Okay. Appreciate that. And just a quick follow-up just on that point or just generally on the Vs. Have you played into the whole product cargo lifting in your fleet?

[Lars Barstad, executive]

Not on the VLCCs, but on the Suezmaxes, yes. So basically cannibalizing our own LR2s.

[Omar Nokta, analyst]

Okay. And then just kind of more on the market here. One, we've seen the recent pullback in Libyan exports or at least production volumes. It seems like they may be still able to export from inventory. But if this is prolonged and that volume is away from the market, how do you think that affects the different dynamics within the crude trade at this point. Obviously, Aframax has seemed more exposed to that. But how do you think the VLCCs and Suezmax react in that type of environment?

[Lars Barstad, executive]

You asked me before the disruption started in the Suez Canal or Red Sea Gulf of Hayden. I would have said that this is kind of material, but basically, what's happened kind of since those events started to occur, Libyan used to go east by way of either Suez or well, actually rarely all the way around, but at least through Suez. And with the disruptions in Suez, we've seen that oil trade local. So you're right that it affects the Aframaxes. It might have a limited impact on to Suezmaxes, but I would say, virtually no impact on the VLCCs. And it's actually again then that if you take one crude out of the equation, another one comes up.

[Omar Nokta, analyst]

And I guess in that situation, the -- if you lose that crude from Libya and that gets made up potentially from the Middle East, does that become a VLCC trade?

[Lars Barstad, executive]

Potentially, but it could also be replenished from Latin America or U.S, Gulf or West Africa. Because Libya is now then predominantly going into Europe and not to this to basically due to the disruptions in Suez.

[Omar Nokta, analyst]

Okay. Got it. And then one more for you. Just on -- you talked about the sanctions and the dark fleet, the grey fleet. I wanted to ask in terms of what's going on with Iran, how would you how do you think the market would move forward in a situation where I say there's more scrutiny on Iranian crude exports and those fall back to where they were a few years ago. I guess, you that grey, dark fleet perhaps maybe makes its way back to the "clean " or not clean but the market fleet. How do you kind of think about that versus needing to make up those barrels?

[Lars Barstad, executive]

No. I think this development has been going on for far longer than at least I anticipated or we anticipated. But it's basically kind of making it less and less likely that the vessels servicing this market is ever going to be able to return to a compliant market. So it means that any change, however, unlikely to the sanction regime against Iran, will be even a more positive effect on the compliant market. How this -- and this is an ongoing -- or a discussion come quite often.

From our side of the equation, we struggle to understand why why this trade can even go on. But obviously, if you come from a crude short nation who needs to refine petrol for your inhabitants, then then you will obviously take an opportunity for any barrels that you can get hold of. So regretfully, I don't think we can necessarily do much with this trade. What I am saying though is that as the compliant fleet is aging, it's a price into this fleet and this aging is accelerating as we move forward here.

So actually, unless you see Iran able to produce significant more oil or same goes for Russia, of course, Venezuela, all 3, which is unlikely. Will actually start to have an overcrowded kind of oversupplied sanctioned market. So I think that's -- because I lost all faith in enforcing sanctions. I lost all faith in kind of -- to regulate one out of this. We had a a tanker that blew out outside Singapore recently and nobody really put too much attention to that.

So we have a Suezmax burning in the Red Sea as we speak. Nobody really -- it doesn't really make that much of a headline if you're outside of shipping. I kind of lost that phase. But what I do believe is that we will see that fleet just continue to grow because the source of oil -- or the alternative for a ship turning 20 is still -- it makes a lot of sense to go into that market. But once the margins in that market are destroyed, we'll actually start to see recycling. If that makes sense. Sorry, it's a very, very long answer to question.

[Omar Nokta, analyst]

No, no, it did not, very interesting. I appreciate that perspective, somewhat sobering. But yes, Thanks, Lars.

[Operator]

[Operator Instructions] And the next question comes from the line of [ Devin Sangoi from TEJ ] Investments.

[Unknown Analyst]

Yes, Lars, I just want to ask you a question that you mentioned about the oil spillage in Red Sea, which happened, and there were several other instances. How do you see this dark fleet insurance getting covered because that's, again, the amount of crude is moving on and you don't have a global insurance companies who are willing to underwrite.

[Lars Barstad, executive]

It's an extremely good question. And when we did the -- basically we've done an exercise prior to this on to gauge how many ships and how many vessels are operating in the sanction trade or kind of a operating illicitly in the Russian trade because there are owners that are able to trade Russian barrels within other by way of getting at the station on the price cap or other means that they actually managed to trade Russian crude without raising any flags. But in order to gauge how much of that oil is actually on the sanction, one of the studies we did was basically to see how many of these vessels are actually not insured by any recognizable P&I club.

And that is basically the foundation for saying that we assume 75% of the Russian volumes are under sanction or sanctions exposed. So -- and that paints a horrendous picture if something happens. So the Suezmax in question that is currently burning in Gulf of Aden, that has insurance, I understand, from a P&I club, that's recognized, but the tanker that blew up outside Singapore, I might be mistaken, but still things they're trying to figure out you actually own the vessel in the end. So I think this paints a very, very big picture if we get more events like this.

[Unknown Analyst]

Okay. And the second question is on -- if you see the way soft landing has been questioned about there is always a doubt about U.S. economy going into a sort of recession, if not soft lending. And you have a Chinese economy not recovering. So next year, do you see if both these don't recover, then there will be a lower oil demand globally?

[Lars Barstad, executive]

I don't think we'll have lower global oil demand globally, but the expected oil demand growth will be limited. So -- but if you couple that with the fact that the fleet -- the tanker fleet is presumably shrinking at least the efficient fleet is shrinking we're not too worried about that from a tanker demand perspective.

[Unknown Analyst]

And any other factor, which can affect the ton mile because we've seen a significant change in ton miles over the last 12 months. So do you see any other factor which affects mile positively or negatively?

[Lars Barstad, executive]

No, there's nothing really that comes to mind. We are moving into a weather exposed period of the year. which partly explains the volatility we normally see towards winter. So that could obviously change things up. But -- and obviously, sudden supply changes like Libya was mentioned, where we're losing 6.5 -- sorry, 660 million barrels per day or thereabouts. That is actually enough to trigger certain changes. But there is nothing kind of apparent I see.

We see the TMX pipeline, which is the new flow out of Canada on the U.S. West Coast. That is kind of developing, but it doesn't seem to have altered trading lanes materially. But again, one thing to watch is, of course, production growth in Guyana in Brazil and then in U.S. Gulf, there is not so much export growth expected out to U.S. Gulf for next year, but everybody has been wrong every year in quite a long time. And there is also an election over there, so -- which might affect the willingness to invest in production, which will hit on exports. So I think there are numerous kind of interesting spots to look at but nothing kind of material that I think will happen very, very soon.

[Unknown Analyst]

Okay. And as you've seen, you've been paying out handsome dividend, but if you're call on the bull market goes right, you will be flushed with so much cash. What do you do with the cash?

[Lars Barstad, executive]

We pay to our dear investors, then you can decide what to do. Now that is -- that was kind of jokingly said, but that's basically how we operate unless we see an investment opportunity that we think will yield our investors a better return on equity. We will pay it all out.

[Unknown Analyst]

So you don't see any -- see you've done pretty -- we were the first one to take out all the ships from the yard, half completed VLCC and now you'll leverage your balance sheet. So you have a financial leverage operating leverage. Do you still see any good asset acquiring opportunity? Or are we done with it?

[Lars Barstad, executive]

I think and I hope that we are in line with the rest of the markets that -- we need to see a confirmation in the rates in our markets before we have the conviction to do anything on the asset side. So basically, right now, we're content with the fleet composition we have. But if the market is going to continue to only pay us $40,000 to $45,000 per day, there is -- makes no sense to either buy or order a ship at these price levels.

[Operator]

[Operator Instructions] As there are no further questions, I would like to hand back to Lars Barstad for any closing remarks.

[Lars Barstad, executive]

Thank you, and thank you for listening in. Thank you for roll off very, very good questions. And we'll just keep our fingers crossed for the normal season pattern to start to contemplate. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.