Frontline - Q4 2023

Transcript

Operator (participant)

Good day and thank you for standing by. Welcome to the Q4 2023 Frontline plc Earnings conference call and webcast. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Please note that today's conference is being recorded. I would now like to turn the conference over to your speaker, Mr. Lars Barstad, CEO. Please go ahead, sir.

Lars Barstad (CEO)

Thank you very much, dear all, and thank you for dialing into Frontline's fourth quarter earnings call. The last quarter of 2023 did not deliver the full-on crazy off the hinges bull market we all wished for, but still gave us decent returns. We also started to take delivery of our VLCCs from Euronav in December, and we are very happy it's all been smooth sailing as they have come under the Frontline flag. I would especially like to praise our project technical and operations teams that effortlessly and professionally have incorporated these vessels into our fleet, proving our company's very scalable business model. Before I give the word to Inger, let's look at our TCE numbers on slide 3 in the deck. In the fourth quarter, Frontline achieved $42,300 per day on our VLCC fleet, $45,700 per day on our Suezmax, and $42,900 per day on our LR2/Aframax fleet.

Both Suezmax and LR2 markets performing well above the previous quarters as they came to an end, as the year came to an end. As our press release shows, the full year 2023 came in firmly as we earned $50,300, $52,600, and $46,800 per day on our VLCC, Suezmax, and Aframax/LR2 fleets, respectively. I may add, we made over $650 million in full-year profit, and this is deemed respectable in some circles, and it's, in fact, the best year we've had in 15 years. So far, in the first quarter of 2024, 81% of our VLCC days are booked at $55,100 per day, 72% of our Suezmax days at $52,800 per day, and 69% of our LR2/Aframax days at a whopping $67,800 per day.

Again, all these numbers in this table are on a load-to-discharge basis, and they will be affected by the amount of ballast days we end up having at the end of Q4. I'll now let Inger. You can take us through the financial highlights.

Inger Klemp (CFO)

Thanks, Lars, and good morning and good afternoon, ladies and gentlemen. Then let's turn to slide 4, profit statement, and look at some highlights. Frontline achieved total operating revenues in the fourth quarter, operating revenues net of voyage expenses of $257 million and adjusted EBITDA of $198 million in the fourth quarter. We report profit of $118.4 million or $0.53 per share and adjusted profit of $102.2 million or $0.46 per share in this quarter. Adjusted profit in the fourth quarter increased by $21.4 million compared with the third quarter, and that was primarily due to an increase in our TCE earnings due to higher TCE rates, partially offset by fluctuations in other income and expenses. Then I think we should turn to slide 5 and look at some balance sheet highlights.

Frontline has strong liquidity of $416 million in cash and cash equivalents, including undrawn amount of the senior unsecured revolving credit facility, marketable securities, and minimum cash requirements as per December 31st, 2023. We have no remaining newbuilding commitments and no meaningful debt maturities until 2027. Then let's turn to slide 6 and look at fleet composition, cash break-even, and OpEx. Following the delivery of all the 24 VLCCs acquired from Euronav and the expected sale of the six older vessels in the first quarter of 2024, the fleet will consist of 41 VLCCs, 24 Suezmax tankers, and 18 LR2 tankers. We'll have an average age of 5.8 years and consist of 99% eco-vessels, whereof 57% will be scrubber-fitted. We then look at the graph at the right-hand side.

We estimate average cash break-even rates for 2024 of approximately $28,800 per day for VLCCs, $23,700 per day for Suezmax tankers, and $21,200 per day for LR2 tankers, with a fleet average estimate of about $25,700 per day. This takes into account the expected sale of the six older VLCCs and also the 24 VLCCs acquired from Euronav in the first quarter of 2024. The fleet average estimate includes dry dock of four Suezmax tankers and five VLCCs in 2024, whereof two Suezmax tankers will dry dock in the first quarter of 2024, two Suezmax tankers and one VLCC in the second quarter, two VLCCs in the third quarter, and then two VLCCs in the fourth quarter. We recorded OpEx, including dry dock, in the fourth quarter of $9,400 per day for VLCCs, $12,500 per day for Suezmax tankers, and $7,100 per day for LR2 tankers.

This includes dry dock of six Suezmax tankers and two VLCCs. The Q4 2023 fleet average OPEX, excluding dry dock, was $7,300 per day. Then let's turn to slide 7 and look at the financing of the acquisition of the 24 VLCCs. When we entered into the agreements with Euronav to acquire the fleet of the 24 eco-vessels, and also in our Q3 2023 presentation, we said that our ambition was to minimize the need for cash from the Hemen Holding shareholder loan through Frontline's capacity to re-leverage the existing fleet due to the historically low loan-to-value and/or sale of older non-eco vessels. In January and in February 2024, we executed on this with the agreement to sell six older non-eco vessels and the ongoing process of refinancing 24 vessels on what we believe are attractive terms, expecting then to generate net cash proceeds of approximately $646 million.

This will enable us to fully repay the Hemen shareholder loan and the amount drawn under the $275 million senior unsecured revolving credit facility with an affiliate of Hemen Holding in relation to the acquisition, and also to maintain our competitive cash break-even rates. With this, I leave the word to Lars again.

Lars Barstad (CEO)

Thank you very much, Inger. Let's move to slide 8 and start to look at the current market narrative. As you all know, kind of the headlines are colored by the Middle East tension, you know, the situation in Israel and in Palestine, and following that, the Red Sea Houthi situation and its ton-mile implications, looking at it from a tanker perspective. We're also seeing that the U.S. are increasing the pressure on what's referred to either as the dark fleet or the gray fleet, and also increasing their focus on potential Russian price cap evasions. It was quite interesting to read earlier in the week in the report that they've analyzed the tanker fleet and found that, according to them, the gray fleet now consists of 135 VLCCs, 90 Suezmaxes, and 150 Aframaxes.

These are vessels that are gone dark, trading in Iranian barrels, trading to North Korea, and doing all sorts of stuff, and including the Russian fleet. So that's 375 vessels in total in the segments that we work in. As a total, all BRS came to 700 vessels involved in some sort of shady activity. That amounts to 8% of the total tanker fleet. So these numbers are quite shocking. Another thing that's kind of played a part in the last few months has been the high activity in the contracting market, and especially so for Suezmaxes and VLCCs, actually to the extent where word on the street now is that 2027 is starting to become somewhat tight. Also, another kind of important thing to note is we've been through a long period of OPEC voluntary cuts, and particularly so by Saudi Arabia.

This has maybe or potentially led to non-OPEC production being allowed to grow quite remarkably. Year-on-year, according to EIA, production has grown by 2.9 million barrels per day. As your listeners would know, most of this non-OPEC production is not in the Middle East, of course. It's further afield and connected to the Atlantic Basin. This continues to kind of confirm our ID that trading lanes are gradually extending as U.S., Brazil, Guyana, and other countries are able to increase their production going forward. China and Asia still is where demand growth is happening. Looking at the charts on this slide, so global oil trade has kind of paused a little bit. Also, global oil ton-miles has paused a little bit.

But on kind of more frequent indicators, we do see that oil inventories is on the rise what we expect it to be due to the longer ton miles around Cape of Good Hope, avoiding Suez Canal. On the bottom three charts, you'll see how kind of the market's been, the volatility has increased in these markets. I like to look at this by drawing a line at the bottom, and I think we are, or hope we are, in what looks like a rising trend territory. And kind of real-time, what we're experiencing right now, particularly so in the VLCCs, is that we seem to kind of find the bottom at a marginally higher place than we were before. And also, there are indications that volatility is increasing, and particularly so we've seen in the clean markets where the volatility has been violent so far in Q1.

Let's move to slide 9 and dig a little bit further into the Red Sea situation. So the straits between Yemen and Djibouti is very unsafe for passage. At the start of this kind of conflict or unrest, the ships that were targeted were predominantly Israel-linked. But attacks are now randomly targeting anyone, and even Russian-linked vessels, which we thought were kind of safe for disruption due to kind of Russia's support for some of these groups, have also been targeted. So I think kind of we should categorize this as random attacks. I'm not a political analyst, but obviously learned a lot over the last months around this conflict. And the Houthi movement is also very fragmented. It's not one uniform group. So what we're understanding from the region is that they're also getting support from Somali pirates.

So this is like a proper mess, I would say, and creates extremely unsafe conditions for seafarers and also for our assets. So Frontline is not going straight and will continue on that position as long as the security situation remains as it is. Traffic through Suez Canal is now down 40%-50%. Some might kind of expect it to be far more than that, but you need to remember. Also an export region. So it means that actually oil coming out of Saudi, for instance, still passes through the Suez Canal because they avoid then these Bab-el-Mandeb straits into the Gulf of Aden. We also see now that trade patterns are adjusting to Cape of Good Hope routing.

This takes time because basically arbs and kind of oil price differentials have been based on Suezmax going through the Suez Canal, will need to be readjusted to basically account for VLCC volumes coming going around Cape of Good Hope. So we see more barrels already move on the VLCC, and the product side is now kind of to greater degree favoring the big lifters, being LR2s and even LR3s. And for those listeners that don't know what an LR3 is, it's basically a coated Suezmax. There are not that many of them in this world. It's about 19, according to Clarksons. But you can also clean up a Suezmax in order to get into this market. Just visiting the graphs, if you look at the right-hand side of this slide, you basically see on top, you see oil tankers that are going around Cape of Good Hope.

You see it's been a kind of a rapid increase since December 2023. And you see the oil tankers in the Yemeni zone, basically not Suez, but more specifically the Bab-el-Mandeb straits, have fallen sharply since December 2023. And what this creates for the tanker industry is widening trade lanes. So basically, more oil is going around the Cape, and less oil is going the shortcut via Suez Canal. So let's move to slide 10 and look at the order books. I mentioned in my introduction that this has been one of the big themes kind of over the last few months is that ordering is picking up.

All these new orders are not reflected in this slide because we use a very cautious and conservative approach to new orders because in the shipping market, there are rumors and there are LOIs and there are options and there are all sorts of kind of discussion points around new orders. So we've chosen to listen to Fearnley to register kind of new builds when the IMO number is issued. So that's basically what is regarded a confirmed order. So you should expect going forward that, particularly on the VLCC and to some extent on the Suezmax, these orange columns to increase. But we need to keep in mind that currently, in the VLCC fleet, 15% of the existing fleet is above 20 years old. We have 133 VLCCs that either are or will pass 20 years in 2024.

If you also look at the generations we're kind of moving into here, so 29 VLCCs were built in 2004, i.e., becoming 20 years this year, and 31 VLCCs were delivered in 2005, becoming 20 years next year. So a total of 60 vessels just this year and next year are passing this 20-year threshold. If you add 2007 deliveries as well, you get to 79 or close to 80 vessels. That will increase these pink negative columns in the chart, in how we portray it. Suezmax, more or less the same picture. We're hitting these generations where you had deliveries of 25, 23, 25 vessels, respectively in 2004, 2005, and 2006. So you're basically off to the same numbers as with the VLCCs. 73 vessels that over the next three years will pass this magical threshold of 20 years.

For the LR2s, that's where we kind of potentially could be worried about the order books and actually quite a significant amount of vessels looking to be delivered in 2025. Well, again, have a look at the left-hand side of that graph and look at and also consider the fact that an LR2 becomes less effective as a product carrier when it reaches the age of 15. Look at the generations we're hitting now from the 2008, 2009, and 2010 builds. There's actually more than 92 LR2s that will pass the 15-year threshold over the next three years. Let's dig a little bit further into this because this is, after all, what I kind of regard as a supply story rather than a demand story.

But with some more in the period from 2004 until 2008, this kind of what we hope to be a prolonged bull market is more related to supply. So let's move to slide 11. And here at the top, we're putting the highlight on the VLCC. So if you basically look at the VLCC fleet development as is expected with the current deliveries that are kind of confirmed in the order book, we see a gradual kind of increase of the fleet up to 900 vessels or above 900 vessels. If you adjust for the vessels that are turning 20 years, you get a completely different curve. Some of you might have seen us using this chart before. Here it's just updated. And then what implications does this have? Yeah, so if you look at the chart on the top right-hand side, you'll see average VLCC utilization.

A VLCC is normally half the time and then ballasting the other half of the time, but then you need to deduct some more utilization for positioning, you know, doing bunkering operations or doing all the other stuff that you do that is not really related to the voyage and also some waiting time to load cargoes. So you get kind of a close to 50/50 laden-ballast ratio. But when you look at this for the various generations of ships, you see that already from 17-year-olds, the utilization of the VLCC starts to diminish. Some charters have a hard stop at 15 years. This is namely the Chinese, for instance. Others are starting to be hesitant or would rather prefer a modern ship when they're facing a ship that's 17, 18, or 19 years. And obviously, from 20 years, you're taking away most of your clients.

So even though the ships actually survive longer than 20 years, the utilization is falling. Another interesting chart, which is more general overall for tankers, looking at the left-hand side, and it's kind of an observation we wanted to show this time, is that if you plot kind of all the orders that's being placed and look at the time from ordering until delivery, you'll see that there is a linear, like a growing trend or high, you know the trend is kind of the lead times are getting longer. And specifically so for the tankers, which is the blue dotted line. You know, in December 2020, it was, you know, on average, 1.8 years from the order was placed until the ship was delivered. Now we're actually closing in on three years. This is a big change.

Also, you need to keep that in the back of your head considering the orders being placed now. There are large order backlogs, but not so much for tankers, which the bottom right-hand slide chart, sorry, is showing you. So basically, you know most of the deliveries that are coming in 2024 and 2025 are related to bulkers and containers. And crude tankers is just a very, very small portion of the overall deliveries coming in. It's only in 2026 we can expect to see some kind of deliveries of some magnitude looking at the crude oil tankers. So with that, let me wrap it up before we open up for questions on slide 12. So I think kind of the highlight of our presentation for Q4 is that we delivered on the long-term financing of the $2.4 billion asset transaction we did in Q4.

Mind you, guys, this is probably the largest single pure tanker deal ever concluded. We've sold 5 non-Eco VLCCs and 1 non-Eco Suezmax, as we indicated in the last quarter. Inger has managed to refinance a significant part of our fleet at very competitive terms and you know without really moving the needle too much on our LTVs. We're obviously being helped a little bit by as the prices rising during the period as well. I think more importantly to you who are listening in here, we have not printed one single share. So all vessels are delivered, and this doubles our VLCC footprint and increases our earning days by more than 30%.

I'd like to remind you, earlier in the presentation, where Inger explained you know our average cash break-even of a fleet-wide is $25,700 per day, every dollar above that number hits the bottom line. We have obviously a grave security situation in the Red Sea, Gulf of Aden, and this seems to be adding to ton miles, and it benefits the larger carriers that are offering greater economies of scale, basically because they can lift higher you know larger volumes. We are seeing increased activity in contracting, especially for Suezmax and VLCC, but it's actually so that the fleet age composition in the tanker fleet demands this. Otherwise, short and medium-term oil demand remains firm, and non-OPEC supply is growing. Then again, Frontline Scalable Operational Platform has digested this fleet expansion quite easily as the market's positive grind continues.

I also think it's important to put your eyes on the bottom chart here at this summary. These are kind of you know the earnings averages, weighted earnings averages for all tankers quite far back. And we you know we do expect that we are nearing or potentially already in something that resembles the 2004 to 2008 period. And at least in the numbers, although you know you get kind of fooled a bit by the fact that the VLCCs are not performing, or at least not performing as prominently as they normally would do, we have actually had both 2022 and 2023 have given remarkable returns to the tanker industry. And we're looking quite okay coming into January this year. And with that, I will open up or ask the operator to open up for questions.

Operator (participant)

Thank you, sir. As a reminder, to ask a question, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Once again, it's star one and one for any question at this time and wait for your name to be announced. Thank you. We are now going to proceed with our first question. The questions come from the line of Amit Mehrotra from Deutsche Bank. Please ask your question. Your line is open.

Speaker 6

Hi, yes, thanks for taking our question and good morning. This is Ben Moore on for Amit here at Deutsche Bank. Can you talk about your conviction levels around the VLCC segment now that we're two months into 2022?

How do you see the segment for the tanker market shaping up so far, and what's your current thinking about the rest of the year?

Lars Barstad (CEO)

Well, we're quite confident, but I'm pretty sure TradeWinds is going to have a field day on this observation. But what we're observing is that, you know, kind of the market is tight. It is very tight. But owners are potentially competing against each other, which, you know, we shouldn't really do in this kind of market. You know, so and the charters are playing their cards extremely well, basically drip-feeding the market with cargoes and pinpointing the owner and the schedule for that ship in order to, you know, make it appear quiet.

While, you know, we have a significant position in this market, so we obviously pick up more information than most, and we see that activity is actually very, very good. So we, you know, the activity is good, but for the owners to translate that into significantly higher earnings has been very, very hard. But apart from that, I've used the word grind in this presentation. I do believe we are, you know, in a firming grind on utilization. And this is going to continue. I still think we're going to have the seasonal kind of slowdowns and the seasonal upward movements. You know, normally, as you come into the summer season with refinery turnarounds and so forth.

But I think you know it's quite kind of positive to see how quickly the VLCC market went for, say, from $35,000 to $40,000 a day, you know going all the way up to $90,000, north of $90,000 a day. And this is for AG-East voyages. And then obviously falling back. But too, that this market, you know when kind of the appearance of certain tight pockets come, you know this market is on fire. So I think you know the general, you know we're only receiving one VLCC this year and potentially five to six VLCCs next year. It's many, many, many years since we've had this kind of supply growth and we're losing quite a few vessels to age.

So I'm positive, but it's very difficult to kind of gauge, you know are we going to go straight into $100,000 per day market or are we going to grind you know $50,000, $60,000, $70,000? It's anybody's guess. Thanks. Maybe as a follow-up, have we seen peak tanker dislocation as it relates to the ships diverting from the regular Suez, or do you think there is more to go? I think there is more to go. We're already seeing you know what normally used to be Suezmax cargoes going through, you know being put together and put on the VLCC, you know passing Cape of Good Hope. We've seen exactly the same happening in the Med, kind of East Med barrels that normally would go through Suez is now being put together on the VLCCs.

So we are actually seeing that, you know or expecting that VLCC utilization is going to continue to go up. And I think kind of in this slide deck, you know you can look at the chart where we kind of measure the amount of ships going or passing Cape of Good Hope. Yes, it has kind of plateaued and maybe potentially corrected a little bit down, but I believe this is going to just increase, obviously assuming that the situation continues to, you know the kind of the security level continues to be as bad as it is now in Red Sea and the Gulf of Aden. Great. Thank you. Thank you.

Operator (participant)

Thank you. We are now going to proceed with our next question. And the questions come from the line of Jonathan Chappell from Evercore. Please ask your question. Your line is opened.

Jonathan Chappell (Senior Managing Director of Transportation Team)

Thank you. Good afternoon. Inger, you've accomplished a lot in a short period of time, both with modernizing the fleet and then you know doing that financing pretty ambitiously and quickly and in a good way that you didn't change the LTV. As we think about 2024 and the market that Lars has laid out pretty detailed, the cash flow generation that's coming, is there deleveraging that you'd like to see you know post this whole transaction of the 24 VLCCs and the refinancing, or are the terms favorable enough for you that you're just happy to let it kind of amortize and any cash flow generation would then be kind of the old Frontline manner of aggressive dividends?

Inger Klemp (CFO)

Yeah, as you said, I mean, we are happy with that we are deleveraging the fleet or the debt by ordinary amortization going forward. So I mean, we are happy with this, comfortable with this loan-to-value that we have after this refinancing. It's not high at all. It's about 53.5%, something in that respect, of market values. So I think we're happy with just amortizing the debt going forward in an ordinary way.

Jonathan Chappell (Senior Managing Director of Transportation Team)

Okay. Great. And then, Lars, you know I asked you this three months ago, and then you went ahead and sold six of your oldest vessels. How do you feel about some of the remaining older vessels in the fleet?

Is there still a pretty decent arbitrage opportunity where you think you can monetize some of your older non-ECO ships, as few as they may be, and kind of help with the cash flow generation, or do you feel like you're pretty content with the fleet as you enter you know this multi-year period of strength?

Lars Barstad (CEO)

I would say we're pretty content the way we sit now, to be quite honest. You know, it's kind of, well, you called it an arbitrage. It is, maybe, but I think kind of there is a lot of risk in the elevated prices we're seeing on secondhand tonnage.

So, and you know, kind of just looking at the book values we're able to kind of take out here, or, you know, the money we're able to take above book values tells us that, you know, we are at a very elevated point in the curve. So, you know, obviously, I can't you know exclude anything, but we're very much or pretty content now.

Great. Thanks, Lars. Thanks, Inger.

Operator (participant)

Thank you.

Lars Barstad (CEO)

Thank you.

Operator (participant)

We are now going to proceed with our next question. The questions come from the line of Greg Lewis from BTIG. Please ask your question. Your line is open.

Greg Lewis (Managing Director and BTIG Energy and Infrastructure Analyst)

Yeah, hey, thank you and good afternoon, everybody, and thanks for taking my question. Lars, I was hoping you could talk a little bit about, you know, the dynamics around the new build market.

I mean, you know, we saw a competitor order a couple of these, I want to say, last week. You know, just kind of how you're thinking about it. I mean, you kind of highlighted the outlook for the order book or the lack really thereof, and you know, you laid out a bullish, you know, outlook for the next few years. You know, I guess at this point, how is Frontline thinking about the opportunities in the new build market?

Lars Barstad (CEO)

That is a very good question. You know, it's still so that, you know, kind of basically due to the cost of capital and the long lead times, that the delivered price is kind of a bit higher than the, or actually significantly higher than the kind of list price that you pay.

I obviously noted one of our competitors you know ordering quite a few vessels recently at a very, very or fairly high number numbers historically. I think kind of the dynamics in shipping, and this is probably what makes shipping quite fun, is that you know when one actor gets his feet wet, then suddenly every other actor is competing to get their feet wet as well. I think kind of you know the newbuilding market has been a little bit muted for the bigger sizes for a while. People you know it's almost like who's going to go first to establish the new level of a Korean built and a Chinese built. There's actually been quite a lot of transactions that have gone through now that seemingly is happening on kind of you know as per last done levels.

You know, you see China new builds being done between $150 million and $120 million. And then you see Korea, which is actually for the first time in a very long time, you know, establishing the $128 million-$130 million for conventional vessel scrubbers. So we're obviously watching this, and but a little bit from the sideline, we've, as I hope you can understand, Greg, we've been a little bit busy in the last quarter and a half. So although we monitor this, we haven't taken an active role yet.

Greg Lewis (Managing Director and BTIG Energy and Infrastructure Analyst)

Okay. Great. And then I, you know, you mentioned that the dark fleet or the shadow fleet. You know, I'm kind of curious, you know, realizing you see a lot more data than we do. Is there any kind of way to, you know, figure out the subsectors in that fleet?

I mean, I've heard 700 vessels in the fleet. You know, I don't know. I mean, I think you said that earlier in the prepared remarks. Any kind of color around, you know, if you were to kind of best guess, you know, what types of vessels are in that fleet? Because, you know, I think a lot of people are trying to figure out, hey, they're in that fleet, and that means, you know, going forward, you know, the efficiency or utilization of those vessels is going to be permanently constrained regardless of what happens. So any kind of views around that of what actually is in that dark shadow fleet?

Lars Barstad (CEO)

I think you can just start with, you know, just assuming every ship above 20 years is one way or another, apart from very, very, very few exceptions that are storage units are, you know, playing a part in the dark or the gray fleet. So, but that doesn't add up to 700 ships. So you need to kind of move into the, you know, 17.5-year category as well. I think you have to understand that even though we do make quite a bit of money in tankers these days, we're not making this. So it means that when you have a 15-year-old ship, obviously, you'll take it through class. Then you need to do your 17.5-year class. Then you start to think, how much is this going to cost me?

You know, how many how many million dollars do I need to put kind of, you know, in vessel kind of trading, at least in their own fleet? Or you start to look at the second-hand market. I think also the door is closing a little bit for those who've kind of, you know, been, say, a bit frivolous in, you know, considering who they're selling their tonnage to. You know, I kind of applaud the recent efforts by U.S. authorities and how they're really now tracking down and penalizing actors that are dealing with either direct or indirectly with ships that disappear into the dark or the gray fleet. Also, you know, kind of the latest regulations from EU have also kind of put the pressure on this.

Kind of identifying these ships is actually fairly easy, but obviously, they use all the tricks in the books in order to avoid getting detected. You know, where we'll see the end game of this is when we start to see extended scrapping. And you know, to this day, we have yet not seen that. You know, we've seen one or two ships kind of being sold for scrap, but it's been extremely muted in that industry. And that's kind of what I would look for to say that, you know, okay, so this market is now gradually kind of coming to senses again. And also a trigger in this market would obviously be a catastrophic environmental event. We already had that actually in the Caribbean.

It's obviously not been, well, not obviously, but it's maybe not been covered enough by the media. But there, you know, nobody actually knows who the ship was or who it was owned by or whatever it was, but you just have a massive sheet of oil drifting into Tobago island that it was. So but it's, you know, I think the easiest way of identifying these ships is basically we look at a portion of the fleet that has, you know, doesn't actually have normally the ticket to trade anymore, which is this 20-year threshold.

Greg Lewis (Managing Director and BTIG Energy and Infrastructure Analyst)

Okay. Super helpful. Thank you for the time, everybody.

Lars Barstad (CEO)

Thank you.

Operator (participant)

As a final reminder, to ask a question, please press star one and one on your telephone and wait for your name to be announced. We are now going to proceed with our next question.

The questions come from the line of Sam Bland from JPMorgan. Please ask your question. Your line is open.

Sam Bland (Equity Research Analyst)

Oh, thanks for taking the question. First one is, we look at the order book on slide 10, and you know it looks very high for the LR2s, 22%. Do you tend to look at that number just for the LR2s, or do you somehow wrap it in with sort of crude Aframax and get one order book across the two of them, given that you can, I guess, trade an LR2 dirty? What's the best way you think of looking at it?

Lars Barstad (CEO)

Well, that's a good question, Sam. You know, we've actually been, you know, if you follow our presentations over some years, we've actually been a little bit kind of confused ourselves of how we're going to do that.

The thing is that the Aframax order book for like non-coated kind of tankers is extremely limited, almost negligible. So, you know, and since, you know, the LR2 is kind of what we're trading, we've just decided to focus on it. But, you know, I mentioned this 15-year kind of, you know, not it's not a limit, but, you know, charters tend to not prefer a more than 15-year-old ship because it's a precious cargo and the quality of coating will actually be reduced, or the quality of the coating will be reduced over the years. So the way I think about this is that, you know, you know, kind of these vessels leaving the LR2 fleet, they become Aframaxes. So that's the Aframax fleet growth for you, kind of.

You can almost say, you know, an LR2 that's passing, you know, 17 years is for sure not trading clean anymore, or at least in most cases. So that's also kind of why we've just, you know, focused on the LR2s. The Aframax fleet is obviously large, and, you know, there's a lot of kind of various levels of quality there and various levels of trade they're engaged in. We tend to focus on the LR2s. There's a bit north of 300 LR2s, and then we rather monitor who are kind of trading clean and who are trading dirty. And right now, at least the last intelligence I saw, we're about, you know, off that 300+ fleet. You know, we're at least up in 80% trading clean these days.

Sam Bland (Equity Research Analyst)

Okay, understood.

And the other one was, you made a comment earlier in the presentation around how rates sort of around Red Sea locations may have some sort of, like I'm not sure you phrased it, but like some kind of reset needed to kind of reflect the new trading patterns and routes. Is it like some of the disruption linked to the Red Sea? Some hasn't it hasn't caught up in rates yet.

Lars Barstad (CEO)

Yes, it's basically no, no, it's you're absolutely right. And I was probably not clear, but the thing is that, you know, when you're a trader and you're booking your cargoes going forward and, you know, kind of filling your shorts or lifting your longs or whatever you do, you know, it's obviously everything is quite a few days forward, if not months.

And then suddenly you need to adjust to the fact that you can't pass through the Suez Canal and your freight cost will increase. So basically, freight cost will suddenly shut the arbitrage. So, you know, oil will stay in the west or stay in the east because, you know, the cost element is not accounted for in whatever kind of structure you have set up kind of on your trading site. So that takes a little bit of time before it comes together. And also you have to some extent logistical constraints because obviously it's easy to take a VLCC from Basra to Europe, but which port are you going to discharge the barrels into? You know, then you need to start to think that, well, I have a VLCC now, not a Suezmax.

A Suezmax is far more nimble and easier to place in and has far more options on the port side. The same goes for clean. You know, although kind of you would love to fill up a Suezmax with a product, well, you can't really discharge that, say, into Rotterdam because the berth doesn't fit a Suezmax. So that's just an example. That's so all these things take time before you kind of pursue it. So I think the initial, which we saw on the clean side, where the rates rocketed, was basically there were no ships coming from west to east because the trading was constrained basically on these long arms. And then suddenly you were empty with ships in the Middle East region.

You know, you had to price for freight had to price to a level where ships would actually go empty from Europe to the Middle East. But obviously we see now that that's now kind of normalized and corrected. I think, you know, and this is just me thinking, I'm, you know, I have limited visibility to the trading books of the various kind of majors and traders. But, you know, what we at least looks like is that we see these stems now being collected and put together and, you know, products moving from the east to the west and from the West to the East in larger bulk.

Sam Bland (Equity Research Analyst)

And that would tend to mean that the sort of you get a little bit more strength in the larger ships. Is that the implication?

Lars Barstad (CEO)

Yes.

Sam Bland (Equity Research Analyst)

Okay. Understood.

Thank you.

Lars Barstad (CEO)

Thank you. Thank you, Sam.

Operator (participant)

Thank you. We have no further questions at this time. I will hand back to you for closing remarks. Thank you.

Lars Barstad (CEO)

Well, thank you very much for dialing in. You know, it's an exciting market we're in, maybe too exciting at times. But again, I would like to highlight that I think we are in a grind, a gradual grind going in the right direction. You know, there are kind of signs in the stars that we'll have volatility going forward. So with that, thank you very much.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.