Frontline - Earnings Call - Q2 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by. Welcome to today's Quarter Two twenty twenty Frontline Limited Earnings Conference Call. I now hand you over to your first speaker, Robert MacLeod. Please go ahead. Thank you.

Speaker 1

Thank you very much. Good morning and good afternoon, everyone. Thank you very much for dialing into our second quarter earnings call. First, I would like to express gratitude towards our shore staff and crew members for their extraordinary efforts and dedication, which clearly are defining factors to our strong results. Our markets are very volatile, but the volatility seen in the last twelve months have been extreme and serves as a reminder of how little it takes for the tanker market to rally.

Frontline's performance in the 2020 was the strongest since 2008, and we've also made solid bookings for the third quarter. Despite the recent fall in rates, 2020 will be a very good year for Frontline. Let's start with Slide three and have a quick look at the highlights from the second quarter. Net income of $200,000,000 just over $1 per share, certainly a solid quarter. Adjusted for non cash items, the net income was $2.06 We declare a $0.50 dividend.

The last dividend was $0.70 for Q1 twenty twenty. We opted to repay $60,000,000 on our Hammond facility in the quarter, which is the main reason for the reduced dividend. Ingo has done some great work in financing. She will take us through that later on the call. Two newbuildings were delivered in the quarter, one Suezmax and one VLCC, leaving us with only four ice class LR2s on order and they deliver next year.

VLCCs made $75,800 in Q2 and we have booked 76% of Q3 at around $61,000 Suezmax has made $51,100 in Q2 and we've booked 77% of Q3 at twenty nine point five. LR2s made just shy of 37,000 and we have booked two thirds of Q3 at 14.5%. These Q3 rates do not include the long term time charters. And then before moving on to the market, I will hand the call over to Inger to take us through the financials.

Speaker 2

Thank you, Robert, and good morning and good afternoon, ladies and gentlemen. Then I think we could turn to Slide four and look at the income statement or the highlights. Frontline achieved total operating revenues test of voyage expenses of $3.00 $1,000,000 and adjusted EBITDA of $259,000,000 in the 2020. And we reported net income of 100 or $200,000,000 approximately and $1.01 per share. And adjusted net income is $2.00 $6,000,000 or $1.04 per share in the quarter.

The adjustments this quarter was in total $6,400,000 net. They consisted of a $5,900,000 loss on derivatives, a $900,000 unrealized gain on marketable securities, a $2,700,000 share of losses on associated companies and a $1,300,000 amortization of acquired time charters. The adjusted net income increased by 27,000,000 this quarter and it was mainly driven by an increase in our transstructor equivalent earnings due to the higher reported TCE rates on our VLCCs and LR2 tankers in the second quarter along with a gain of $12,400,000 as a result of the sale of one VLCC previously recorded as an investment in finance fleet. Let us then take a look at the balance sheet highlights. The main happenings in the second quarter, which affects the balance sheet, where that we took delivery of the Suezmax tanker from Cruiser and also we took delivery of Front Dynamics and we drew down debt on these vessels.

We as Robert mentioned, we repaid our senior unsecured facility with $60,000,000 We entered into two new loan facilities to refinance two loan facilities with total balloon payments of $349,000,000 which were due in December 2020 and in March 2021 on terms in line with Frontline's other loan facilities. We then also paid $138,000,000 in dividends and we earned adjusted net income $199,700,000 At the end of the quarter, Frontline has $462,000,000 in cash and cash equivalents, including undrawn amounts under our senior unsecured loan facility, multiple securities and minimum cash requirements. Requirements. The current portion of long term debt includes $240,000,000 debt maturity of the $466,500,000 facility due in April 2021 and $80,300,000 debt maturity of the $109,200,000 facility in June 2021, which we both expect to refinance. Our remaining newbuilding CapEx requirements at the end of the quarter was $161,100,000 related to the four LR2 tankers, where two of them are expected to be delivered in January 2021 and in February 2021, and two are expected to be delivered in August 2021.

In this connection, Frontline has obtained a financing commitment for a loan facility in an amount of up to $133,700,000 from Sexim and Cinosor to partially finance these four LR2 tankers. This facility will have a tenure of twelve years. It will carry an interest rate of LIBOR plus the margin in line with contract of the loan facilities, and it will have an amortization profile of 17. And the facility is subject to final authorization. Let's then take a closer look at the next slide on the cash breakeven rate and OpEx on Slide six.

We estimate average cash cost breakeven base for the remainder of 2020 of $22,600 per day for VLCCs, dollars 18,900 per day for the Suezmax tankers and $15,700 per day for the LR2 tankers. And the fleet average estimate is about $19,100 per day. These are the rates the all in daily rates that our vessels must earn to cover the budgeted operating costs and drydocks, estimated interest expense, TCE and bareboat hire, installments on loans and G and A expenses. In the graph on the right hand side of this slide, we have shown as usual the incremental cash flow after debt service per year and per share assuming $10,000 $20,000 30,000 or $40,000 per day achieved in excess of our cash breakeven rates respectively. And the numbers, they include vessels on time charter out, and we are looking at a period of again sixty five days from 07/01/2020.

As an example, with a fleet average cash cost breakeven rate of $19,100 per day and assuming that we have $30,000 on top of the average fleet TCE rate would be then $49,100 And sometimes we then generate the cash flow per share at the debt service of $3.49 With this, I leave the word to Robert again.

Speaker 1

Thank you very much, Einar. Let's have a look at the Q2 tax market on Slide seven. So the first six months of twenty twenty brought a dramatic crude oil demand correction, the likes of which we've never seen. The demand shock brought on by COVID-nineteen was so large and sudden that global commercial inventories quickly surged to record levels, effectively utilizing all available land based capacity. At the same time, the crude oil market went into contango, encouraging traders to store oil on tankers and driving demand for short term charters of our ships.

This in turn resulted in exceptionally strong tanker rates, which are reflected in our results for the 2020. The freight market has since declined to lower levels and although the signs of recovery are evident as economies continue to reopen, the recovery in demand is unlikely to be linear and the extent and duration of the impact of COVID-nineteen is difficult to predict. COVID-nineteen related challenges have been extensive through the industry. These include logistics around crew changes, delayed discharge and diminished capacity at shipyards for dry docks and surveys. These are all factors that positively impact effective fleet supply.

There is significant month to month volatility in the demand forecast as shown on the chart at the bottom of the slide. Let's move to slide eight please and have a look at the global fleet capacity growth, which is slowing. The vessel supply side of the equation continues to improve, which is very positive. The order book as a percent of the total fleet is at the lowest level since 1997. At the same time, the average age of the VLCC fleet as of the end of the 2020 is at the highest level since September 2002.

By the end of next year, there will be 65 vessels older than 20 and an additional 85 older than 17.5. The effect of slowing fleet supply growth will be pushed out to 2021 or 2022, but it should be material and lead to a sustained period of higher rates. We do like the current situation where new vessels enter the market at a controlled pace, the order book continues to shrink and retirement of vessels is inevitable. Present markets and a bit of outlook. The demand shock is likely behind us, but volatility can be expected.

The present freight market remains under pressure. Crude production is down almost 10% since January and the lost volume reduces the volume that is normally shipped, meaning that the cargo accounts are down by as much as 20% to 25%. On the positive side, inventories are being drawn, a short term pain, but possibly long term gain. Forecast suggests that a significant portion of the OPEC cuts could return in the coming months and combined with the Northern Hemisphere moving toward winter, this gives grounds to believe in a stronger freight market. So in conclusion, the large moves in tanker rates during the last twelve months illustrates the tight balance in the market and the fact that it does not take much for the tanker market to rally.

Looking ahead to 2021 and beyond, recovering demand for crude oil transportation will coincide with rapidly declining fleet growth, which supports our long term highly constructive market outlook. So at the front line, we enjoy the youngest fleet and lowest breakeven levels in the history of our company. Frontline's earnings potential is substantial, dollars 23,000,000 annualized for every $1,000 above 18.7%. So we are very well positioned. With that, let's turn over to questions, please.

Speaker 0

Thank you. Ladies and gentlemen, we'll now begin the question and answer session. And now for your first question, it's coming from the line of Randy Giveans from Jefferies. Please go ahead. Your line is now open.

Speaker 3

Howdy, Robert and Inger. How are you?

Speaker 2

Fine. Thanks.

Speaker 3

Great. Well, yes, I guess first question is around the dividend, right? So in the 2019, the 2020, you paid dividends above I guess 70% of net income. Now for the second quarter, you reduced this to 50 percent. I think you mentioned part of it's because of the $60,000,000 pay down back in April on that Hammond facility.

So, I guess, is that the entire reason for it? Or are you kind of bridging to a weaker dividend next quarter? And then should we expect at least 50% of net income going forward?

Speaker 2

That is the entire reason for it. So if you add that on top, I guess you would get to $0.8 dividend,

Speaker 1

which

Speaker 2

I guess is probably what you assumed.

Speaker 3

If you include the Hennen $60,000,000 that was referring to?

Speaker 2

Yes. So that's the entire reason for that dividend is $50,000,000

Speaker 3

Okay. And then going forward, is 50% of net income a fair assumption?

Speaker 2

Going forward, it's standard normal that we have in a way. It's not changed at all in a way. We just this quarter opted to repay the facility with $30,000,000 which is $60,000,000 I mean, which is $0.30 per share. That's what happened this quarter.

Speaker 3

Okay. And about the Hemen facility, I believe that was done back in April, right? You expect to repay the remainder of that here in the third quarter?

Speaker 2

No, we don't know yet. We haven't really decided what to do with the remaining part of it in a way. Might be that we can extend the facility. It might be that the fee pays. We'll have to see.

Speaker 3

Okay. And then I guess last question around your scrubbers. You know, what's the status of those scrubber installations? I know you postponed a few. I think it was four.

Any expectations on when those will be installed or or kind of your plans going forward on remaining scrubbers?

Speaker 1

So Andy, we've done that. We've got a couple being installed as we speak. But the four that we postponed, we've not done anything further with. So what we'll do is that when these ships that we're supposed to have these scrubbers installed, when they dry dock over the next coming quarters, then we will prepare these ships. So all the underwater work will be done, which is a small cost.

And then the actual scrubbers can be fitted or retrofitted. And then they are now stored at our production facilities in Indonesia. So we'll see here. The spread is improving a little bit, but we have the optionality. And for the time being, they will remain in storage.

Speaker 3

Got it. All right. Well, I'll turn it over. Thanks again.

Speaker 1

Thank you.

Speaker 0

Thank you. Your next question comes from the line of John Chappell from Evercore. Please go ahead. Your line is now open.

Speaker 4

Thank you. Good afternoon, Inger and Robert. A couple of quick clarification questions first. I think we're always here where the quarter to date bookings look very elevated basically because of the load to discharge accounting. I know you guys really try to flush out the differences here.

So maybe a way to ask it is, as you look at the rest of the quarter, the other 24%, let's say, the VLCCs, is there any extreme or out of the ordinary uncontracted or contracted vessels where, let's call it, that stub part of the rest of the quarter would be higher or lower than the market averages?

Speaker 1

So it all depends, obviously, whether we fix the loading dates then September or early October. That's what's going to determine. So it's but there's nothing to answer the second part of your question, there's nothing specific. There's nothing special. But what I would say about the earnings, it's important here to look at earnings over several quarters.

If I was just say, if you ask me how has front been done on VLCCs so far this year, then my take is that we had a very good Q1. We outperformed our peers. We're giving some of that back in Q2 as you see from the numbers. And my guess is that we're on a pretty good rate level and a good percentage share for Q3. So I would say outperform what Q1 we know, slightly below in Q2.

And then I think we're looking quite good for Q3.

Speaker 4

Okay. And then just another clarification, Robert. I think you said that the long term contracts are not included in the quarter to date rates. In the press release, it says these short term charters are included in the forecast. So what's between the long term and the short term?

I guess you have two that are nine point five months and one that's twelve months and then you have four that are just below six months. So just to be clear, the ones that are just below six months, that is included in the quarter to date and then the longer ones are not?

Speaker 1

Yes, correct. So basically, the six month charters, which are basically six months plus minus one, so it's a minimum period of five months. So those deals that we consider spot in the numbers and anything above, which then starts in the eight months deals and it we have a couple of one year deals and we've got the five Suezmaxes on the three year deals. So anything above six months, that is then considered longer term and are not included.

Speaker 4

Got it. And then also I noticed in the disclosures that you have seven ships chartered to affiliates of Hemen. I'm assuming those would be seven that you did in the second quarter. Just curious, is there any options associated with those? Or were those kind of strict on the timing?

Speaker 1

There are no options attached.

Speaker 4

Okay. Final question, Robert, is I think you've laid out a very balanced second half of the year outlook for the market. And clearly, given the start to third quarter, you will be cash flow positive. And Ingers kind of laid out the dividend strategy. When you think about the cash going forward, do you think this period of, let's call it, choppiness or uncertainty provides you with an opportunity to add tonnage?

Or do you think that you spend this next six months continuing to delever the balance sheet to position yourself for the favorable twenty twenty one, twenty twenty two outlook that you spoke of?

Speaker 1

We're pretty happy with the size. We're very happy with the age. As I said in the intro, the company is in a very good shape. But so I don't think we need to do anything. It's if opportunity come up, for example, like something like the Trafigura deal we did, which we quite liked, then maybe.

But base case is to enjoy what we have and then harvest from that through having hopefully what is the best operation.

Speaker 4

Great. Thanks so much,

Speaker 3

Robert. Thanks.

Speaker 0

Thank you. Your next question comes from the line of Chris Chung from Weber Research. Please go ahead. Your line is now open.

Speaker 5

Hi. Good afternoon, Robert and Inger. How are you?

Speaker 2

Good afternoon. We are fine. Thanks. What about you?

Speaker 5

Good. Good. Thanks. I kind of wanted to just touch on the cash breakeven levels again. On Slide six, I know John asked this earlier too, but I guess I'm asking you from a slightly different angle.

So on Slide six, the cash breakeven levels of like $19,000 on a fleet average. In the press release, it says that the charter coverage are not included in the breakeven level. So I was wondering, would that mean the breakeven levels excluding the time charters would show a slightly higher breakeven for the fleet?

Speaker 2

No. I mean, the cash breakeven rates that we disclosed are the total cost that our fleet has divided by the different number of days for each segment and then shown on a gross basis. If you have contract coverage above the breakeven rates, that would obviously take down the cash breakeven rates for the spot vessels. So it will not increase then.

Speaker 5

Right, right, right. So like if the charter the contract coverage takes it down, if we were to exclude it, that bring it up and you're saying if the answer is no?

Speaker 2

It's even down, yes.

Speaker 5

Okay, all right. I just wanted to clarify. Thanks. And kind of wanted to ask about your investment in Clean Marine. I guess when the investment was made back in October 2019, I guess, it seemed like it would be a smart hedge for IMO 2020 and scrubbers in general.

And fast forward ten, eleven months now, COVID, OPEC and market vol, what are your plans for this investment going forward?

Speaker 1

We'll see how this develops. We own about 17% and the company has a production facility, which is owned in Indonesia. It's got its stocks and so forth. We have we only our investment is now we only have a very small loan to the company. So we don't really have any risk there.

We don't see the need to put any money into the company. And I think there will be some positive news at some point going down the road. It's not turning out to be as elusive as what we were hoping, of course, but the downside was so the risk in the downside was always controlled and limited.

Speaker 5

Right, I see. Okay, makes sense. And just last question. Just given the news about the voluntary cuts from several key OPEC members, the congestion that's happening around Chinese ports and Hurricane Laura in The U. S.

Gulf. I'm just curious in terms of how are you guys choosing to position your fleet in the near term?

Speaker 1

What we're doing now is that it's an extremely difficult market to predict. And that is the obvious thing to say here because it's I've been doing this for few years and my sort of gut feel is that we are going towards a more normal market. We're well, well down on volumes as we know. It looks from the last steps that we're seeing then the world production is 3,000,000 to 4,000,000 barrels lower than the consumption, which is obviously hurting freight, but it could build a better case as we move towards winter and Q4 is normally a strong quarter. So my I'm done with sort of with no sort of high conviction.

I got a feel that things will get better as we move towards the end of the year. And what we're doing with this fleet is that we are trying to reposition in the Suezmaxes in the Atlantic Basin. And if we have the choice between a long voyage at current rates or a shorter one, we opt for the shorter one. There are some potential triggers out there. So we're watching it all very closely and we've got a feel that things might get better.

At the same time, the volumes remain low. So it all depends on the cargo count. What we've seen in The Middle East over the summer, where basically one out of three cargoes has disappeared has obviously dented the earnings, but hopefully something demand will steadily come back and there could be some better times ahead. But I'm very cautious. I'm not going to put on the bullish hats just yet.

Speaker 2

All

Speaker 5

right. Makes sense. Thanks guys. That's it for me.

Speaker 0

Thank you. Your next question comes from the line of Greg Lewis from BTIG. Please go ahead. Your line is now open.

Speaker 1

Howdy, Greg.

Speaker 0

Excuse me, Mr. Greg Lewis, your line is now open. Please check your line if you're on mute. Thank you. Okay.

Let's just take the next question. It's coming from the line of Jay Mintzmyer from Value Investor. Please go ahead. Your line is now open.

Speaker 6

Thanks for taking my questions.

Speaker 1

Hi, Jay. How are doing?

Speaker 6

Doing excellent. Thanks. So first of all, congrats on a good quarter. As we're looking towards the shifting interest rate environment, I know you've done a few swaps and hedges in the past on some of your debt profiles. I know you also have a new debt profile coming up with the new builds.

Is there any plans to expand or extend those interest rate swaps? Is any of that in the works? Or are you going to maintain some floating exposure?

Speaker 2

Although we do have entered into quite a lot of interest rate hedges now recently. So I guess, the moment, we have no further plans for entering into even further interest rate hedges. But I thought we had done we have $550,000,000 of hedges now at the moment and also as short as an additional portion of about the $100,000,000 which is very soon going to mature. But so at the moment, think we are happy with that.

Speaker 6

Okay. Makes sense. Yes, I was tracking ahead about one third or so hedged. I was wondering if that would those plans have changed. John asked earlier about kind of your cash plans and if you looked at maybe expanding or new builds or secondhands or anything like that.

Sort of a related question, Frontline carries a nice premium to some of your tanker peers. Think Frontline is probably the only one of the only tanker companies that carries what you could say is like a respectable valuation in today's market. Is there any opportunity out there for Frontline to become an equity consolidator? I know there's some peers in the Norwegian market, for example, we won't name names today, but they're trading at a significant discount to NAV. Is there some opportunity for consolidation there?

Or is that sort of off the table?

Speaker 1

No, there are opportunities. And as you say, we have the pricing. We're well below where the premium we normally are at. And that premium is there for the obvious reasons. We do have a main shareholder who remains hugely supportive and that will remain so.

But in terms of consolidation, yes, are a potential consolidator, but we are happy with what we have now. We will keep tracking opportunities. So let's see what comes up and what makes sense. But with the size we already have, then our earning potential is already there and which you can clearly see from the Q2 numbers.

Speaker 6

Excellent, excellent. You'll have to forgive me for this one, Robert, the parting question here. But we talked back in April and you had kind of a fun bet gamble about if rates would come back down unsurprisingly that you'd be walking across Norway. So I just wanted to check-in on that and see when the trip's planned. And maybe it's after COVID we can get a group together.

Speaker 1

Yes, I'll tell you what, you would probably enjoy the walk. Of course, it's a beautiful walk as long as you start from the East Side and then walk towards my hometown, then it's the right you're going the right way. But Jay, I've actually settled the bet. So it ended up being a dinner. And but I must say, with the confidence I had in the bet was high and they did come very, very close.

But fortunate enough, I got away with it.

Speaker 4

Excellent to hear. Thanks again, Robert. Have a good one.

Speaker 1

Thank

Speaker 0

you. Your next question comes from the line of Louis McGivin, a Private Investor. Please go ahead. Your line is now open.

Speaker 7

Hello, Robert and Inger. Hey, I'm calling from Pittsburgh, which is the home of the steel industry that a good Scotsman named Andrew Carnegie had made famous. And I was curious, what effect does scrap steel rates have on the retirement of vessels?

Speaker 1

Sorry, Did you say scrap steel price?

Speaker 7

Well, the decision to retire vessels, I know it has to do with the five year intervals and so forth and the market of but do high or lower scrap prices affect your decisions in the industry to retire ships? I just wondered if the rate of scrap steel would go up if that would result in more retirements, which would be beneficial for your industry?

Speaker 1

Interesting question. And the fact is that yes, it does. And to give you an example, so our largest ships so by the way, older ship now is 2,009. So we don't have really any candidates. But if you look at that market, as I mentioned in the introduction, there are a growing number of older ships.

And looking at the last eighteen months, then the value the steel value has fluctuated between $11,000,000 and $18,000,000 So now it's at the lower end of that scale. So it's part of decision making here, whether to scrap or not, it's obviously then linked to this price. It is a good portion of the value of the contract.

Speaker 7

Well, maybe you could talk some of these shipbuilders into offering bonuses to the scrappers to tie in a sale of the new vessel to scrapping a ship.

Speaker 1

Yes. That could be one way of doing it or combining it, making it pool of all the old ships and get the balance back quicker that way.

Speaker 0

Okay. Well, thanks. We have no further questions coming from the phone lines. Please continue.

Speaker 1

Okay. Now I think we'll round off. So I'd just like to thank everyone for calling in. And also to my colleagues and everyone at Frontline, thank you very much for all your efforts.

Speaker 0

Ladies and gentlemen, that does conclude our conference call for today. Thank you for participating. You may all disconnect.