Frontline Plc Q1 FY2025 earnings call

Slide 3:

• TCE numbers for VLCC, Suezmax, and LR2/Aframax fleets in Q1 2025 and first quarter to date.

Slide 4:

• Reported profit of $33.3 million or $0.15 per share and adjusted profit of $40.4 million or $0.18 per share in Q1. Adjusted profit decreased due to lower time charter earnings, partially offset by other income/expenses.

Slide 5:

• Solid balance sheet with $805 million in cash and cash equivalents, no meaningful debt maturities until 2030.

Slide 6:

• Fleet composition: 41 VLCCs, 22 Suezmax, 18 LR2; average age 6.8 years, 99% ECO vessels, 56% scrubber fitted. Cash breakeven rates: ~$29,700/day for VLCCs, ~$24,300/day for Suezmax, ~$23,300/day for LR2; fleet average ~$26,800/day including drydock costs. OpEx expenses: $8,400/day for VLCCs, $8,000/day for Suezmax, $8,200/day for LR2.

Slide 7:

• Cash generation potential: ~$332 million or $1.49 per share based on current fleet and May 25 forward rates.

Slides 8-12:

• Discussed market themes, including sanctions, supply/demand, order book, vessel age impact, and how sanctions affect tanker fleet utilization and oil transport.

Slide 13:

• Oil supply/demand suggests potential inventory building, demand for compliant tonnage growing with sanctions, less active tanker fleet growth, and retention of material upside.

In the first quarter of 2025, Frontline achieved $37,200 per day on its VLCC fleet, $31,200 per day on its Suezmax fleet, and $22,300 per day on its LR2/Aframax fleet. For the first quarter to date, 68% of VLCC days are booked at $56,400 per day, 69% of Suezmax days at $44,900 per day, and 66% of LR2/Aframax days at $36,100 per day. Revenue contribution details are integrated within these TCE performance figures.

• Cash breakeven rates for VLCCs, Suezmax, and LR2 tankers over the next 12 months. Cash generation potential based on current fleet and forward rates. Forward-looking comments on market dynamics influenced by sanctions, oil supply/demand, and compliant tonnage demand.

• Sanctions impact on vessel utilization and market dynamics, with certain key players self-sanctioning against OFAC. Potential tightening of sanctions affecting oil transport. Environmental and compliance risks associated with OFAC-listed vessels. Old vessels potentially not returning to compliant market and challenges with recycling of such vessels.

Q: First, at a high level, when I look at VLCC fixtures over the last few weeks, activity in the Atlantic has been a bit on the quiet side. Do you think that's a reaction to OFAC accelerated ramp? And do you have a sense what might drive more long-haul cargoes out of the Atlantic Basin?

A: Yes. No, it's a very good question. The [ARD] and basically the economics of U.S. exports is very much an ebb and flow business. We actually find it difficult to explain the quietness in the U.S. Gulf area as we speak, basically. In general terms, there is quite a bit of tonnage sitting on kind of oil majors and traders hands. And these are fixtures you will not really see in the market. They will basically be concluded in-house and the material will sail so it could be a degree of that. But it could also be a degree of refinery runs in the U.S. ahead of summer. That basically kind of lessens the demand for exports or the push for exports. And lastly, there is also an element around Canada, who have increased their exports away from U.S., not materially because it's limited mostly to the TMX pipeline expansion, but it also adds to the picture. But as I say on the same note, we have seen extremely active flows coming out of Brazil and also a good kind of volume coming out of Guyana. And we've also seen an increased interest, particularly from the Indian--from India on lifting West African barrels.

Q: Just as a quick follow-up to that, and along the same lines of thinking, there's also been some asset sales in the industry at values that are still somewhat elevated, especially for older tonnage. And I understand that the sanction fleet or shadow fleet where you want to call it is under a bit more pressure. But are there opportunities for you? You still have 81 vessels, a ton of operating leverage. Are there some older vessels that you may be able to monetize now without giving up much of your operating leverage? But maybe providing a bit of an arb on asset values versus equity value?

A: Of course. But as you probably appreciate, and I don't think it's a big secret, some of the demand for the kind of more vintage tonnage is coming from counterparties that quite obviously, want to engage in trades we don't like. So we're very cautious on addressing that market. However, there are also players out there and that's not necessarily a big owners now, but have a growth strategy for the compliant market and actually see the same opportunity in buying vessels that have 5 to 7 years life in them or for storage projects or conversion projects. So you're right, there are opportunities out there. And but we have--we want to retain this kind of magic 30,000 earnings days per year. We have maybe one candidate out there, but it's not going to be material in our strategy to reduce the fleet here.

Q: Just a couple of questions from my end and maybe just first on the market. We've seen obviously VLCCs improve here into the second quarter, definitely better than what we saw second half of last year. As you said, it was a real disappointment back then. But things have improved, although they don't necessarily jump off the page when we look at where rates are. I guess from your perspective, how would you say things have been progressing. We've seen the sanctions take out a big portion of the fleet. We've got the OPEC volumes now coming. How do you explain kind of the rate structure today? Is it still too early to expect a real gapping up? Have we seen the benefit yet of these sanctions fully? Or is there still more to come?

A: I don't think we've seen it fully. Well, first of all, just on the OFAC side, as I mentioned in the presentation, we haven't really seen the impact on cargoes that they have kind of month-over-month grow materially from the Middle East OPEC producers. And the only kind of area where we've seen a significant growth is out of Kazakhstan, which might actually be the reason why OPEC decided to do this. But the--on the general note, what we're observing and hopefully it's a trend is that ever since it started off, of course Venezuela being sanctioned around going back being fully sanctioned and we saw that volume getting kind of moving over to the dark side. Then Chem Russia, which is a big chunk coming into the dark side, basically, the incremental barrel that comes to market now and mind you, demand is still growing, is actually coming from compliance sources. So the market that we operate in has actually seen a gradually declining volume, particularly, Iran has been able to ramp up their exports quite materially second half last year. And but now that's finished too. And I've said before that kind of this will be solved eventually anyway because kind of it's not very likely that Iran, Venezuela or Russia can manage to increase direct production and exports materially going forward. Then you need compliant oil exports to grow to satisfy demand. And that seems to be going on now and further kind of amplified by the fact that the OPEC is returning barrels to the market. So this is kind of good news for the compliant fleet. And a lot of these barrels are VLCC barrels. And that's why we have--we made a huge investment in VLCC, half our fleet are VLCCs. We believe that maybe it can be the norm of a proper VLCC market over the next 6 months.

Q: On Page 6 of the presentation, in the presentation for 4Q '24 said that the drydock for the next 12 months or for calendar '25 were going to be 2 VLCCs and 1 Suezmax tanker. And then on today's presentation, we've upped it to 10 VLCCs, 2 Suez and 5 LRs. And all we've done is slide into the first quarter of 2026. Is that just a normal, very heavy drydock for that first quarter of '26? Or is there something else happening to the maintenance of the fleet?

A: No, it's--you're completely correct about what we mentioned that it was 2 VLCCs and 1 Suezmax last time [indiscernible] and that was for the calendar year of '25. Then what happened now is that 2 VLCCs were moved from '26 into in Q4 in '25. And then in addition to that, we have added on the first quarter of '26 since this is a 12-month forward-looking cash breakeven rate. And that takes the total number to these 10 VLCCs, 2 Suezmax and 5 LR2s because it's kind of very many of these vessels which are going to be dry docked in 2026 or dry docked in the first quarter.

Q: With the--you're suggesting it's going to be a lot harder to trade OFAC ships in the future trade restrictions, plus the age they're never coming back into the compliant market. One would think that, that would drive the older ships and the OFAC ships to scrapping and so far, that has not happened. What do you think will be necessary to drive that scrapping decision? And when do you think it's likely to happen?

A: Yes. No, it's a very, very good question, and thank you for bringing it up because this is something that needs to come into the discussion with IMO and other regulatory kind of offices or whatever you call it, because we actually have a big issue ahead of us. If you look at I think the last number I saw, if you combine all the various sanctioned entities and ships--ships actually the relevant ones here. We were talking about 600, 700 ships being on OFAC list or EU sanction list or similar. What some of you might not know is that the recycling industry is a dollar industry. And they are also--they need to do their KYC and they obviously can't buy a vessel for recycling from an actor that has broken sanctions. So this is kind of a clog in the recycling world. So there, I think actually the needs to be set up some sort of rules for exemptions for recycling. And this is typically where IMO as a UN organization can take a strong initiative in order to find a method how we can facilitate that because the scary picture is that these vessels will sit somewhere in Southeast Asia with [indiscernible] in and just be kind of a floating environmental bumps. So this is--it's a very kind of good point to make. And hopefully, this is going to come up higher on the agenda from the regulators, hopefully higher than further the decarbonization. So have that conversation first and then we can talk on the decarb later. And then on timing, it's regretfully so that these processes take very, very long until they sit kind of in front.