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Frontline (FRO) Q4 2020 Earnings Call Transcript

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Frontline (NYSE: FRO)
Q4 2020 Earnings Call
Feb 19, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the fourth-quarter 2020 Frontline Limited earnings conference call. [Operator instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Mr. Lars Barstad.

Please go ahead, sir.

Lars Barstad -- Chief Executive Officer

Thank you very much. Good morning, and good afternoon. Welcome to this Frontline's fourth quarter and full-year earnings call. It's been a very volatile year, and black swans have become a common feature in our market landscape.

The COVID-19 pandemic has affected our business on many levels, but most importantly, our sea fares have been safe and our organization have been spared serious human consequences. Tanker markets have been challenging, but the year as a whole, has been solid business-wise. And we recorded our best full-year result in 2020 since 2008. Let's move to Slide 3 and have a look at the highlights.

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Frontline came into the fourth quarter of 2020 on a soft note, expecting some degree of normal seasonality to kick in as the Northern Hemisphere usually stock up for winter. But this time around, the fourth quarter proved to be softer than Q3, actually for the first time in 10 years. On a low to discharge basis, we made $17,200 per day on our VLCCs, $9,800 per day on our Suezmaxes and $12,500 per day on our LR2s. So far in the quarter -- in the fourth -- so far in the third quarter, we have booked 78% of our available VLCC days at $22,600, 68% of our available Suezmax days at $17,800 and 65% of our LR2/Aframax days at $12,200 per day.

I think it's safe to say our markets in Q4 were challenging, but I will come to that later in this presentation. I'll now let Inger take you through Frontline's financial highlights.

Inger Klemp -- Chief Financial Officer

Thanks, Lars, and good morning, and good afternoon, ladies and gentlemen. Let's then turn to Slide 4 and look at the income statement. We achieved total operating revenues, net of f voyage expenses of $101 million in the fourth quarter and adjusted EBITDA of $31 million. We report a net loss of 9.2 million, $0.05 per share, and adjusted net loss of 20 million or $0.10 per share in the fourth quarter.

We had some adjustments in the fourth quarter, which were the gain on the sale of SeaTeam of 6.9 million, also a 2.5 million gain on derivatives, a 1.9 million unrealized gain on marketable securities, 1.3 million amortization of acquired time charters and a 1.6 million share of losses of associated companies. The adjusted net income in the fourth-quarter decreased from third quarter by $76 million, and that was primarily driven by a 75 million decrease in our time charter given earnings due to the lowest reported TCE rates in the fourth quarter, which Lars went through. Frontline reported a full-year 2020 net income of $413 million or $2.09 per share and adjusted net income of $422 million or $2.13 per share. And this is the strongest yearly result since 2008.

Then let's take a look at the balance sheet on Slide 5. At the end of December 31st, 2020, Frontline has 413 million in cash and cash equivalents, including the undrawn amount under our senior unsecured loan facility, the marketable securities and minimum cash requirements. In November 2020, we entered into two term loan facilities in a total amount of 351.5 million to refinance two existing term loan facilities, which matured in the second quarter of 2021, which had total balloon payments of 324.4 million. And we also entered into a loan facility in an amount of 133.7 million to partially finance the capex requirements as of the end of 2020 of 142.4 million for the four LR2 tankers that we have under construction.

Further, in February 2021, we extended the terms of our senior unsecured revolving credit facility of up to $275 million by 12 months to May 2022. $60 million of this extended facility has been recorded as long-term debt as of December 31st, 2020. 215 million remains available and undrawn under this facility. And following the concluded refinancing and financing, we have no material debt maturities until 2023.

And the newbuilding program is fully funded. Then let's take a closer look at the cash breakeven rates and opex on Slide 6. We estimate average cash cost breakeven rate for 2021 of approximately $21,600 per day for the VLCCs, $17,800 per day for the Suezmax tankers and $15,600 per day for the LR2 tankers. And the fleet average estimate is about $18,200 per day.

These rates are the all-in daily rates that our vessels must earn to cover the budgeted operating costs and dry dock the estimated interest expenses, TC and bareboat hire, installments on loans and G&A expenses. We recorded opex expenses in the fourth quarter of 2020 of $7,800 per day for VLCCs, $9,700 per day for the Suezmax and $8,300 per day for the LR2 tankers. The opex expenses were impacted by dry docking of four Suezmax tankers and one LR2 tanker in the fourth quarter. We will dry dock one Suezmax tanker in the first quarter of 2021.

In the graph, on the right-hand side of the slide, we have shown incremental cash flow after debt service per year -- per share, assuming $10,000, $20,000, $30,000 or $40,000 per day in achieved rates in excess of our cash breakeven base, respectively. And then -- sorry, the numbers include vessels on time charter out. They are adjusted for newbuilding deliveries and we are looking at a period of 365 days from January 1st, 2021. As an example, with a fleet average cash cost breakeven rate of $18,200 per day, and assuming $30,000 on top of the average fleet TCE rate would be $48,200 per day.

And Frontline would generate a cash flow per share after debt service of $3.46. With this, I'll leave the word to Lars again.

Lars Barstad -- Chief Executive Officer

Let's move on to Slide 7 and recap the fourth quarter tanker markets. So during Q4, oil inventories drew at a record pace to the tune of 2.6 million barrels per day according to EIA. As oil demand continued to rise to levels near 10 million barrels above the Q2 levels, oil prices continued to strengthen further and the structure of the oil market incentivized players to empty tanks, both floating and on land. And the future price was increasingly lower than the prompt price, making it ineconomical to hold stock.

A significant number of tankers were employed in storage in the second half of last year, particularly outside China. And this inventory draw cycle added pressure to an already oversupplied market as these vessels now returned to compete in this spot business. Asia and in particular, China has been the key driver in the recovery so far. This supported the VLCC market for a while as they sourced their returning oil demand from the Atlantic basin.

In the latter part of last year, we saw China also withdraw on inventories, muting their demand for tankers. By December 2020, Chinese oil consumption reached all-time high at 15.6 million barrels according to the EIA. Let's move to Slide 8 and look at the crude fleet and order books. The argument that ships older than 20 years struggle to trade in the conventional oil market is undisputed.

Oil majors, traders and national oil companies all practice a hard stop at 20 years. This means that we have a very limited amount of options once the vessel has gone through the 20-year struggle. And with freight rates at zero to negative for non-eco tonnage, we struggle to see the prospects for this portion of the fleet for alternative use. The convention markets for FFOs and SSOs is not very hot at the moment, and there is a limited demand for storage as all the curves are in steep backwardation.

We also believe the upcoming regulatory changes with regards to GHG emissions will challenge the fleet going forward. This indicates a limited lifespan even for vessels of 17.5 years of age. Ordering activity is muted and does not match the age profile of the fleet. We did see some orders toward the end of last year.

And that lifted the order book slightly. 30% of the overall tanker fleet is about 15 years. And after regulations on energy efficiency or the famous now EEXI kicks in in 2023, the potential for carbon tax regime and the potential work for carbon tax regime kicks off. This whole portion of the fleet will either need to invest heavily or retire.

Let's move to Slide 9. We want to talk about our clean product tankers. We normally don't mention our clean trading capabilities in these presentations, but we do have 18 modern LR2s and four more to come, which makes us a significant owner in this space. The reduction in jet fuel demand as travel got restricted in 2020 hit refinery margins severely.

Refinery margins in Europe and U.S. have been under pressure for years. And due to big prospects, little investments have been done in improving and modernizing these plans. Last year's depressed margins accelerated the decisions to permanently close or convert refineries to storage plants or in some few examples buy a few plants.

Asia, in general, and in particular, Middle East and China, however, the last three years, expanded refining capacity significantly. Modern refineries can process a wider range of crudes more efficiently, and I can give you an entire presentation on the topic. The key is that they outcompete local refineries in especially Europe, but also to some degree in U.S. We can see on the slide here that the refining capacity that has permanently closed in Europe is to the tune of 500,000 barrels per day; in the U.S., close to 700,000 barrels per day.

There has been some closures in Asia of 705,000 barrels per day, but the new addition are 1.4 million barrels per day. In net, we see that -- or we expect trade flows to be affected by this. As product demand normalizes post-COVID-19 pandemic in Europe and U.S., we have to assume we returned to some level of normality over the coming years. Jet fuel and other products are far more likely to be sourced by Asia, and this will incur longer ton-miles.

Our LR2s offer great economies of scale for the expected developments in the product trade flows. Let's move on to Slide 10 and discuss the market outlook as we see. I'm focusing on the short-term drivers in this presentation as that's probably the interesting part considering where the markets are. Saudi Arabia has signaled the reversal of their voluntary 1 million barrel per day cut to come in April '21.

That comes in addition to whatever there is. Unusual cold weather in the Northern Hemisphere distorts usual demand patterns. Gas, LNG in Asia turn on capabilities to -- sorry, the gas and LNG spike in Asia and the unknown capabilities to oil for heating dynamics work as we haven't really seen oil for heating in 10 years, creates a lot of uncertainty around how much oil has been -- incremental oil has been consumed during this period. The spike in LNG prices implied oil prices at $260 per day, making great incentives to burn oil for heating.

We have episodes of -- or sole situation where skiing suddenly became popular in Madrid and most recently in Texas, we've seen how the cold weather has affected production. Goldman Sachs estimates that this production loss to be close to 700,000 barrels per day for February. Oil demand continues to recover despite extended lockouts. Oil prices indicate tightening markets.

The floating storage is no longer a significant factor weighing on the tanker market as we see it. And in April alone, oil supply is expected to increase by 3 million barrels according to EIA. So let's move to Slide 11 and sum all these things up. So the global tanker markets have corrected sharply during second half '20 after significant retraction in world growth.

All the leading commodity markets are pricing a strong recovery in 2021. And the global GDP is expected to grow by 5.5% during this year. Oil demand is recovering and to what pace is a little bit unknown. We all know that the rate analyst agencies are slow to react, both on the downside when demand disappears, but also to the upside when demand is recovering.

But global oil production is expected to increase by 5.3 million barrels during 2021. When this recovery starts for tankers is unknown, but we are very low in the cycle as the chart on the bottom right side indicates. OPEC+ is expected to ease cuts from Q2 '21 onwards. And with all the above, we believe Frontline is very well positioned for a recovery in tanker markets with our modern, spot exposed fleet.

With that, I would like to open up for questions from the audience.

Questions & Answers:


Operator

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

Jon Chappell -- Evercore ISI -- Analyst

Thank you. Good afternoon. Lars, as I was reading your press release and your presentation, it struck me that Frontline has a history of being nimble and acquisitive when others kind of can't. And now that you've been very prudent with your dividend.

Inger has done a great job of pushing out the maturities. It seems like you're in a position of financial strength at a time when the market is really still kind of struggling. So how do you think about these next six months and Frontline's willingness and ability to acquire ships before there's -- the optimistic upturn starts maybe later in the year or early next year? Or do you sit back and wait to see the whites of the eyes on a recovery before you get more aggressive?

Lars Barstad -- Chief Executive Officer

Well, it's a good question, and it's an expected one. I think I would like to put emphasis on our capabilities, and they are as you mentioned there. Whether if we sit back or whether if we're looking at something right now or whether if we will do something in Q2 or later, I'm not going to comment on, to be quite honest. But the solid answer, I believe, is we're always looking.

And our financial show, we're also ready to move when we see the opportunity.

Jon Chappell -- Evercore ISI -- Analyst

OK. And then second question, more of an industry one, the one I've also been thinking about. I think scrapping is kind of important on the margin. It's not the most important part of recovery in this market.

That's going to be demand-driven. But it seems like a lot of companies have been talking about the new emission standards and the terrible market environment and older ships being discriminated against and why that's going to drive scrapping and you had a whole slide on that yourselves. It just seems like there hasn't been much in the form of scrapping in the last 12 months where rates are pretty much as bad as they could be, at least the last six to nine months. And now there's this kind of consensus optimism that OPEC starts producing again and the world is recovering and everything is going to get better.

So why would we see scrapping accelerate when the view is that things can only get better from here where there really wasn't much to be done at the absolute trough?

Lars Barstad -- Chief Executive Officer

Well, I must admit. And I think I mentioned or at least indicated in my presentation that the lack of scrapping in this market is a bit of a mystery to me. I think I pointed out that for all economical reasons, and we should be scrapping a lot during this month or the last month. And we haven't seen that yet.

I think scrapping will accelerate throughout the year. With regards to the challenging kind of -- or the somewhat hazy outlook with regards to regulatory changes and so forth, I think it's going to be a very important factor to our market going forward. But I wouldn't be -- I won't join like the doomsday prediction saying that every vessel that's above 10 years needs to scrap and all that stuff. And there's a lot to be done for the tankers to actually improve the GSG emissions with the existing kits.

And -- but for sure, it will affect our market going forward. But I think one has to be a little bit kind of critical of all the various kind of analysts predictions on the outlook for the tanker fleet.

Jon Chappell -- Evercore ISI -- Analyst

Yeah, that makes sense. OK. Thank you, Lars.

Operator

Thank you. Our next question comes from the line of Chris Tsung from Webber Research. Please ask your question. Your line is open.

Chris Tsung -- Webber Research -- Analyst

Good afternoon. How are you Lars and Inger? So, I guess I just want to start up, kind of following up on what Jon was talking about regarding your strong balance sheet and you guys pushed debt [Inaudible] and instead of asking about acquisitions in the span of the fleet, what about -- is there any appetite to kind of increase your operational revenues by actually turning in charters? And what could be the strength of this market and [Inaudible] what sort of durations are you looking at?

Lars Barstad -- Chief Executive Officer

So sorry, we couldn't hear you too well. I'm sorry for that.

Chris Tsung -- Webber Research -- Analyst

Is this better?

Lars Barstad -- Chief Executive Officer

Yes, this is better.

Chris Tsung -- Webber Research -- Analyst

So I guess I was just following up on what Jon was saying and commenting that -- noticing that you guys have incredibly strong balance sheet. Inger has done done a great job in pushing out the debt maturities at 2023. And instead of just taking it purely from an absolute expansion exactly, what about your appetite to increase your operational leverage of terming in new charters of any sort of duration?

Lars Barstad -- Chief Executive Officer

Yes. So if I got you correctly, basically to increase our -- the appetite to increase our operational leverage. The thing is that -- let me answer the question in a different manner. So we -- right now, we're really happy with the situation we're in because we have a fleet that's spot exposed to a very large degree.

Apart from the five Suezmaxes we have on long-term time charter out, we are nearly 100% spot exposed. So basically, we are in a position where we want to reach the benefits, whether if we want to increase kind of our ability to make more money, I think that's potentially a few months out. And back to the previous comments, we are looking, but I can't really confirm anything.

Chris Tsung -- Webber Research -- Analyst

Yes. No, that's fair. And I guess if you're looking, are you able to hear sort of color if you're looking at these specific propulsion tags or maybe in the more [Inaudible] is there something that you need to share?

Lars Barstad -- Chief Executive Officer

Sorry, I'm really struggling to hear you, but did you mention propulsion?

Chris Tsung -- Webber Research -- Analyst

Is it -- sorry, is this better?

Lars Barstad -- Chief Executive Officer

Yes. You're breaking off. But whether if we are looking at various propulsion types, yes, we are but we're not ready to invest on that yet. We think the jury is to some degree out.

As I mentioned in our Q3 presentation, with our modern fleet, we're actually in a pretty good shape at least when it comes to emissions toward 2030. Obviously, for us to make an investment in propulsion, and with that, I mean, retrofitting or ordering kind of shifts with a different propulsion than the traditional one, we actually need to see -- it's a little bit like the scrubber discussion. We and others started to invest in scrubbers when it was obvious the economical case for it. On propulsion, it's not yet.

We don't know -- well, we're pretty sure there will be a common tax. We don't know how much it's going to be. We don't know how it's going to be applied. But -- so basically, the propulsion discussion is still something we have -- I could easily say that both LPG and LNG and then eventually ammonia looks probably the way to go, but -- or one of the ways to go.

I think we'll end up in a situation where there are various propulsion types depending on what kind of trade you're doing. But I think it's very important to keep in mind that shipowners, we can't be paying for this outcomes. So basically the market needs to tell us what it's willing to pay for if that was the market --

Chris Tsung -- Webber Research -- Analyst

OK. Right. Yes. Part of it, but -- I mean, I'm going to just try to reconnect and jump back in queue.

So sorry about my connection. Thanks guys.

Operator

[Operator instructions] And our next question comes from the line of Randy Giveans from Jefferies. Please ask your question. Your line is open.

Randy Giveans -- Jefferies -- Analyst

Hello Lars and Inger, how are you?

Lars Barstad -- Chief Executive Officer

Very good.

Randy Giveans -- Jefferies -- Analyst

All right. So just asking about the dividend. Obviously, you bought that back last year, having paid a dividend now for the last two quarters. So if earnings return as expected, I guess, here in the coming quarters, is there a formula for the dividend to return? Or is it kind of fully discretionary? And if so, what will cause you to reintroduce the dividend?

Inger Klemp -- Chief Financial Officer

Randy, I think it's like we stated in the earnings release. It's -- we are in a way dedicated to return dividends to our shareholders over the board, but we would have to look at both positive results. First, we have to have a positive result and then obviously, also we will have to look at the market condition. So that's the same wording in a way as we have in our press release.

Randy Giveans -- Jefferies -- Analyst

Got it. OK. And then as you operate in both the crude and the products tanker market, which of those are or maybe which asset class, VLCCs, Suezmaxs, LR2s, are you most bullish on here in the coming months?

Lars Barstad -- Chief Executive Officer

Well, I've been asked that a couple of times today, actually. And so we are -- our company is like a four-cylinder engine, where we have the VLCC, Suezmax, we have the LR2s that are trading clean and dirty. So right -- recently, we've had at least some spark in the Suezmax cylinder, not to any excitement at all, but at least recovering from negative returns. Right now, we have the Aframax base where there's some excitement due to weather and disruptions in U.S.

Gulf. I'm unsure which segment will be hit first, to be quite honest, when the recovery story starts to kind of come true, potentially the VLCC markets because eventually you need refinery runs to increase for products to flow. But the start of any return of volume will probably come from the Middle East, which would firstly benefit VLCCs, I would say.

Randy Giveans -- Jefferies -- Analyst

Got it. All right. That's fair. And then quickly here on asset values.

How have those been impacted kind of in this current market weakness? However, there's also an optimistic outlook, right, for the back half of this year. So it seems like should the share price rally has maybe outpaced the increases in asset values, is that accurate? Or what are you seeing on that front?

Lars Barstad -- Chief Executive Officer

I agree with your analysis. I believe share price -- the share market is pricing the recovery a little bit further out. So obviously, jumping over the unsecurity in the front here. But we have seen a few transactions that kind of underpin the values, at least if you look at the five-year old bucket.

We're also about to get some price transparency, I believe, on resale and new build. But I wouldn't say it's an upward movement, but I would say it's -- we're at least firmly at what might be the floor.

Randy Giveans -- Jefferies -- Analyst

Sure, that's it for me. Thanks again.

Lars Barstad -- Chief Executive Officer

Thank you.

Operator

Thank you. Ladies and gentlemen, we have no further question at this time. Please go ahead. We have no further questions at this time.

Please continue.

Lars Barstad -- Chief Executive Officer

OK. With that, I would like to thank you all for listening. We are excited for the time to come in tankers, and wish you all a great weekend. Thank you.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Lars Barstad -- Chief Executive Officer

Inger Klemp -- Chief Financial Officer

Jon Chappell -- Evercore ISI -- Analyst

Chris Tsung -- Webber Research -- Analyst

Randy Giveans -- Jefferies -- Analyst

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Motley Fool Transcribing has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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