Release Date: August 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Frontline PLC (FRO, Financial) reported a profit of $187.6 million or $0.84 per share for Q2 2024, with an adjusted profit of $138.2 million or $0.62 per share.
- The company has strong liquidity with $567 million in cash and cash equivalents, including undrawn amounts of the senior unsecured revolving credit facility.
- Frontline PLC (FRO) completed its strategy of freeing up capital by deleveraging part of the existing fleet and divesting older vessels, enabling the repayment of $395 million in debt.
- The company secured long-term financing at highly attractive terms with a maturity of about eight years and improved margins by about 30 basis points on a weighted average basis.
- Frontline PLC (FRO) has no remaining newbuilding commitments and no meaningful debt maturity until 2027, providing financial stability.
Negative Points
- Q3 bookings came in somewhat short of market expectations, reflecting the volatility and seasonal lows in the market.
- The disposal of three VLCCs and two Suezmax tankers led to a decrease in TCE earnings by $12.4 million.
- Geopolitical risks linked to the Middle East and tightening sanctions against Russia are increasing, adding uncertainty to the market.
- The fleet average estimate for cash breakeven rates is approximately $35,700 per day, which is a significant operational cost.
- The market is experiencing a two-tier system with a growing divide between compliant and non-compliant (dark/gray) fleets, complicating market dynamics and potentially affecting future earnings.
Q & A Highlights
Q: Inger, first question is for you, slide 6 as 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.
A: Your first question was that there were no more refinancings until 2027. Was that correct? Well, not any material ones. We have a few smaller ones, which will come in 2025. And your next question or your second question was, sorry? Was around the divesting of the older vessels. Is that process completed as well? Yeah, that is also completed.
Q: What was the thought process of doing another sale and leaseback at this point in the cycle to refinance that prior one?
A: Well, actually, this new sale leaseback arrangement is refinancing a current sale-leaseback arrangement. So we are not actually doing more. I mean, that is the same type of 10 vessels that we have today, which we are just 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 its leverage is only 60% loan-to-value. And the terms are like a banking facility in a way.
Q: Lars, just one 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?
A: It's a very good point. And if we did that chart with China isolated, although its implied inventory builds because the strategic part of their inventories is not public. It would be 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 growing at the speed that we would like to see.
Q: Just got a couple of questions on the market, but also wanted to touch on the TCE 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 premiums. So just wanted to ask what's driven that perhaps outperformance in your view.
A: 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, basically because we can't account for income until the vessels actually load the cargo. But what has happened in Q1 is that we received the fairly big new fleets from Euronav, almost all delivered in the Middle East. What we've done over the quarter is been able to kind of put this fleet into the trade reflecting the rest of the Frontline fleet.
Q: One, we've seen the recent pullback in Libyan exports or at least production volumes. It seems that there 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, Aframaxes seem more exposed to that, but how do you think the VLCCs and Suezmax react in that type of environment?
A: Already asked me before, the disruptions started in the Suez Canal or Red Sea, Gulf of Aden, I would have said that this is a material, but basically what's happened since those events started to occur. Libyan used to go is by way of either Suez or actually really all the way around, but at least three 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 been a limited impact on Suezmaxes. But I would say virtually no impact on the VLCCs. And it's actually again, then if you take one crude out of the equation, another one comes up.
Q: Just on you talked about the sanctions and the dark fleet, the gray fleet. I wanted to ask in terms of what's gone on with Iran, how would -- how do you think the market would move forward in this situation where say there's more scrutiny on Iranian crude exports in those fallbacks to where there were a few years ago?
A: I think, I've asked this -- this development has been going on for far longer than at least I anticipated or we anticipated, but it's basically 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 you have an exchange, however, unlikely to the sanction regime against Iran. It will be even a more positive effect on the compliance markets.
Q: 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 you are willing to underwrite.
A: It's an extremely good question. And when we did the -- basically, we've done an exercise prior to this to gauge how many ships and how many vessels are operating in the sanction trade or operating illicitly in the Russian trade because there are owners that are able to trade Russian barrels within either 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 under 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 sanctions or sanctions exposed.
Q: If you see the be soft landing is been question about there's always a doubt about US economic going into a recession, if not soft landing and you have a Chinese economy not recovering. So next year, do you see if both these don't recover, then there will be lower oil demand globally?
A: I don't think we'll have a lower global oil demand globally, but the expected oil
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
