Frontline Ltd. (NYSE:FRO) Q3 2023 Earnings Call Transcript
Frontline Ltd. (NYSE:FRO) Q3 2023 Earnings Call Transcript November 30, 2023
Frontline Ltd. misses on earnings expectations. Reported EPS is $0.36 EPS, expectations were $0.46.
Operator: Good day and thank you for standing by. Welcome to the Q3 2023 Frontline plc Earnings Conference Call. At this time, all participants are in a listen-only mode. [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: Thank you. Dear all, thank you for listening in to 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 Sept 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 jaw 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 Q3 numbers on slide 3 in the deck. In the third quarter, Frontline achieved, [Technical Difficulty] a day on our VLCC fleet; $37,600 a 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 booked 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 load-to-discharge basis and they will be affected by the amount of ballast days we ended 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 you can only account for revenues when the 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: Thanks, Lars, and good morning and good afternoon, ladies and gentlemen. Then I think we can turn to slide 4, Profit Statement. Frontline achieved total operating revenues net of voyage expenses of $232 million in the third quarter and adjusted EBITDA of $173 million. We reported net income of $107.7 million, or $0.48 per share and adjusted net income and net profit of $80.8 million or $0.36 per share in the third quarter. 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 partially offset by fluctuations in other income and expenses. The adjustments in the third quarter consist 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 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 VLCCs, $25,700 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’s average estimate includes drydock of 7 Suezmax tankers this quarter where one vessel only includes 50% of its drydock cost due to docking in between two quarters and also one VLCC in the fourth quarter. The cash breakeven rates excluding drydock cost is estimated to be $2,000 lower or $22,200 per day. We recorded OpEx expenses, including drydock 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 drydock in the third quarter and finalized in the fourth quarter. Q3 fleet average OpEx, excluding drydock, was $7,400 per day. Then lastly, let us look at slide 7 and how the acquisition of the 24 VLCCs funded. As we can see from the slide, we will finance the purchase price of $2.35 million (sic) [$2,350.0 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 Euronav to CMB, $49 million cash on hand, $99.7 million from our senior unsecured revolving credit facility and also $540 million from the shareholders of Hemen. The ambition is to minimize need for cash from the shareholder loan through Frontline’s capacity to releverage the existing fleet due to the historically loan to value and/or sale of older non-eco less efficient vessels.
With this, I leave the word again to Lars.
Lars Barstad: 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 we look at the three graphs at the bottom side of the slide and you look up July, August, and September, you’ll see kind of what state we were in. Despite this, we actually managed to churn 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 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 fleets as we progressed through Q3.
I think on the positive side, China continued to grind with record import volumes. And U.S. exports surprise to the upside, incurring very healthy ton miles. We got U.S. sanctions on Venezuela lifted. I’ll come back to that later. We did see towards, as we got into Q4, a growing political risk and the Israel/Hamas conflict. This has yet to affect the physical kind of trade of ships, per se, but it’s a security concern in respect of our seafarers, and it’s also an operational concern when we sail through the area. I’ve also mentioned earlier in presentations that we do have 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, which is very, very current, OPEC action and OPEC’s 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 OPEC has actually come with a statement yet. But it seems that there is a lot of people betting on a 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, I’m -- 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 leave 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 OPEC producers, we’ve actually seen the same trend. So, as production is actually coming off in line with adjusted targets, exports 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 the day, 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 and 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, again, kind of a very firm policy on crude [ph] being purchased [Technical Difficulty]. We also see Iran, who is still heavily sanctioned, 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 entrance to the table where U.S. sanctions have been lifted. Also, U.S. exports are at record highs and they’re increasing. With regards to Venezuela, we expect their exports to be able to increase by around 300,000 barrels per day 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 see, there are 4 to 6 VLCCs [Technical Difficulty] in the late -- sorry, in December, late November and December. And this is actually a significant number of vessels than that are not available to U.S. exports. So, we believe that this will actually to some extent tighten up the Atlantic market. 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 fall 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 the 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 West of Suez. We’ve seen Brazil increasing production. We’ve seen new production coming out of Guyana. We’re seeing Venezuela exports increasing. And we see that shale continue to increase productivity. 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 this product -- the clean product or refined product will flow back West of Suez.
And I think it’s important to note that the future tanking capacity is not reflecting these projections and the trade extension whatsoever. Let’s then move to slide 12 and have a look at orderbooks. We’ve gone through this slide every quarter now for quite a while, and it’s not materially changing, I would say. We see virtually no new orders for VLCCs over the last quarter. And the orderbook 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 VLCC is to be delivered next year. This will affect the markets come Q1. Normally, you will have, I wouldn’t say a wall, 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 fleet increase, but predominantly in 2026 and to some extent in 2027, most recently. This gives us an indication of that the yards capacity to build in 2026 is waning, and we’re now more focused to 2027. And I’ve 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 EU and in and out of EU.
And shipping is to be included from the 1st January 2024. The EUA exposures on current voyages going into 2024 are already exposed. 100% of 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 one 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 or on our way 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 that we need to report during our -- or via our normal MRV reporting to the authorities.
I think the headline here is that, or the big question mark here, 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 compared to an additional fuel cost. So basically put it into our voyage 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 charterers and owners on how we deal with this, from a charter party and a legal perspective. Worldscale has already put EU ETS into their Worldscale calculation. But how this is going to end up, when we start to see the trading patterns develop going in and out and evidently increased cost to the charter or hopefully add this to 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 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 tighter fundamentals. The fundamental backdrop remains, we have decade low order books and we have further extending lead times for that to be replenished. Frontline has, by this transaction, increased our operational leverage as global oil demand is expected to grow. And short- and medium-term oil demand expectations are very good. And we’re seeing that in the numbers. We have 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 this next chapter unfolds. Thank you very much for that. And with that, I’ll open up for questions.
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