Earnings Labs

Frontline Ltd. (FRO)

Q3 2021 Earnings Call· Mon, Nov 29, 2021

$36.22

+0.25%

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Transcript

Operator

Operator

Good day, and thank you for standing by. Welcome to the Q3 2021 Frontline Limited Earnings Conference Call [Operator Instructions]. Please be advised that today's conference is being recorded [Operator Instructions]. I would now like to hand the conference over to your speaker today, Lars Barstad. Please go ahead.

Lars Barstad

Analyst

Thank you very much, and good morning and good afternoon to everyone. And welcome to Frontline's third quarter earnings call. These are indeed volatile times, although maybe not as volatile as we hope for in freight. Q3 '21 marked the bottom of the tankers post COVID-19. This is seasonally a low point in the markets, but everything seems to have been amplified in these times we currently live in. Towards the end of the quarter, we actually started to see a recovery in demand for freight as export volumes grew, which has continued into the fourth quarter. Right now, we are, as of the rest of the world, worried about the implication of this new Omicron variant of the COVID-19 virus. What will OPEC+ do in that respect and will something come out of the ongoing Iranian nuclear talks in Vienna. Well, let's start with the facts on Frontline's third quarter and look at the highlights on Slide 3. Q3 '21 performance reflects the challenges the tanker markets faced this quarter. It is, however, a proof that our business model, our efficient operations, our modern fleet and very hardworking team managed to outperform most of our peers. In the third quarter, Frontline achieved $10,500 per day on our VLCC fleet; $7,900 per day on our Suezmax fleet; and $10,700 per day on our LR2/Aframax fleet. So far in the fourth quarter, we have booked 79% of our VLCC days at $21,600 per day; 72% of our Suezmax days at $17,900 per day; and 64% of our LR2/Aframax days at $16,000 per day. All numbers in this table are on the load-to-discharge basis but I do think they show that the markets have indeed recovered from the third quarter, although we have yet to see rates reaching for the skies. I'll now let Inger take you through the financial highlights.

Inger Klemp

Analyst

Thanks, Lars, and good morning and good afternoon, ladies and gentlemen. Following the acquisition that we did of the 8 VLCCs in the first half of the year, we have [Indiscernible] on the financing side. And in the third and the fourth quarter, we have entered into term loan facilities and obtained financing commitments for a total amount of up to $507 million to partially finance the acquisition on the two 2019 built VLCCs and also the six VLCC newbuilding contracts. These facilities will finance 65% of market value and they will carry an interest rate of LIBOR plus a margin of 170 basis points. And they will have an amortization profile of mostly 20 years but also 18 commencing from the delivery date from yard. When we factor in $33.4 million available under the term loan facility entered into in November 2020 to partially finance the delivery of the last LR2 tanker, we have established bank debt of up to $540.4 million. The company has also raised gross proceeds of $51.2 million under the equity distribution agreement and also net cash proceeds of approximately $67 million through the sale of four LR2 tankers. And following this remaining commitments as per September 30th for Frontline's newbuilding program consisting of one LR2 tanker and the six VLCCs and for the acquisition of the two 2019 built VLCCs is fully funded. Through these new financings, we reduced our borrowing costs and we also reduced our industry leading cash breakeven base, providing significant operating leverage and sizable returns during periods of market strength and help protecting our cash flows during periods of market weakness. Frontline has also extended the terms of the senior unsecured revolving credit facility of up to $275 million by 12 months to May 2023, leaving Frontline with no loan…

Lars Barstad

Analyst

Thank you very much, Inger. Let's move over to Slide 7 and look at the third quarter tanker market. So tanker rate bottomed during Q3 and this is seasonally kind of the normal weakest moment of the year. But I think it's safe to say that this is not a normal year. We actually haven't had any normal year since 2019. So global oil consumption averaged 98.6 million barrels per day that's up 1.9 million barrels from the second quarter. Supply averaged 96.8 million, also increasing by close to 2 million barrels per day. But we continue to grow then kind of very close to 1.8 million barrels per day of inventories. OPEC+ plus supply rose an average of 1.4 million barrels per day. And I think it's important here to note that a lot of the key OPEC suppliers came out of their peak demand period, which is when they burn fuel for electricity generation and basically for cooling and this normally happens in September, so towards the end of the quarter. We saw strong demand growth in North America and in Europe, whilst the Asian demand recovery was muted also in the third quarter like we saw in the second quarter. What was special about the quarter that we went through was that oil and energy prices were extremely volatile. We saw natural gas prices, coal prices, also other commodities that are affected by energy prices rise rapidly during the quarter. And all the markets kind of performed strongly as we came to the end of the quarter. I think it's important to note here, if you look at the graph on the left hand side at the bottom of the slide, so total world consumption is now actually not that far off from where we started in…

Operator

Operator

[Operator Instructions] Your first question today comes from the line of Chris Tsung from Webber Research.

Chris Tsung

Analyst

I wanted to just ask about the four LR2s that were sold. Were they clean prior to the sale or are they still relatively dirty?

Lars Barstad

Analyst

No, they were trading clean.

Chris Tsung

Analyst

And then I think last quarter, there was seven dirty and then 13 clean. What's the composition of your fleet now?

Lars Barstad

Analyst

It's actually quite -- 35% trading dirty and 65% trading clean.

Chris Tsung

Analyst

And to dry docking, I think Inger, you said one VLCC and one Suezmax in Q4, roughly, how many days would you estimate for these two?

Inger Klemp

Analyst

How many days? Around 20 days, that's the kind of standard.

Chris Tsung

Analyst

20 days for each, so 40 in total?

Inger Klemp

Analyst

Yes.

Chris Tsung

Analyst

And lastly, a quick one from me. How much is remaining under the equity distribution agreement?

Inger Klemp

Analyst

The equity distribution agreement is a total of $100 million. So when we now have raised $41.2 million, the difference is $48.8 million remaining.

Operator

Operator

Your next question comes from the line of Greg Lewis from BTIG.

Greg Lewis

Analyst

I guess I wanted to discuss a little bit more about the decision to sell the LR2s. What was it about those vessels maybe that made them more attractive than some of the other vessels in the fleet? Is it more of realizing the acquisition, what was that last year on the Suezmaxes? Was the function of those vessels being in the sale leaseback transaction really the fact that those were product vessels versus crude? Or really, what I'm wondering is I think we're all optimistic that we're going to see a recovery in tanker rates in '22, hopefully. But I guess what I'm wondering is, could we see more of those similar types of transactions maybe with some of your crude vessels.

Lars Barstad

Analyst

So over the last year, we've obviously grown tremendously in our exposure to the VLCC market. This is something we've communicated for a long period of time that this has been our ambition. Historically, we have seen that kind of the return we are able to give our shareholders is kind of the best return we're able to give is from the larger vessels. So kind of in that process, we've obviously reached far in order to increase that fleet quite a lot. And then with the -- during the year and this is kind of a weird one, the asset class that has appreciated the most is, in fact, LR2s. So whilst all asset prices have risen but the LR2s have been tremendously strong. So basically, we saw this as an opportunity to capture value at the point in the curve. There could be that we'll kind of divest in other vessels as well. But it's kind of -- our focus is to grow and maintain our VLCC position that's where we believe we'll get the best kind of bang for the buck. And then the LR2 segment is a very interesting one. We believe in that market. We found it kind of prudent to capture this value as we felt kind of the price we can achieve on these four units, the oldest four we have in the fleet, Chinese built, our ability to capture value there, so we basically took it.

Greg Lewis

Analyst

And then in going, thank you for the presentation and in talking about the VLCC market. You referenced historical prices. Really, what I'm trying to understand is, as I look at the VLCC fleet today, let's just put those 100 vessels that are -- the 20 year-old vessels you referenced, 115 or whatever that -- over 100, let's say. Do we have any sense for how much of the, call it, the modern VLCC fleet is scrubber fitted?

Lars Barstad

Analyst

Actually, on the model, I don't have that number in front of me. But what I've looked at is that at this point in time, about half of the VLCC fleet is scrubber fitted. And I would assume that the most modern vessels are basically as they come from the yard. But then most of the scrubber investments have probably happened on the kind of non-ECO, more thirsty units because that's where kind of it makes most economical sense. But I don't have that split kind of in front of me but about half of the fleet is sailing with a scrubber.

Greg Lewis

Analyst

And then just one more for me. As I think about -- hold on a second as I think about -- I'll queue in if it comes to me, it just escaped my mind.

Operator

Operator

[Operator Instructions] Your next question comes from the line of Jon Chappell from Evercore.

Jon Chappell

Analyst

Inger, I'll ask Greg's question for him. So you got a lot done on the financing side in 3Q, and it seems like you're all squared away now, which checks a big box as far as meeting the newbuild commitments. I'm just curious on the equity distribution. Why did you feel necessary to issue equity at that size given all the financing you had lined up and the fact that you're basically covered now even without the more expensive equity?

Inger Klemp

Analyst

Well, the moment that we did that was accretive to the company in a way because the NAV of the Frontline share was far below the share price at the point in time we printed those shares. So we felt it was a good wise thing to do for the company.

Jon Chappell

Analyst

And on the macro side, Lars, clearly, there's a lot of things we can't identify right now. And this question was probably more fitting two weeks ago before more things thrown out there. But everyone's put out this very optimistic view, ourselves included, on why things should get better. It's just the spring is coiling. The inventories are really low, production is increasing, demand is increasing, the fleet shrinking. Yet we're still at these very low levels where every once in a while, you get a little bit of an increase and you think here we go, here at the start of the cycle and then it pulls back again. Other than OPEC just being a little bit stingy with their releases, what has been kind of the limiting factor in letting this recovery from the third quarter trough really gain momentum? And other than the things you've addressed already, are there any other concerns you have about the sustainability going into early '22?

Lars Barstad

Analyst

I think obviously, there is probably not one correct answer to that question. But our experience is that in some segments, you are suddenly in a position to push so you could kind of push rates northbound. But then other kind of parts of the pie or the spec is experiencing kind of issues. So basically, what we've had now for the last couple of weeks is that we've had really, really good demand in the VLCC space. We see Middle East exporting finally kind of according to the OPEC program. Whilst prior, we suspect that the other countries have actually consumed or kept a lot of the oil in domestic or domestically. But [obviously] then you get West Africa with production issues. So suddenly that volume kind of tapers off. There's also been, over the last couple of months, a situation where for the long haul oil, you need the arbs to be open. So basically for Atlantic Basin oil to be priced in a manner where it's attractive to Asian refiners. And that has not really been the case and this is basically as demand recovery has happened relatively kind of quickly during this -- or the second half of this year, at least in in Europe and in the US. So basically, the local oils in -- around the Atlantic Basin have been kind of relatively good priced, basically meaning that the Asian refiners can't really compete. So you've had a couple of these factors during this fall. And we're still shy of a couple of million barrels of production until we are at pre-COVID levels. So obviously, there are new ships that have been delivered throughout the year. So I think it's a mixture of those three reasons. With regards to pricing and how crude price is priced, whether if it's going to go into Asia or stay local that could rapidly change. With regards to the production increase, I think that's more risky now, whether OPEC actually will increase volumes into Q1. But one thing that's for certain is that we are very close to a balance but we have yet to have kind of -- I think I mentioned this before that the market has like three or four cylinders, and we need to fire on all cylinders in order for it to get some traction. And regretfully, we have one cylinder fail when all the other cylinders go.

Jon Chappell

Analyst

And if I could just follow up with one point there. I mean all eyes are going to be on OPEC this week. Obviously, they tend to be really driving the sentiment in the tanker markets right now. Given what you noted about the arbs and the SPR release in the US leads to lower domestic prices here, which could lead to more exports, which are longer haul. Does OPEC carry the same amount of sway in the tanker markets that it once did or is it more of a sentiment driver than an actual fundamental driver?

Lars Barstad

Analyst

I think it's more of a sentiment driver than an actual fundamental driver, to be quite honest. I think -- and the proof is that throughout this year, we've had OPEC kind of both adding then suddenly not adding, then kind of delaying meetings and also kind of relatively small portion of production increases has kind of been reflected in their exports. We have OPEC producers that are actually over -- in overcompliance basically because they have production issues. So I think it's more the headline. What we see in our little pond of global transportation of crude oil, we just see volumes gradually increase. And obviously, if OPEC suddenly finds that they don't want to increase in January, I think you'll have price action and suddenly Atlantic barrels will then be attracted kind of -- or be moved out to Asia again. So for us, on the tanker side, that's far more important than kind of what OPEC may decide for one month kind of…

Operator

Operator

[Operator Instructions] Your next question comes from the line of Randy Giveans from Jefferies.

Chris Robertson

Analyst

This is Chris Robertson on for Randy. Just to follow up on the ATM issuance there. Can you just talk about how you decided upon the amount that was issued in October? And if let's say rates stay weak in 2022, would you look to utilize that again with a further issuance?

Inger Klemp

Analyst

Based on the current share price, we will not consider to utilize the ATM further.

Chris Robertson

Analyst

Okay…

Lars Barstad

Analyst

And I'd like to add to that, that kind of Frontline has had ATM programs before. And we've always been extremely disciplined and only acted kind of when it's accretive and when the conditions are there for it. So that should also kind of further answer that question.

Chris Robertson

Analyst

Yes, definitely. Thanks for the additional color.

Operator

Operator

Thank you. There are currently no further questions. I will hand back for any remarks.

Lars Barstad

Analyst

Yes. Thank you very much for calling in, and thank you for the time. Also, obviously, thank you to the entire Frontline team who's done a fantastic job again this quarter. Stay safe.

Operator

Operator

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