Frontline (FRO) Q1 2021 Earnings Call Transcript

Frontline (FRO 0.85%)
Q1 2021 Earnings Call
May 27, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Q1 2021 Frontline earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session.  [Operator instructions] I must advise you that this conference is being recorded today on Thursday, 27th of May 2021.

And now, without any further delay, I would like to hand the conference over to your speaker today, Lars Barstad, interim CEO. Please go ahead.

Lars Barstad -- Interim Chief Executive Officer

Thank you very much. Thank you and good morning, and good afternoon to everyone. Welcome to this Frontline's first-quarter earnings call for 2021. We're obviously quite content to being able to provide black numbers, maybe to the surprise of many of you.

Q1 '21 was a fairly quiet quarter corporate-wise as we are in a good position financially and no major transactions were concluded during the quarter. We continue from Frontline a high focus on the well-being of our seafarers as they are out there being exposed to the global ebb and flow of COVID-19 infections. Our technical and operations team are doing a fantastic job in mitigating the challenges that arise and I'm very happy to report that they are well under way in vaccinating our sailors. Let's move to Slide 3 and have a look at the highlights.

The Q1 '21 performance is very much a testament to keeping true to our strategy. Being mostly spot exposed and not expecting an imminent recovery in the market, our charter investment remains true to trading the ships in a month where we allow our vessels to commit to long voyages securing income but potentially giving away upside. Our modern fuel-efficient fleet is built for this purpose and it also gives us this flexibility. This proved to be the right call.

In the first quarter of 2021, we made $19,000 per day our VLCC fleet, $15,000 per day on our Suezmax fleet, and $12,000 per day on our LR2/Aframax fleet. So far in Q1, we have booked 70% of our VLCC days at $18,100 per day, 63% of our Suezmax days have $13,600 per day, and 59% of LR2/Aframax days have $14,200 per day. All these numbers in the table are on the load to this chart basis. Before Inger takes you through the financial highlights, let me quickly comment on the fleet development as well.

We took delivery of two of our four LR2s coming this year. Front Fusion and Front Future in March and April respectively, bringing our number of LR2s on the water to 20. Further, subsequently, we confirmed acquisition through the resale of six high-spec ECO-scrubbers fleet of VLCCs to be delivered from Hyundai Heavy Industries in Korea. Five in 2022 and one early in 2023.

I'll now let Inger take you through the financial highlights.

Inger Klemp -- Chief Financial Officer

Thank you, Lars, and good morning and good afternoon to all of you. Let's turn the slide to Slide 4 and look at the income statement. As I said, we are happy to report numbers in black, and Frontline achieved total operating revenues and work expenses of $107 million in the first quarter. We also have an adjusted EBITDA of $59 million and net income of $28.9 nine million, or $0.15 per share.

Further, we have an adjusted net income of $8.8 million or $0.04 cents per share. The adjustments consist of a $15.7 million gain on derivatives, a $3.1 million unrealized gain on marketable securities, a $1.2 million on amortization on acquired time charters, and $0.1 million results of associated companies. The adjusted net income in the first quarter has increased by $21 million compared with the previous quarter. The increase was driven by a decrease in ship operating expenses of $11 million, mainly as a result of $6.4 million lower dry-docking fund.

We also had an increase of cash and cash equivalents of $6.4 million and that was due to the prior TCE rates, as well as we had a $11.2 million decrease in other costs. Let us then take a look at the balance sheet on Slide 5. The total balance sheet numbers have increased by $10 million in the first quarter. The balance sheet movements in the quarter were related to taking delivery of the energy sector from Fusion in addition to ordinary debt payments and depreciation.

As of March 31, 2021, Frontline had $318 million in cash and cash equivalents including undrawn amounts under our senior unsecured loan facility, marketable securities, and minimal cash requirements. Let's then take a closer look on Slide 6 on the cash breakeven rates and the opex. We estimate that risk cash costs break-even rate will remain for 2021 of approximately $21,500 per day for VLCC, $17,700 for days for the Suezmax tankers, and $15,900 per day for LR2 tankers. This gave a fleet average of about $18,100 per day.

These rates, they are all-in day rates. That's our vessel rates to cover budgeted operating costs and dried up estimated interest expenses, TCE, and bearable high, and installments on loans, and G&A expenses. In the quarter, we recorded opex expenses of $7,300 per day for the VLCCs, $7,100 a day for the Suezmax tankers, and $7,200 for the LR2 tankers. We did dry dock one Suezmax tanker in the first quarter only, and we expect to dry dock up two Suezmax tankers and four LR2 tankers in the second quarter.

Let's then look at the graph on the right hand of the slide. As usual, we show the incremental cash flow after debt service per year and per share. Assuming $10,00, $20,000, $30,000, or $40,000 per day achieve rates in excess of all the cash breakeven rates. The numbers include vessel on timeshare are distant from building deliveries.

And then looking at the period of 365 days from April 1, 2021. So in this graph, as an example, with a fleet average cash possibly breakeven rates of $18,100 per day and assuming $30,000 on top of the average fleet earnings, then the TCE rate would be $48,100 one per day. A strong fund would then generate a cash flow per share of the debt service of $3.45. With this, I'll leave the word to Lars again.

Lars Barstad -- Interim Chief Executive Officer

Thank you, Inger. And let's move to Slide 7 and have a look here for a recap of the Q1 '21 tanker market. And it goes without saying that it's been somewhat demanding. So total world oil consumption rose by 4.3 million barrels from January to March and reached to 96.5 million barrels per day.

On the other hand, supply fell by 0.5 million barrels. This was mostly fueled by the actions from Saudi Arabia and their volunteer cuts to -- turn it up at 93.5 million barrels per day at the end of the quarter. As we continued to draw on inventory, tanker demand remained basically unchanged. We did, during the quarter, see return of Libyan volumes.

And we had toward the end of the quarter a U.S. -- the U.S. cold snap that created a lot of volatility. So tanker rates firmed toward the end of the quarter, and this is I find quite positive because it actually is indicating a thinner balance than what may be perceived.

So basically, to wrap up Q1, we see demand or consumption is running ahead of supply and the draw on inventories is come for mitigating that volume. If you look at the chart on the right-hand side, you see what I refer to as a ripple rather than a very strong market, but we see how quickly rates react where we saw, firstly, the Aframax market move in line with the Libya opening up. And secondly, the Suezmax market reacted and that was mostly fueled by the U.S. Gulf cold snap or the U.S.

cold snap, affecting what was inside of the U.S. Gulf. So let's move on to Slide 8 and look at the tanker order books. On all asset classes, we are observing delayed recycling.

We see very little support for keeping older tonnage in this market. But they remain in the fleets. Recycling prices are up 30% year to date and are now count being negotiated around %550 per long ton or $23 million for a VLCC. This is, to some extent, being outcompeted by the fact that we continue to see demand for vintage tonnage from undisclosed price -- buyers with relatively firm prices.

The overall tanker order book has shrunk year to date by approximately 4%. This as vessels deliver and new ordering has been fairly muted. We've seen on the VLCC's 20 new -- 28 new orders placed, but as 25 vessels are delivered at the same time, the order book remains to be fairly flat. The VLCC order book stands at around 9% of the existing fleet, and the overall order book for tankers is up to around 7% of the existing fleet.

Let's move to Slide 9 and recap what's going on the asset prices. So the asset prices are on the move. We have, over the last six months, see more -- seen more than 170 new orders for containerships. We've also seen quite some ordering on LPG.

And also seeing confirmation of LNG orders, which has further contributed to the activity. And in line with the entire commodity space, steel prices have appreciated sharply. The fundamentals of the tanker market suggest a tightening of capacity over the coming years. And the regulatory tightening in respect of greenhouse gas emissions further supports the case of investing in modern fuel-efficient ships.

Propulsion is yet not the driver. Right now, it's the yard capacity or rather the lack of it which is driving prices together with the steel. So let's move to Slide 10 and look at the short-term outlook. So we're currently right in the middle of OPEC plus productions increasing.

They are increasing somewhat slowly, but they are adding to transportation demand. Currently, Asia, and in particular, China, are coming out of refinery maintenance. And oil demand continues to recover. Now, it's the U.S.

and Europe in focus as we're coming out of lockdowns. Inventories, both on land and floating, are now normalized and at pre-COVID-19 levels. From where we are now, according to EIA, oil supply is expected to grow by 6 million barrels by year-end. If you look at the graph on the left-hand side below, we see that most of these increases are expected to happen basically from where we stand now and over the summer.

The key to the demand bounces in 2021, you can find on the right-hand side. We know that gasoline demand fell by 3.3 million barrels per day in 2020. And it's now expected to grow by 1.8 million barrels per day in 2021. For jet, it's affected the crude oil balances by 3.2 million barrels per day and negative in 2020 and about 1.3 million barrels per day is expected to return this year.

For diesel, we're actually adding more than we lost, 1.2 million barrels per day. For fuel oil, we're keeping at level. Other kind of uses of oil is also linked to this at 0.7 million barrels per day. Let's move over to Slide 11 and my summary.

So basically, to wrap this up, all key macro indicators points toward a firm recovery. And global GDP is expected up 6% this year. Asset prices are on the move as yard capacity is tightening and steel prices are increasing. I've just mentioned, global oil supply is expected to grow by 6 million barrels by the end of 2021.

The COVID-19 vaccination pace in the developed countries is very encouraging and countries are opening up. We can see on the graph below, which indicates activity within the various key segments of the shipping sector. That the cyclical recovery run has started. All key shipping sectors are firm.

The tankers are lagging. Frontline is ideally positioned to capitalize on the anticipated recovery in tanker markets with our modern, spot-exposed, fuel-efficient fleet. And with that, I would like to open up for question-and-answer session.

Questions & Answers:

Operator

[Operator instructions] Your first question today comes from the line of Jon Chappell of Evercore. Please ask your question. Your line is now open.

Jon Chappell -- Evercore ISI -- Analyst

Thank you. Good afternoon. 

Lars Barstad -- Interim Chief Executive Officer

Hi, Jon.

Jon Chappell -- Evercore ISI -- Analyst

Lars, I'd say that's a pretty balanced outlook on the market, maybe a bit more balanced than some of the optimism out there. You had obviously the press release last week on the six new VLCCs indicate I think a lot of optimism about where the market's going. I think I asked this three months ago, but, you know, at this stage in the cycle, based on what you see for the next 12 months or so, do you think you're a more aggressive acquirer of assets? And if so, how much of this fuel propulsion, you know, question play into whether you're doing more newbuilds like you announced last week versus maybe the traditional Frontline activity in the secondhand market? 

Lars Barstad -- Interim Chief Executive Officer

Well, it's all a question on -- well, first of all, you know, I would say that we're comfortable with aggressive, but the right opportunity has to kind of come our way. But, you know, our overall view of the market has kind of firmed over the last couple of months, and we have more conviction now that we are moving in the right direction. With regards to resale versus modern kind of vessels on the water, we obviously have to look at the, you know, the current kind of spot market, you know, when we weigh to take a ship that's, you know, sailing in this market or taking a ship that will be delivered at a point in time where we're expected to be on full throttle again. So that's obviously a part of the consideration.

Secondly, you know, it's actually not that many vessels for sale that kind of fall within where we want to invest. So you could say that although the activity in dry dock has been tremendous and the activity on ordering containerships and LPG has been so fantastic and so forth, the VLCC kind of asset market has been fairly muted year to date. 

Jon Chappell -- Evercore ISI -- Analyst

OK. Now that makes complete sense. And then just a follow-on to that, as far as the financing is concerned, look, I understand you're going to almost certainly get financing for these ships ordered or announced last week. It was a bit curious to me that for the down payment, given the cash you have on your balance sheet, you still drew down 50 million from the Hemen facility.

So what's kind of the thought process around the amount of liquidity you want to keep, taking debt to pay down payments, you know, not resuming the dividend despite a profitable quarter. I understand that the second quarter is weak, and we have a kind of near-term choppy outlook, but should we think about just drawdowns of debt to finance newbuilds going forward and maybe retain the cash for a stronger market, and then you can think about capital returns again? 

Inger Klemp -- Chief Financial Officer

I think we have flexibility with respect to this facility that we are drawing on. We will establish the, let's say, debt financing. We intend to do that, I guess, probably in the second half of 2021, at least for the first vessel, and maybe also for all of them, depending upon the opportunities that arise when we look in -- or start to work on that. So with respect to equity and repayment of this facility that we're drawing on, we will have flexibility going forward to decide how to do that and when to do -- or if we would like to use the ATM.

That depends upon the share price and when we would like to raise equity, it also depends on that. So I think we will keep that a bit open a bit. 

Jon Chappell -- Evercore ISI -- Analyst

OK. All right. Thank you, Inger. Thanks, Lars.

Lars Barstad -- Interim Chief Executive Officer

Thank you. 

Operator

Thank you. Your next question today comes from the line of Randy Giveans of Jefferies. Please ask your question.

Randy Giveans -- Jefferies -- Analyst

Team Frontline, how's it going?

Lars Barstad -- Interim Chief Executive Officer

It's good, Randy. How is it for you, too?

Randy Giveans -- Jefferies -- Analyst

All right. I guess, question, you know, we talked a lot about the crude markets. Just looking also at the product tankers, maybe how do you view those two and maybe the timing of an inflection where you really start to see some rate improvement? And then with that, are you using any of this kind of soft patch to clean up some of your LR2s that were trading dirty to start trading clean going forward?

Lars Barstad -- Interim Chief Executive Officer

Well, to start with the first one, you know, we are obviously in a recovery phase, and I think we've probably just finished kind of drawing on inventories. That's at least some of the stuff I'm seeing, which is relatively live, which means that, you know -- and we're also in a refinery turnaround, a relatively heavy one. So actually, I was quite hopeful for the product market to start to run kind of already in March and -- but that kind of faded. I think in order for the product market to start to properly move, we need a bigger portion of the lost jet demand back.

And -- but there is always a product market to be had around arbs kind of opening up. And for that, we need to see the refineries coming out of turnaround. So it's like a chicken and egg kind of discussion, and to be quite honest, I'm still kind of not 100% sure which would come first. So whether if it's going to be a pull or a push, or whether if we're going to see increased demand for crude oil first, pushing the VLCC market, then drizzle into the LR2s as product is transported, or the other way around.

So it's difficult to say, to be quite honest. With regards to cleaning up, we have cleaned up one vessel and used kind of this opportunity in the market. It's not really an opportunity because it always comes kind of with some degree of cost. And we always have to remind ourselves that we actually have a lot of incremental income darting up when we're doing this.

But I think it should be expected that we gradually will look at utilizing our vessels as LR2s because that's what they are rather than Afras.

Randy Giveans -- Jefferies -- Analyst

Yeah. That makes sense. All right. Then, I guess, second question for me, you know, you've shown some impressive expense control here with the market downturn, specifically, more recently, a sharp reduction in vessel opex and G&A.

So going forward, what's a good run rate for those two line items?

Inger Klemp -- Chief Financial Officer

As I mentioned, for this quarter that we are into now, we will have a dry-docking cost, which is higher than we had in the first quarter. We only had less than $600,000 of dry-docking costs in the first quarter. And I guess for the second quarter, we estimate around seven or probably a bit more as well. So in that sense, of course, the operating expenses will increase in the next quarter.

But this will vary a lot between quarters depending upon how much vessels we dry dock. In the third quarter, we are planning to dry dock three vessels instead of six, meaning that it will be kind of half again of what I said for the second quarter that -- of cost, I mean. With respect to the admin expense, I would say that G&A would -- that what we have now in the first quarter is not the going rate. I think it's -- probably a couple of million dollars on top of that would be our going rate going forward.

Randy Giveans -- Jefferies -- Analyst

A couple of million on top of the six. OK. So 9 million, is that a good run rate going forward?

Inger Klemp -- Chief Financial Officer

That's probably a bit too high, but a couple of dollars on top of what is in the report, that is, I guess, something then -- 8.3 or 8.5, whatever, something in that respect.

Randy Giveans -- Jefferies -- Analyst

OK. Perfect.

Inger Klemp -- Chief Financial Officer

Yeah.

Randy Giveans -- Jefferies -- Analyst

Well, that's it for me. Thank you so much.

Inger Klemp -- Chief Financial Officer

Thank you.

Lars Barstad -- Interim Chief Executive Officer

Thank you.

Operator

Thank you. Your next question today comes from the line of Magnus Fyhr of H.C. Wainwright. Please ask your question.

Magnus Fyhr -- H.C. Wainwright & Co. -- Analyst

Yeah. Good afternoon. Just most of my questions have been answered. But just kind of going back to Jon's question regarding your thoughts on ordering or buying more ships, do you think there's an opportunity here? There seems like a lot of the operators are a little hesitant to buy ships or order ships at these levels given the uncertainty regarding propulsion technology.

But, you know, just curious to see if you think there's further opportunities there, new building versus acquire-and-resells. Thank you.

Lars Barstad -- Interim Chief Executive Officer

Well, we – I think we will remain true to kind of our word and try not to [Audio gap] up to the order book. And to be quite honest, where the current order book is quite difficult to gauge because I think you would struggle tremendously to order a VLCC for delivery in Q4 2023. And if you should locate the SLOC there, I think the prices are probably north of $100. So, you know, it could be that, you know, we would rather than focus on acquiring-and-resells or the modern eco vessels on the water.

So, but I think it's important to note here that there has been a frantic activity with the yards. And Inger and I like to compare, you know, some of the outlook going forward to the period we had in 2002, 2003. And at that time, we had a lot more yard capacity coming. Right now, we don't have that.

So, we even have yards starting to look at 2025, just to give you color on kind of the situation out there.

Magnus Fyhr -- H.C. Wainwright & Co. -- Analyst

OK. And, you know, you guys have a really modern fleet, and you mentioned the scrapping prices are picking up, what do you see out there as far as, you know, actually some of these older ships finally heading to the scrap yards. I mean, you know, current market prices -- I mean, current spot prices are very challenging for these older ships, and I was just curious if we should expect to see that scrapping finally start to increase here during the summer.

Lars Barstad -- Interim Chief Executive Officer

I think it will come up. Our count stands up to eight. We also see sold-for-scrap year to date, and I think it's three Suezmaxes. We have to remember though that the halt and disruptions in the capacity for the recycling yards to actually accept office due to COVID.

So, the pandemic has affected the kind of efficiency there as well. I think where the prices are now on recycling steel, we should definitely see some action. But having said that, we still have this competition out in the market for vintage second-hand tonnage coming from undisclosed parties, which most likely are involved in the trade that I like to refer to as the "dark web of oil," basically transporting either Venezuelan or Iranian-sanctioned crudes.

Magnus Fyhr -- H.C. Wainwright & Co. -- Analyst

So, I guess with the ongoing. Yeah -- I guess with the ongoing talks -- yeah. I guess with the ongoing talks with the Iranians and potentially those sanctions being removed, you know, what's your thoughts about those vessels, you know, finally maybe not being able to compete in an open market?

Lars Barstad -- Interim Chief Executive Officer

I think that could be a tremendous kicker to the conventional law-abiding tanker market. And it's basically, you know, we all talk about the Costco moment in the tanker industry, and I think you could have that. Because suddenly, at least with the nuclear deal between U.S. and Iran, you're going to have quite a lot of volume that needs compliant ships to trade kind of within the compliant market.

Magnus Fyhr -- H.C. Wainwright & Co. -- Analyst

OK. Great. And just one final question if I may to Inger or you regarding the dry-docking schedule. What's, you know, are you trying to do all the dry-dockings ahead of the fourth quarter, or you think you will have some ships in the fourth quarter as well? Just kind of position yourself for a market recovery.

Inger Klemp -- Chief Financial Officer

We will do any dockings -- dry-dockings in the fourth quarter. It's only in the second and the third.

Magnus Fyhr -- H.C. Wainwright & Co. -- Analyst

OK. Great. Thank you.

Inger Klemp -- Chief Financial Officer

Thank you.

Operator

Thank you. [Operator instructions] We do have one more question at this time. This comes from the line of Chris Tsung. Please ask your question.

Chris Tsung -- Webber Research -- Analyst

Hey, guys. Good afternoon. How are you?

Inger Klemp -- Chief Financial Officer

OK.

Chris Tsung -- Webber Research -- Analyst

OK. I -- I wanted to just kind of dig in just a little bit more to a question that was asked a bit earlier regarding the opex it's -- so that it kind of came down significantly from Q2 -- from Q4 roughly around 20%. And just looking back at your previous presentation of the opex, the opex really pursue as much as like around 9,700 a day. And, you know, in this presentation, it's down to like 7,100.

So, maybe if you can help explain, you know, how that is achieved.

Inger Klemp -- Chief Financial Officer

The opex will vary between quarters, as I said, due to the dry dock of the vessels, whether we had dry-docking or not, in a way. And in this particular quarter, you're referring to with the switchbacks is having a high opex, that was due to that you had dry-dockings of switchbacks in that quarter. Why now? You only have a small dry-docking cost, so it shouldn't really affect the opex.

Lars Barstad -- Interim Chief Executive Officer

I think to further clarify. We actually take the actual dry-docking costs in the quarter. 

Inger Klemp -- Chief Financial Officer

Expensed.

Lars Barstad -- Interim Chief Executive Officer

We expense it.

Inger Klemp -- Chief Financial Officer

We don't capitalize as many of our peers do.

Lars Barstad -- Interim Chief Executive Officer

So, that's why we get that volatility in there.

Inger Klemp -- Chief Financial Officer

Yeah.

Chris Tsung -- Webber Research -- Analyst

Right. I see. I see. OK.

Understood. Thanks so much. I guess, just following up on another question is for your -- the VLCCs' resales that's going to start their delivery in 2022, could you perhaps expand on the cadence of the delivery? Is it more front-loaded or back-loaded? I know one is delivering in 2023, just wanted to know if it's going to be smoothed out or -- any color would be appreciated.

Lars Barstad -- Interim Chief Executive Officer

It is -- well, it's going to be fairly smooth, to be quite honest. The -- you know, the first vessel delivering very early in 2022. Obviously, we have a little bit of flexibility in the deliveries at this stage. So, and them coming like pearls on the string, and the last one coming very, very early in 2023.

Chris Tsung -- Webber Research -- Analyst

OK. And -- great. And just the last question. I noticed in the presentation or in your press release, there was a purchase -- there's a decision to purchase shares in Golden Ocean.

Just -- I think the only amount 400,000, so it's not material and is not big. But I just wanted to kind of see if you can go into your details on the decision to purchase shares of Golden Ocean.

Inger Klemp -- Chief Financial Officer

This is related to those we have a forward contract where we -- for Golden Ocean shares, where we then -- to do that contract in a way. Got the possibility to take part in that rights issue, which Golden Ocean has. So, it was not a huge amount. It was few shares.

But anyway, we did it because it wasn't money anyway.

Chris Tsung -- Webber Research -- Analyst

All right. Fair enough. That's it for me. Thank you, guys.

Lars Barstad -- Interim Chief Executive Officer

Thank you.

Operator

Thank you. There are no further questions at this time. Inger, Lars, back to you.

Lars Barstad -- Interim Chief Executive Officer

Yeah. Well, thank you very much for hosting. And also, thank you very much for listening in. Thank you to the entire Frontline team for the fantastic efforts in Q1.

And stay safe, everyone.

Duration: 35 minutes

Call participants:

Lars Barstad -- Interim Chief Executive Officer

Inger Klemp -- Chief Financial Officer

Jon Chappell -- Evercore ISI -- Analyst

Randy Giveans -- Jefferies -- Analyst

Magnus Fyhr -- H.C. Wainwright & Co. -- Analyst

Chris Tsung -- Webber Research -- Analyst

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