Frontline Ltd

NYSE:FRO

Earnings Call Analysis

Frontline Posts Strong Q3 Performance

In Q3 2023, Frontline achieved robust earnings with its VLCC, Suezmax, and LR2/Aframax fleets at $48,100, $37,600, and $33,900 per day respectively. Positive financial health is indicated by a net income of $107.7 million, an adjusted net income of $80.8 million, and a solid liquidity position of $715 million. The quarter faced challenges due to geopolitical events and market dynamics but saw record Chinese imports and favorable U.S. exports. Projected Q4 cash breakeven rates for the fleet average at $24,200 per day, lower to $22,200 per day excluding dry dock costs.

Fleet Expansion and Refinery Capacity Restoration

The company has recently experienced a significant boost in its refinery capacity, with 2.5 million barrels now back online after maintenance. This uptick in capacity is poised to augment the ocean transport of oil, which is particularly notable considering the daily global movement of approximately 42 million barrels. The anticipation of rising crude transport demand, paired with the construction of new refinery capacity particularly east of Suez, suggests a prosperous future for oil trade routes, benefiting both crude and product transportation.

Strategic Positioning in Very Large Crude Carrier (VLCC) Segment

Frontline has strategically more than doubled its presence in the VLCC market, positioning itself to capitalize on the global growth in oil demand and the potential benefits stemming from the current geopolitical tensions. The company has bolstered its operational leverage through this move and is primed to navigate future market dynamics with its large, modern, and efficient fleet.

Dry Docking and Fleet Operations

The company foresees a Q4 where approximately 15 vessels are delivered, translating to roughly 255 operating days for December alone. Alongside operating expenses and interest expenses from day one, depreciation expenses will also hit the financial statements following each vessel's delivery. With dry dockings assumed to span 20 to 25 days per vessel, the company's operations are set to become even more robust.

Global Trade Shifts and Oil Transport Trends

The landscape of crude oil exports is shifting, with the U.S., South America, and to some extent, the North Sea and West Africa, emerging as substantial contributors. This geographical shift is likely to boost the long-haul trade of crude oil. The company acknowledges the contradiction between these evolving dynamics and OPEC's bullish demand stance but also recognizes the opportunities these changes create for U.S. fracking and production.

Navigating Regulatory Changes

Frontline is proactively preparing for the introduction of the EU Emissions Trading System (ETS) in January 2024, which will tax carbon emissions from voyages within and into/out of the EU. The company has integrated these anticipated costs into its freight calculations and is focusing on maintaining its competitive edge through a modern, energy-efficient fleet.

Market Uncertainties with Venezuelan Exports

The Venezuelan oil market remains uncertain, partly due to the potential change in sanctions allocations by the U.S. and the need for a diverse crude slate in U.S. refineries. While some Venezuelan cargoes have started pointing towards India, the direction of exports remains to be fully discerned, keeping the outlook for regional trade nebulous.

Guyana's Production and Geopolitical Considerations

Guyana, with its daily production and exports of approximately 450,000 barrels, is a growing figure in the global oil landscape. Given that U.S. interests own virtually all oil production in the country, it is expected that U.S. support will shield Guyana's sovereignty and its ongoing operations from any geopolitical tensions with its neighbors.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Q3 2023 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 speaker today, Lars Barstad. Please go ahead.

[Lars Barstad, executive]

Thank you. There all, thank you for listening into Frontline's third quarter earnings call. To start off, I believe it's prudent to mention that Q3 this year started challenging and remind the audience of July, August and Sep is normally called the summer lull in the tanker industry.The excitement in June did give us high expectations for the fall market. And although not draw dropping, we have seen worse. The tanker market continues to be firm with risk rather on the upside than the downside, but there are many pieces to this puzzle. I will get to some of them in this presentation. Before I give the word to Inger, let's look at our TC numbers on Slide 3 in the deck. In the third quarter, Frontline achieved $48,100 per day on our VLCC fleet. $37,600 per day on our Suezmax fleet and $33,900 per day on our LR2/Aframax fleet.We saw the more normal split between the segments, but this converged again as we progressed into Q4 with 81% of our VLCC days looked at $48,100 per day, 70% of our Suezmax days at $50,300 per day and 70% of our LR2/Aframax days at $51,300 per day. Again, all numbers in this table are on a low to discharge patients and they will be affected by the amount of ballast days we end up having at the end of Q4. We would also like to highlight that these numbers exclude the 24 VLCCs that are delivered during this quarter and next. Further, as we can only account for revenues when a vessel is laden, the new vessels are not likely to affect revenues for Q4 materially. I would now like to let Inger take you through the financial highlights.

[Inger Klemp, executive]

Thanks, Lars, and good afternoon, ladies and gentlemen. Then I think we can turn to Slide 4, profit statement. Frontline achieved total operating revenues and net of voice expenses of $232 million in the third quarter and adjusted EBITDA of $173 million. We report net income of $107.7 million or $0.48 per share, and adjusted net income, a net profit of $80.8 million or $0.36 per share in the third quarter.The adjusted profit in the third quarter decreased by $129 million compared with the previous quarter, and that was mainly driven by a decrease in our time charter equivalent earnings due to lower TCE rates in this quarter, which was partly then offset by application in other income and expenses. The adjustments in the third quarter consists of $17.9 million gain on marketable securities, a $1.7 million share losses of associated companies, $400,000 unrealized loss on derivatives and $11.1 million of dividends received.Let's then look at the next slide, Slide 5. Frontline has strong liquidity of $715 million in cash and cash equivalents, including the undrawn amount of our senior unsecured revolving credit facility, the marketable securities and minimum cash requirements for the bank as per the September 30, 2023.The current portion of long-term debt in the balance sheet at the third quarter includes $91 million from a loan facility due in the first quarter of '24, which was refinanced in November '23. And then also $75.3 million related to the senior unsecured revolving credit facility, which we in October '23, extended to the first quarter of 2026.We have no remaining newbuilding commitments and no meaningful debt maturities until 2027, and we also have a healthy leverage ratio of 52%. Then I think we can turn to Slide 6. We estimate average cash cost breakeven rates for the fourth quarter of 2023 of approximately $28,200 per day for the DCCs, $35,700 per day for the Suezmax tankers and $17,100 per day for the LR2 tankers with a fleet average estimate of about $24,200 per day. The fleet average estimate includes dry-dock of seven used batch tankers this quarter, where one vessel only includes 50% of its dry-dock cost due to docking in between two quarters and also one VLCC in the fourth quarter. The cash breakeven rates, excluding dry dock cost is estimated to be $2,000 lower or $22,200 per day.We recorded OpEx expenses, including dry dock in the third quarter of $7,400 per day for VLCCs, $7,500 per day for Suezmax tankers and $7,100 per day for the LR2 tankers. One Suezmax entered dry dock in the third quarter and finalized in the fourth quarter. Q3 fleet average OpEx excluding dry dock was $7,400 per day.Then lastly, let us look at Slide 7 and how the acquisition of the '24 VLCCs is funded. As we can see from the slide, we will finance the purchase price of $2.35 million for the '24 VLCCs with the bank facility of $1.4 billion, $252 million cash proceeds from the sale of the $13.7 million shares of Euronet to CMB. $49 million cash on hand, $99.7 million from our senior unsecured revolving credit facility and also $540 million from the shareholder on from [indiscernible[00:07:57] ]. The ambition is to minimize need for cash from the shareholder loan through front line capacity to deleverage the existing fleet due to the historically low loan-to-value and/or sale of all the nonequal less-efficient vessels. With this, I leave the word again to Lars.

[Lars Barstad, executive]

Thank you very much, Inger. As I started with in the introduction, Q3 was a challenging quarter. And just so the audience on Slide 8, can remind themselves, if you look at the three graphs at the bottom side of the slide and you look at July, August and September, you'll see kind of what state we were in. Despite this, we actually managed to turn quite a good return for this quarter, I believe.The big theme in Q3 was definitively the G7 price cap that came into force in earnest on Russian crude and the increased scrutiny on the fleet sailing with Russian crude. A lot of these vessels and owners decided to return to the non-Russian fleet, which increased supply, basically competing with the Frontline fleet as we progressed through Q3. I think on the positive side, China continued to grind and with record import volumes and U.S. exports surprised to the upside incurring very healthy ton miles. We go to U.S. sanctions on Venezuela lifted. I'll come back to that later. We did see, as we got into Q4, growing political risk and the Israel-Hamas conflict. This has yet to affect the physical kind of trade of ships per say, but it's a security concern in respect of our seafarers and it's also an operational concern when we sell through the area.I've also mentioned earlier in the presentation that we do have a normal seasonality at play now that we have kind of less amounts of black swans in operations in the market post COVID. And then we come back to OPEC action and OPEC eagerness to balance markets.So on that note, let's move to Slide 9. So I was actually just trying to check on Twitter, whether if the OPEC has actually come with a statement yet but it seems that there is a lot of people betting on 1 million barrel per day cut into next year or during next year in addition to Saudi Arabia's 1 million barrel voluntary cut. And I think it's prudent to remind the audience that OPEC output production and export, these terms are not kind of equal.Output and production is not exports. And as oil demand is very firm, we also need to remember that OPEC is not the only supplier. Also, these production targets leaves room for individual nations to adjust their export levels. And exports seem to be more correlated to domestic demand amongst the large producers rather than kind of the stated OPEC targets. What we've experienced since August this year, for instance, from Saudi Arabia is that their exports have actually increased. Also, if we look at an aggregated graph on the right-hand side, looking at all the OPEC solutions, we've actually seen the same trend. So as production is actually coming off in line with adjusted targets, export is actually increasing.And again, the reason for this is basically because the domestic needs for this oil or for oil has been reduced, which enables the various OPEC members to actually export more. At the end of today, I believe it's oil revenues. That is what really matters for these nations. And we kind of commitment to balance in the oil market is probably difficult for OPEC considering all the alternative sources of crude we currently have.With that, let's move to Slide 10, on some of the tanker narratives. One thing that's quite surprising is, first of all, the stickiness to Russian exports amidst kind of a very stated policy against -- sorry. Well, first of all, the market is quite surprised about Russia and the resilience of Russian exports against a very firm policy on crudes being purchased along the first half. We've also seen Iran who is still very functional, managing to maintain their exports and even increase them as we come into the second half of this year.And then lastly, Venezuela is kind of the new entrant to the table where U.S. sanctions have been lifted. Also U.S. exports are at record highs, and they are increasing. With regards to Venezuela, we expect their exports to be able to increase by around 300,000 barrels per day in short term. Basically, to reach 600,000 to 700,000 barrels per day annually. This is not a massive number. But if we look at just now as we speak, there are 4 to 6 VLCCs on successfully Russian nonimportant crude in December, late November and December. And this is actually a significant number of vessels that are not available to U.S. exports. So we believe that this will actually, to some extent, tighten up the Atlantic markets.Then lastly, what we have seen, and I mentioned this before on seasonality, we've had 2.5 million barrels of refinery capacity, which is now back after the full maintenance. And since a lot of this volume is directed to oceangoing oil, this is a significant percentage of the 42 million barrels of oil that is transported every day.Let's move to Slide 11, and we've included in this presentation what we call a very long view. And this is kind of an interesting observation, both from a products point of view, but also from a crude point of view. East and West of Suez and how the pipelines of the ocean seem to be stretching. New oil production capacity and shale is contributed from the west of Suez. We've seen Brazil increasing production we've seen the new production coming out of Guyana, we're seeing Venezuelan exports increasing, and we see that shale continue to increase productivity.At the same time, we're seeing a strong refinery capacity to be built up or having been built up and to continue to be built up East of Suez. This would benefit both crude transportation as feedstock into these refineries, and products trade would benefit from this development as the clean product or refined product will flow back west of Suez. And I think it's important to note that the future tanker capacity is not reflecting these projections and the trade extension whatsoever.Let's then move to Slide 12 and have a look at order books. We've gone through this slide every quarter now for quite a while, and it's not materially changing, I would say. We see there are virtually no new orders for VLCCs over the last quarter, and the order book stands of 1.8% of the fleet. I think it's at least in my time in shipping, it's the first time we're only looking at 3 VLCCs to be delivered next year. This will affect the markets come Q1.Normally, you will have, I wouldn't say whole, but you would have a significant amount of VLCCs being delayed from the previous year into Q1. This is also likely to affect the demand for LR2s as a lot of these vessels on their maiden voyage will carry refined products. This will not be available in Q1 next year. We've seen both the Suezmax and LR2 fleets increased but predominantly in 2026 and to some extent, in 2027 most recently. This gives us an indication that the yard capacity to build in 2026 is winning, and we are now more focused to 2027. And I have repetitively said this quite many times now, this gives us quite a long time going forward where the fleet growth is expected to be muted. Also, please keep in mind that the effective age of a clean trading LR2 is much closer to 15 years than 20 years.Lastly, on Page 13, I thought I'd spend a little bit of time on EU ETS. As most of the listeners would be aware of, EU has imposed a tax or a fee or whatever you call it, on carbon emissions inside the EU and in and out of EU and shipping is to be included from the 1st of January 2024. The EUA exposures on current voyages going into 2024 are already exposed. 100% of the emissions on voyages within EU and the EEA needs to be accounted for and 50% of the emissions going in and out of EU and EEA will apply. This scheme will cover 40% of the total emissions in 2024, 70% in 2025 and 100% in 2026. This is a fairly big change to how shipping is being orchestrated within the EU.For every ton of carbon we emit inside the EU in or on our way out, we actually emit 3.2 tons of carbon. And this means that we need to buy carbon credits for each ton we emit. EUAs are easily available and can be traded through various exchanges. The European Union are the ones monitoring this, and we need to report via our normal MRV reporting to the authorities. I think the headline here or the big question mark here is, is our industry really prepared for this change?At Frontline, we have decided to take a very pragmatic approach. First of all, we have a modern and energy-efficient fleet, meaning that we should be competitive as our emissions is most likely to be lower than our peers. We also have decided to look at this as an additional fuel cost. So basically, put it into our warehouse calculations and put it in our freight calculation. So, it's basically an additional voyage cost.Also, our overall fleet, it's only 60% of our voyage days that are exposed to the EU ETS. But I think it's very important that this is coming basically around the corner. There has been some discussions in the press about this. There are ongoing discussions between charters and owners on how we deal with this from a charter party and a legal perspective. Growth scale has already put the EU ETS into their wholesale calculation. But how this is going to end up when we start to see the trading pattern develop going in and out with an evidently increased cost to the charter. We had the evidence to the charter. I think it's going to be interesting to see how this plays out next year.And as I mentioned, we're already getting exposed because vessels that go into the EU for a cargo operation in 2024, and some of these are being fixed as we speak, will be exposed to the EU ETS. So let's move to Page 14 and go through the summary. So tankers are performing and if you look at the bottom chart here on this page, and I think this is important because we're obviously, as I mentioned today, and I was quoted in the press, I would obviously love a lot of fireworks in the market. But if you look at the columns to the right, we are actually on an average as a combined tanker fleet, including all the tankers, we are actually not doing too bad. So, tankers are performing and maybe now it's time for the VLCCs, at least looking at the most recent development in the market.Frontline has more than doubled its VLCC position, and we are gearing up for title [Indiscernible]. The fundamental backdrop remains. We have decade-low order book, and we have further extending lead times for them to be replenished. Frontline has, by this transaction, increased our operational leverage as global oil demand is expected to grow and short-term, medium-term oil demand expectations are very good, and we're seeing that in the numbers. We haven't seen political risk increase, and this creates tension in the oil and the freight markets. But we believe Frontline's large modern fleet and very efficient business model is ready as these next chapters unfolds. Thank you very much for that. And with that, I'll open up for questions.

[Operator]

'[Operator Instructions]' And now we're going to take our first question, and it comes from the line of Jon Chappell from Evercore ISI.

[Jonathan Chappell, analyst]

I have three kind of quick clarification questions mostly. Lars, if I can start with you. So the slide on the output versus production versus exports is very interesting. Obviously, the exports have started to pick up meaningfully from August. But if I look at your quarter-to-date bookings on the VLCCs, only a little bit higher than what you did for the full third quarter, and you're also insinuating that because of the ballast days that number comes in less than 48,000. So probably even a shorter or more narrow outperformance relative to 3Q. What's been holding back the seasonal recovery in the fourth quarter so far for VLCCs if the exports have lifted so meaningfully off the bottom in August?

[Lars Barstad, executive]

It's a very good question and it's a daily discussion point amongst us, at least in-house in Frontline because the general activity in the tanker market is extremely high. There are a lot of cargos being worked, a lot of fixtures being conducted every day. But quite a few players there are seemingly very happy with doing the last one.I think kind of one way to explain it, and I'm going to be quite frank here. If you look at Middle East as an export region, about 70% of the cargos going out of the Middle East are contracted. So it means that they're either under a COA or some formal time charter coverage. The COAs are price of stock, the stock market as possible. But it only leaves like kind of 30% of the cargos coming out into the stock market to be negotiated. And then if you look at the balance between the owners, you also find that quite a few of those 30% owners that are pairing kind of in that market are very inclined for the market to go up. It's either they're both charters and owners or for other reasons, they're not really that interested in fighting this market. So it leaves us with kind of very few, well, to reuse the term, real owners, that are there to basically hold back and fight for the next world scale points. And I think kind of regret the market has become more and more efficient.So when we have situations in the VLCC market, where you would say, okay, this is going to pop by five points because there's only one ship in position, suddenly, that one ship in the position does last ton or two points below last. So it's a very kind of the dynamics, it's very difficult to understand right now. On the Suezmaxes and Aframaxes, I believe it is explained by the increased scrutiny, particularly by OPEC on former Russian traders which basically has increased the free supply in this conventional market at a price of the indices.So I think, basically, you need to do and what we need to see is this market just need to grind for a bit longer before the tightness becomes evident. Lastly, we do still see a significant volume of oil being transported on ships that are totally out of IMO or insurance or legal or whatever kind of framework. So if you look at the population of shifts that are above 20 years, and it was commented by one analyst in the morning meeting today, you see a 1996 sea lifting a rain in crude, you do wonder why is this still going on. So I think that should answer your and many other people's questions, I guess.

[Jonathan Chappell, analyst]

Yes, I appreciate that. Inger, the second one is for you. On Slide 7, completely understand the ambition to minimize the shareholder loan of $540 million. And I understand that there's opportunities to refinance and also potentially sell some noncore vessels. But your liquidity is $715 million. If I look at this chart, I assume that, that $149 million, the cash on hand, $49 million, $100million on the senior unsecured is part of that $715 million. So that takes you down to $565 million of liquidity, which would be more than the shareholder loan. So I guess the question is, why couldn't you use the existing liquidity, understanding you don't want to use every last dollar of liquidity to bypass a significant portion of the shareholder loan immediately without being then reliant on vessel sales or refinancing?

[Inger Klemp, executive]

Okay. This is $715 million, that includes the shares in Euronav, also as a part of the, let's say, financing of this transaction. So we have to take that out first, at least. And then also this $715 million includes the undrawn portion and the senior security revolving credit facility, where we have stated in this slide that we will plan to use about $100 million off. Yes, and also of course, we need to have some cash on our balance sheet to support the operation and also, I mean, cash requirements, yes. So, I think you will find that we do need the cash of $540 million as well.

[Jonathan Chappell, analyst]

Last one, super quick. Just understanding the dynamics for the fourth quarter. I think you were clear the revenue from the '24 VLCCs. We shouldn't expect anything until January when they look their first cargo. Obviously, the interest expense would fall in December. What about operating expense and depreciation? Will operating expense and depreciation hit the profit and loss statement as soon as the vessels hit, and therefore, the revenue will be the only lag?

[Inger Klemp, executive]

Yes. I guess what we talked about earlier today was that you could probably assume that as much as 15 vessels will be delivered in the fourth quarter out of this '24. Let's assume that one vessel is delivered every second day in December, and then you will get to about 255 operating days in December for these vessels. And then, so as you say, you will have operating expenses of course, because from the very first day, you take delivery of a vessel that will start to accrue. You will also have interest expense on the loan drawdowns, then you will also have a depreciation on the vessels. So that's correct.

[Operator]

And the next question comes from the line of Amit Mehrotra from Deutsche Bank.

[Christopher Robertson, analyst]

This is Chris Robertson on for Amit. Just first question, Inger, for you. On Slide 6, talking about the dry docking expected for 4Q. How have dry docking days kind of trended recently? I know that they are pretty elevated during the COVID congestion times. But are they around 30 days now for vessel 35? Where does that sit?

[Inger Klemp, executive]

No, the assumption for these dry dockings that we have in the fourth quarter is about 20 to 25 days for each stocking.

[Christopher Robertson, analyst]

And then, Lars, maybe a market question for you. Turning to China, Chinese oil import demand has been pretty robust this year, I guess, despite some economic issues in the property market issues going on still. What are you seeing in terms of today of Chinese oil product demand domestically? And what are your expectations around export quotas coming into 2024?

[Lars Barstad, executive]

Well, as you're absolutely right, in the economical headwinds that have dominated the narrative around China hasn't really been noticed on the crude oil import side. And incidentally, it's actually the same case if you look at LPG and coal and iron ore as well that China is seemingly pretty healthy. I think over time here in China, oil and oil products have become more kind of a consumer good rather than an industrial good, potentially explaining some of this resilience.We're also seeing that China did use or at least is implicated that they built a lot of inventories kind of as we proceeded into Q3, which they're apparently drawing on now. On the product export side, I think kind of how this winter will bear with us is going to be a key to that because we did see that a little bit last year that with a fairly mild winter in the Northern Hemisphere across the globe. You saw that China's kind of ability to export or willingness to give export quotas on product was pretty good at the beginning of 2023. So, I think that the last question is on product and product quotas is probably more a weather question than anything. On the import side, we saw them just recently increase the import quarters of fuel oil, which is actually quite positive in light of the fare of China to stop growing.

[Operator]

And the next question comes from the line of Omar Nokta from Jefferies.

[Omar Nokta, analyst]

Lars, I think, obviously, as this call has gone on, we're starting to see headlines coming out that OPEC Plus have agreed on a cut. And it looks like you're still waiting for the statement, but it appears million barrels of incremental cuts. Now we don't know if that's a cut or just a quota reduction. But just, I guess in general, historically, there's always been this close relationship with VLCCs, especially that cut is bad, a boost is good. That seems to have been challenged here over the past several quarters. I guess, and with your commentary in the presentation, but as far as you kind of think about it, how do you think that this market plays out here in the near term if indeed there is 1 million barrels taken off the market? Obviously, it reads as a negative. But just a bit of picture, what do you think this means for VLCCs and say the Suezmaxes over the next few months?

[Lars Barstad, executive]

I'm tempted to say it's flat out positive, but you can't really say that. I think kind of this notion of OPEC cuts and predominantly, that happens in or around the Middle East. If you look at it in a very historical perspective, this was when the Middle East countries dominated crude oil exports in total. Now the landscape has changed. U.S., South America, even the North Sea and West Africa, to some extent, is a big contributor to the crude oil. I think there is no doubt that the demand side is kind of the Middle East and the East of Suez. And I'm not the only commentator that has said this, but this is, in fact, great news for U.S. fracking and great news for U.S. production.But then it will also then benefit the long-haul trade of crude oil. But I think initially, it's obviously a bearish sign. It does contradicts OPEC's very bullish stance on demand. So that's maybe something one needs to dig a bit more into. So, number one, assuming demand is going to be the same, you need to source oil from elsewhere. But, number two, also keep in mind that, as I mentioned, production is not necessarily exports. And we do see that the Middle East and exports are actually more correlated to the temperature in the Middle East over the summer when they do consumer lots for cooling rather than the stated production quotas.

[Omar Nokta, analyst]

And I guess maybe it does feel perhaps that as time goes on, we're going to see more of that non-OPEC production start to fill the gap. And, I guess, as you think about the '24 VLCCs coming on, obviously, you have those financed and you've been pretty vocal about not needing to raise any equity to fund the transaction and kind of went over the liquidity earlier, Inger. I guess any updated thoughts on the need or potential willingness to want to issue equity, even though your leverage is still at 52%? Any update or thoughts on perhaps when to tap into equity, just to derisk the transaction?

[Lars Barstad, executive]

Not really to quite understand. I believe we're fairly vocal in this presentation and Inger do clearly stated that we have capacity in our existing or old Frontline to say, to choose another word. We're also looking to see if we can divest certain assets to maintain our very, very modern fleet. So, I believe we have the same message as we did when we went public with the transaction, and we'll just continue that.

[Omar Nokta, analyst]

And then a final one, just on the dividend. Obviously, I think I may have asked you this last quarter or maybe last month when you held the call following the announcement of the deal. Just in terms of the dividend, you've had this unofficial policy of perhaps paying out 80% of earnings. That was recently with a lower net debt gearing, how are you thinking about that dividend? Does that change percentage-wise once the deal is complete in Europe to a higher leverage? Or are you still comfortable with, say, that 80% being a good threshold?

[Lars Barstad, executive]

As you rightfully say, we don't have a policy, but the expectation should be around 80%. And we will continue to do that as long as the market allows us to do that. This is why we don't really have a policy because we don't want to be forced to pay out the dividend when it's not kind of feasible from a financial perspective. So, this is basically at the discretion of our Board but we have the main shareholder who is more interested in dividends than you are. So I think you should expect that to continue going forward.

[Operator]

'[Operator Instructions]'. Now we're going to take our next question, and it comes from line of Greg Lewis from BTIG.

[Gregory Lewis, analyst]

Lars, I guess I had a question around, as we look out at potential pockets of oil production outside of OPEC. Clearly, Guyana has been a nice bright spot. I'm kind of curious, as we look at South America, what's your outlook on volumes from that? And then I guess there's been more recent headlines this week. I guess they're coming at us in a million directions about Venezuela potentially, I don't know. They're unhappy with what's happening in Guyana and there's talk of invasion of Guyana. I guess my question is, how much crude is hitting the international market from Venezuela as of today? How much is coming from Guyana and if there's a disruption there, what segments of the tanker market are probably going to be most impacted by that?

[Lars Barstad, executive]

Well, the Venezuelan exports and it's obviously will be strongly allocated by the U.S. on relief on the sanctions. It's basically because the U.S. refining industry or the crude slate, which is a word for that, do need these barrels. They can't refine more shale. So, they actually need this mix into the refineries. So, one would assume that most of this enclosed going short haul on Afram and potentially Suezmax into U.S. But what we've seen just recently is that there's a lot of VLCC-cargos being built up. And actually, some of them have been pointing towards India.So, I guess, the jury is still out on Venezuela. Venezuela were exporting between 300,000 and 400,000 barrels per day prior to the sanctions getting lifted. It's expected and this is not my number. It's what I've basically read in the press is that they might short term, be able to increase this to 300,000 barrels per day or with 300,000 barrels per day. So they're going to be in 600,000 barrels to 700,000 barrel per day kind of export capacity. Which portion of this is going to U.S., Europe or Asia? It's very, very difficult to gauge. They do still apparently owe China a couple of billion dollars for that oil for loan or financing deals that were done some years back.When it comes to Guyana, Guyana is producing and exporting because it's a small nation that don't really consume anything, around 450,000 barrels per day. I think in the Venezuela-Guyana discussion, one could probably have some comfort in the fact that virtually, all their oil production is owned by U.S. interests. So it's probably likely to think that U.S. will help Guyana in protecting their sovereignty over these areas. But it's very early days to speculate on that.Operations are going as normal out of Guyana as we speak. I think, the bright spot here is that, I think most analysts have been quite surprised by how resilient U.S. production has been this year and even going kind of above expectations despite the lack of DUCs and the lack of CapEx and the lack of everything. And at the same time, we've seen that Latin America, there are more and more barrels being kind of squeezed out of the various basins there. So we're kind of mildly optimistic about that development going forward.

[Gregory Lewis, analyst]

And then as I think about the queue at the Panama Canal, I mean, clearly, that looks like it's impacting the smaller segment of the product tanker markets just as we look at like North American cargoes heading down to Southwest, South America. Has there been any knock-on effect on the LR2 market, given that's where your focus is? Trying to understand these disruptions and I guess, containerships have priority over product tankers which is keeping product tankers more. I was hearing that you might even see some MRs go through the Strait of Magellan. Is there any kind of knock-on effect that we're seeing there that's impacting the LR2 market?

[Lars Barstad, executive]

I wouldn't say it's significant to put it that way. It's not that often we've been exposed to the Panama Canal. We have on the old location, ballasted true from the other end. Yes, I would play down the impact at least on the larger clean vessels because we haven't really seen that tighten up the market very much or increased ton miles.

[Operator]

'[Operator Instructions]'. There are no further questions at this time. And I would now like to hand the conference over to Lars Barstad for any speaking remarks.

[Lars Barstad, executive]

Well, thank you all very much for listening in, and I wish you a pleasant day. And hopefully, there is some, I'll use the word fireworks, at least there are some fire crackers left in this market as we move into December. Thank you.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.