Frontline's CEO On The Tanker Market (Podcast Transcript)

Summary

• Value Investor's Edge Live hosted Frontline's CEO to get the latest 'on the ground' (on the water?) viewpoint in the tanker markets.
• CEO Robert MacLeod reviewed the VLCC, Suezmax, and LR2 markets and Frontline's positioning.
• We discussed spot vs. charter economics, floating storage metrics, and the potential longevity of these rates.

Editors' Note: This is the transcript of the podcast we posted yesterday. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast, embedded below, if you need any clarification. We hope you enjoy.

J Mintzmyer: Good morning, everyone. Welcome to another edition of Value Investor’s Edge live. Today, we’re hosting CEO, Robert Macleod of Frontline to discuss the surging crude and product tanker markets.

Frontline is a heavy owner in the VLCC, Suezmax and LR2 space, definitely positioned to have knowledge and to benefit from the current tanker market environment. Disclosures to start out, I currently have no position in Frontline.

However, this is recorded on the morning of 23 April 2020. So if you’re listening to a later recording, those positions may have changed. This call does not constitute investment advice or official company guidance in any form.

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Robert, thanks for joining us.

Robert Hvide Macleod: Thank you, J. Great to be back on your recording.

JM: Yes, fantastic. I think last time, we hosted you was sort of early to middle of January. We’re sort of talking about IMO 2020 and how the crude tanker markets were going to develop for the year? Of course, at the time, we had no idea of coronavirus or how – any of that would impact the markets. So let’s start with that. What has – besides coronavirus itself, what has changed the most year-to-date about the tanker market? What is different than what we expected maybe in January?

RHM: I think when we were talking last time, then we were heading into the year, things were looking very good. And then we had only a few weeks afterwards, after our chat, the market turned into what I described my Q4 call as more like a horror movie than anything else. And I think that was a good way to describe it.

But what happened and that was obviously with the Costco fleet coming back and the carbs [ph] and there was a lot of negative stuff in the market at once. But since then, the market has completely – actually, before I go to where we are now, then we’re – coming into February, things actually started to improve.

And I think February is very important, because the February market showed us that the sort of a balanced fleet that we’ve been speaking about very clearly, in our last three quarterly reports, we’re starting to show. So things were not as bad as it looked on the face of it, things were improving.

And then we got, what I would simply call massive tail winds with the demand destruction, causing a promising oil price, which in turn, is starting to show on the fleet now, when – where fleet ships are being used for storage, because the commercially available land space in the world is simply not there. So the next place to go is ships. So we’re seeing that huge effects in our market at the moment.

JM: Yes, certainly, Robert. And it’s totally different than anything we’ve seen before, right? Because normally when demand comes down, or we’re talking about any sort of cuts, especially OPEC cuts, right, that’s a very negative thing for the tanker market. So have we ever seen anything like this before? I know I haven’t did in my 10 years, but you’ve been around the industry longer. Have you ever seen anything like this before?

RHM: I’ve not, J. And I was speaking to our Chairman, Mr. Fredriksen about this. Lately, the last time was actually today, and I used to describing it many times. It’s something he hasn’t seen either. So it is – I’ve said in earlier calls, I’ve been describing it, or when it started off, I described as a sort of once in a decade opportunity, then I moved on to describing it this once in a generation.

And it’s – as you know, the tanker market is not complicated. And I think, there’s a lot of similarities we can point towards versus 2015. At that time, we had – end of 2014, we saw a lot of oil volume hit the market and we’re seeing our excess volume, and that’s what we’re seeing now as well as – which is causing this inventory build.

But it’s happening at such a fast pace compared to 2015. But the way the market is reacting on the spot and also the time charters is quite similar. So we always look at what’s happened in the past. But a lot of textbook stuff is totally out of the window, because this is unprecedented times.

JM: Yes. It’s like kind of we’re learning as we’re going, but you can clearly see the pressure in the market, of course, with the rates. So a lot of folks are looking at different sort of data for their storage. So we have the EIA data for the United States and that seems to be fairly current. We can see the weekly stock builds, both in crude oil and petroleum. But the global numbers tend to be all over the place.

Is there a sort of data source that you use preferably, or a sort of metric or chart that you are tracking to kind of figure out what the global storage situation looks like and how many tankers are being utilized at the moment? Is there a data source you utilize, or does an estimate? Or what does frontline look at?

RHM: So what we look at, first of all, J, we do not have our own internal research. So we rely on external and then we also, because this is very simple business. We also rely on our common sense. But if I was to sort of explain to my own children what’s going on, then I would refer to the kepler data. The Kepler data, I think is – one of the data points is what they call oil on water. So basically, it shows how much oil is on ships worldwide. This is not never going to be 100% accurate, but it’s – it is pretty from what we can see, it’s very good and it shows how things are developing.

So we’re looking at this. Then it’s clear that we are in a situation we’ve never seen before, that – that’s obvious. And what this catches is, it catches in or includes storage, of course. It includes – slow steaming will be included in that. Congestion will be concluded – included.

So this many – or every sort of important factors is in that number. And then we see how things are like from yesterday to today, we saw in these figures, we saw an increase of 7 million barrels. So basis that pace. And again, well, I’m not going to say this is 100 accurate, but it shows a trend. So the trend that showing is a weekly builds on ships of 50 million barrels, which in VLCC terms is 25 cargos. So that piece of data I find very useful.

JM: Yes. Thank you, Robert. I know you sent me a chart in an e-mail a few days ago, and it kind of caught my eye and it was a different metric than we had been using before, you say oil on water, right? And you can see that it’s clear…

RHM: Yes.

JM: …well above the trend line and growing. How far back does that data lag? For example, I think the chart you sent me was showing 7 April, and I think another one may have been 20 April, is that correct? Is that pretty much…

RHM: Yes.

JM: …the current data, or is there some sort of lag in that?

RHM: That’s current data, and it was funny [ph] when I said this to you. I think that’s probably the reason why we’re on this call, right? Because you were pretty quick coming back, which I appreciate, because I think that piece of information is very important. So this is something that I was showing as a very easy way to explain in the market. We get this data daily.

So I basically looked at a two-week actually ended up being a first because of weekend, it ended up being a 13-day development. And what it showed me was that during the 13 days that I illustrated on the chart, then the growth in oil on water was 7%, which is substantial, because what this is all about, this whole thing that is going on is simply tankers being employed and we are watching how quickly it happens.

And obviously there’s a flip side of this, and that is that volume – volumes will be disappearing with OPEC cuts and charter times and so forth. But from what we are seeing, the growth on oil and water is exceeding the other factor, which stand in favor of the tanker market.

JM: Yes, absolutely. It’s very interesting and we can track the oil on water. And I think that’s a very good metric. It’s obvious how many tankers are being utilized, put for storage and also maybe slow steaming or just different logistical routes and so on. It doesn’t really matter what they’re doing, right, as long as they’re employed in some fashion?

RHM: Exactly.

JM: What sort of metrics can we track for the actual on land storage? Because it seems like a lot of stuff out there is just kind of estimates and guesstimates. And I mean, I know for the United States, we have the EIA data. Is there anything you utilize for a global land storage, right? Because we see the headlines. And the headlines say, storage is filling up rapidly, but no one seems to be able to quantify it. Is there any sort of estimates that you’ve seen?

RHM: I think you’ve – all you’re pointing out is 100% agree. So what I do, again, we don’t have our own research. So we rely on what we talked to people and we asked a lot of questions. And for me, what’s important, because there’s a lot of headlines that will confuse people. I think what is important when you look at land-based storage, that is what land-based storage is available to you and me and traders and oil companies.

So you can take, for example, Chinese SPR, that’s not available. So that’s not – when you’re looking at the oversupply of oil now, that’s only available to very few. So commercially available is limited. Obviously, U.S. SPR have been opened up a little bit, but then going back that’s not been available.

So in talking to the traders like three, four weeks ago, their estimates were between 250 million and 300 million barrels. So since then this number has clearly come down. So it would only be a guess, but say, there’s 100 million to 150 million barrels left again, I’m guessing.

But I think that’s a fairly educated guess. And from the data we are seeing now, we are building by 50 million barrels a week. So this is, again, it’s a simple business and it shows a clear trend and it shows why the spot rates are strong now across all segments we are operating in. And that is, because more oil is hitting and going on ships and things are taking longer time.

JM: Yes, certainly. I mean, it’s – like you said, it’s common sense that the demand for oil storage or transport is far higher than the marginal supply of vessels. I mean, that’s obvious by looking at the rates. You mentioned it’s strong in all segments. I mean, VLCC is – that’s pretty obvious, right, for crude carrier storage and so on. Suezmax is – that makes sense as well. But we’ve also seen a huge surge in LR2s.

So I guess, first part of the question, can you remind the audience what your current split is between dirty and clean on the LR2s? And then secondly, can you talk a little bit about what’s driving that LR2 spike?

RHM: So the LR2s, we have 18, all our modern like the rest of our fleet. We are currently trading 11 clean and seven dirty. The dirty has been outperforming over the last several quarters. But the clean as is now into kind of especially hitting mega spike is something – this is – that’s never seen such earnings. And it’s driven by high remote refinery margins, which in turn leads to higher volumes of products available to ship.

And there’s simply not enough ships around and the tightness in the markets is extreme. And every voice is taking longer, whether you have the same contango on products as you have on crude. So it’s a – it’s an extremely interesting situation.

JM: Yes, it’s definitely interesting to see the spot market rates. I mean, we can see the clear quotes for those. But let’s talk a little bit about time charter markets. What sort of time charter offers have you been getting for the crude tankers for six months or 12 months? And have you been also seeing any sort of time charters for LR2s? Or is that simply a spot market?

RHM: Great question. J, and I think this is essential thing, because looking at our fleets, we’ve been, last three quarters, saying very clearly, we believe in the spots, I think, it was proven in February and then we had these massive tail winds.

Again, comparing to earlier cycles is important. Looking at 2015, similar. Six months charters were active. We’ve had that over the last three, four weeks. I would estimate that about 10% of the VLCC on the Suezmax fleet was employed on six-month contracts. I think, generally, owners are now more reluctant in doing six months and the period market is moving towards 12 months, again, exactly the same as 2015.

In terms of rates, the Suezmaxes are now on the modern ships in the 50s for 12 months, and the modern VLCCs are in the 80s, and the LR2s were in the 40s. They could even a modern composition could well start with a five. So very, very strong across the Board. And we have maintained a very high spot percentage. But as we’ve done in previous cycles and what has saved us in the downturns, because after inventory build periods, where you have strong faith, you do get inventory draw for weaker freights.

So I think, this is a great opportunity to take some hedging going forward. And for someone like us with such a large fleet, that’s obviously important. But the liquidity is low on a time charter market compared to what many think. So it’s all about being patient and waiting for this to come to you. And I’m confident that will happen, because I don’t think the sort of build of oil on tankers is going to stop anytime soon. This will go on and leave plenty of opportunity to take some charters if I want.

JM: Yes. It makes sense to watch that market and see where the time charter spread is between that right in the current spot to kind of get an indication of what the longer-term viewpoint, I guess, medium-term viewpoint is versus just the very short-term. And it sounds like you mentioned about 80,000 for VLCCs, about 50,000 for Suezmaxes and 40,000, but maybe also 50,000 for LR2s. Has Frontline decided to take any period cover at this point yet? Or are you just purely spot at this moment?

RHM: Thanks for the question, J. We will be very clear on what we’ve done when we do our quarterly release here in May, but all of them will have a full rundown. But we are watching this very closely now. I’ll get – come back with more details.

JM: Copy that, Robert, keeping that close to vest, but definitely watching the market.

RHM: Yes.

JM: We see weekly reports of reported charters and there’s a huge surge about two weeks ago. It was one of the longest list of period charters I’ve ever seen in a weekly report. And then last week, there was only a handful. So we’ll continue watching the report and see where those lineup.

One of the tools that retail investors and I think institutions now utilize as well is Twitter account called Tankers International. It’s also an app called VLCC fixtures. And they – it’s sourced from data based on, I think, the TI tanker pool, and there’s a lot of sometimes pictures from your own avatar [ph] on their International Seaways, or various other companies. Does Frontline participate in any sort of information source like that? Or do we just need to wait until your quarterly call to kind of get an idea of where fixtures are at?

RHM: So we – our fixtures often come out in the market and then they are put in the app, but we do not put our own fixtures onto this. We treat each chart apart. Yes, it’s written, which is probably confidential. But a lot of our fixtures if they leak out into the market, you’ll see them on the app. We are not active participants.

JM: All right. Thank you, Robert. I know that’s been kind of a frequent question of folks saying, “Hey, where can I find out what Frontline is doing specifically?” And is it fair to say that the kind of the indicated spot rates from Clarksons’ and other benchmarks? Is that fair to say that’ a good approximation for Frontline for investors thinking about how you’re doing today?

RHM: I think when we’re at the extremes we are now, then investors should discount the headline number on, because when it goes up to $200,000-plus, if you have four days of waiting, that hits your number a lot. And there are delays as weather delays and so forth. So no tanker company will be a highest at the index shows on the face of it.

JM: Yes, it makes sense when the spikes are enormous, you’re talking about five fixtures.

RHM: Yes.

JM: …maybe a normal day might have 20 or 30 fixtures, right? So…

RHM: Exactly.

JM: …we sort of look at – we tend to look at kind of the median rate on periods like that, look over a period of 60 to 90 days, 90 days and looks more sort of the median as opposed to the average. Is that sort of something that you would do as well? Or is there any sort of way you would tell investors to kind of, I guess, discount some of those huge rates?

RHM: I think it’s a good way to look at it. But it’s – when it’s very, very strong like it is now and it keeps over time like it also done fasten out, then I would apply – I can’t give you a percentage. But I would look at discounting in a bit, because that’s what reality is likely to show.

JM: Certainly, it makes sense. I think it’s a good caution for folks when you hear 250,000 that, yes, maybe you get one or two ships at that, but that’s not going to be the entire fleet.

RHM: Yes. No, exactly.

JM: I know you would think – you think that would be common sense. But I think sometimes folks do get carried away. And maybe you say, you do 150 and people get disappointed and they lose, the forest for the trees that 150 is actually very good? So…

RHM: I think you’re touching on something very – I just need to comment on that. I think it’s a great point, J. And that’s what why I don’t like these mega spikes. And – because it’s like – if you go from 200 to 250, let’s say, it looks like the world is falling apart. But the fact is that for Frontline with a cash break-even on a VLCC of $22,000, then 150 for a long voyage, it’s amazing return. So that, that cautiousness of being well, I think it’s very important.

JM: Of course.

RHM: And also – okay, carry on.

JM: Yes. No, that’s great, Robert. I just – we have 50 – actually closer to 60 folks live on a call and we’ll have probably 400 or 500 people listen to the recording, and hopefully, we’ll get this public as well. So yes, just good to get those numbers out there. So people have realistic expectations, let’s say, “Hey, look, maybe 250 isn’t something you should look for, maybe it’s more like 140, 150, which, of course, is still a phenomenal rate.”

Robert, one of the big headlines and it’s probably more distracting than anything. But one of these big headlines has been this Flotilla of Saudi Arabian crude headed for the United States, and it’s been kind of a political football. And recently, there was a story about them changing course and going somewhere else, not going to the United States anymore.

First of all, is that a story that you’re following at all? And second of all, I guess, related to that, what happens when a crude tanker cannot find somewhere to dock and has to store the oil longer? What happens in that scenario?

RHM: So number one, I find what’s been sent out by Reuters, I find it very, very hard to believe. So I think by commenting on it, I probably would just add to speculation. So I think I just leave the comment as that.

Your second one is a great question, because this is one of the important things to realize, and that is why is oil and water increasing? It’s because one of the facts of this, there’s no home for the oil. We’re all talking about land-based storage. Another thing is that the traders and the oil companies have cargos slouching around and there’s no home – there’s no buyer.

So for us, as a strong buyer, I can’t give you a percentage. But I’m sure between 10% and 20% somewhere of our ships are currently sitting at a place or port anchor down and the owner of that oil has no idea where the oil is going. So this is one of the factors why this oil and waters is increasing rapidly.

There’s nowhere to put this and we’ve got plenty of examples in Europe. Spain, for example, where there’s a lot of ships sitting. We’ve got South Africa with Durban, a lot of ships are sitting; Malacca in Malaysia; we’ve got Brazil; we’ve had ships in there for many, many weeks. So delays caused by unsold cargo is a key factor.

JM: Yes. It seems like those might increase if the buyer cannot find online storage or cannot find a refiner to utilize it or so on. You would think those arrangements had already been made. But it seems like things are rapidly changing in this market.

There’s a report out earlier this morning that we saw posted on our boards that was mentioning something about how some tanker owners would need to wait maybe six months or 12 months for payment? Is that something you’ve seen at all in the market? And how does that usually happen on one of these spot voyages or charter voyages? When do you receive actual cash payment?

RHM: So what do we say we contract a ship to do Arabian Gulf to the U.S., the ship might be contracted in March, loads end of April and then arrives in June and then it might be discharged in August, September.

So what I’m describing here is, it’s basically a six-month period from contract to discharge. And the freight is to also owners is payable after discharge. So there’s a timeline here. There’s also this is called demurrage, which is basically the daily rate at which we’re paid for waiting, that is normally paid within three to six months on average after discharge.

So then you’re looking at nine to 12 months from contract to receiving old demurrage. Given the extreme market and the conditions, we and many of our other owners have successfully included in the contracts on many of them that demurrage is payable on account every 10, seven or 15 days. So that means that we get that cash sort of payable on account, whilst the freight is paid within days of discharge. So payment of freight comes very soon after discharge.

JM: Makes sense, Robert. What about a time charter, if someone takes your ship for six months or 12 months? Is that payment schedule different, or is it still paid at the end?

RHM: That is scheduled very differently. So then, you are paid monthly ahead. So you would – now, for example, a ship that is in time charter that from Frontline to one of our customers, we would, in April, invoice to further the monthly hire for May. From a cash flow perspective, time charters are better for us than voyage charters. Also, when we charter other ship on time charter, then upon arrival, the charterer will purchase all bunkers on board the vessel.

JM: Yes, it’s definitely a different cash flow situation and definitely more advantageous in dollar for dollar. Now, of course, if spot rates are triple, then it might be worth getting paid somewhere in the future. This has never been a problem in the past. But do you see any concerns about counterparty risk, considering that the payments are delayed until after unloading or sometimes demurrage is not prompt? Do you see any sort of concerns with counterparty risk? Or have you heard anything in the market about that?

RHM: It has happened in the past. We’ve looked back in 2008, 2009 financial crisis, there were problems there. At Frontline, we are very, very cautious when it comes to counterparty risk. We have – all our 10 main customers do a very high percentage of our business. So we only deal with the best signatories and we are not concerned on this front.

But got a new customer with no relationship to and so forth, we would do very, very thorough credit checks or even as far from payments before entering into a contract. We’re not going to address. But – and generally, we’ve not heard in the market here of it being a problem. But obviously, in the state of oil, there’s certainly cause for being conservative on this front.

JM: Yes, it definitely makes sense to be conservative and thanks for bringing that parallel back to 2008, 2009, where there were a few indications or a few cases where I guess, the credit did not come through at the end. And I think that is a valid concern that some investors have as they say, “What happens, right, with all these oil companies are struggling, we’re seeing these headline prints of negative prices. What happens if one of your counterparties does default?”

And it sounds like some of the terms are being adjusted a little bit. You mentioned demurrage shifting from something that’s paid off in the future to maybe something that’s paid every 10 to 15 days. I mean, you mentioned some of these charters might be paid upfront. Do you think it might be possible to see spot voyages, where they are no longer paid to discharge? They’re paid throughout the voyage, almost like a term charter, or do you think that’s too extreme?

RHM: I don’t – if you present the idea, I think, charter school would feel, it’s too extreme. But if you look at the facts, then I would say, it’s not extreme at all. And I would not be surprised if this is something that’s brought up and suggested. If you look at the dry cargo market, that’s how it works in that market.

But just when talking about this, I think, it’s important to also highlight in terms of the risk factors, because I think you’re making the investors aware of very important point is that just one more to add is that, we – obviously, the oil price is down, but substantially – but still has value.

So looking at the cargo value, so if we have someone that do not pay, then we can – we’ll obviously have some security in the value of the cargo. So that’s the sort of – so just to be aware of. But again, Frontline, we are very, very cautious. And the customers, we have all the big players and they have been our customers for decades.

JM: It definitely makes sense. Customer vetting is more important than it has ever been in the future. One of the viewpoints and I think something that’s scaring away investors now is, they’re saying, “Well, these rates are phenomenal, right? It’s kind of a feast.”

But what happens in three months or six months or nine months or whatever period is on the other side of famine, if you will, right? There’s a drawdown of global inventories, exporters are still utilizing cuts. How do you see that scenario unfolding, Robert? Is that a risk factor investors should be worried about? And if so, what sort of market do you anticipate on the other side?

RHM: Knowing it’s a great question, this is the trickiest question. This is the billion-dollar question. And I see inventory build for 2020 event and we’re starting it now. So – and through the inventory build and we’re going to have strong rates. Again, back to 2015, that’s exactly what happened and lasts for them for 18 months. I’ve got no idea how long it will last this time. But I do see inventory builds through this year, I’m guessing it’s going to be through this year.

And when we come to the inventory draw period, then freights will go down. There’s obviously no doubt. And that’s going to be a time, where we need to be well-positioned in terms of having taken some charter coverage. And – but I think, generally, and I need to be careful on this.

But generally, my feel is that, the concern of the other side is a little bit higher than what I think we’re actually going to be faced with. And the reason I’m saying that is the fleet supply side. And that’s obviously the main factor in the market normally. Now we have these new factors that come in and play the main roles. But the main role is normally the fleet supply. I’ve always got a slide on that in my presentation.

So on fleet supply, it is looking very good. And that is compared again to 2015 – the 2015 cycle. Coming into 2017, we had the inventory draws, but we also had a very, very large fleet growth of 8% in 2017 and 8% in 2017 and 2018, both years. But this time, it’s going to be – going to look very different.

I don’t think we will have many new building orders in 2020. And that is for various reasons, it’s finance, it’s propulsion, and it’s also all the miners going down. And people will see that adding ships to the tanker fleet is probably not a good idea. And if you want a tanker, you should buy one that’s on the water and there are ships for sale on the water.

So given that view, I expect to start 2021 with a very, very low order book. It’s probably going to be historically low. The estimate between 2% and 3% of the world’s fleets. And when 2021 starts, we’re going to have a world fleet in VLCCs, where one out of four ships will be about 15 years.

So I expect when the inventory draw starts, then I expect us to enter into a ship recycling period, which could be massive that provided the market drops to low levels. And when these ships come down to their operating costs, so like $8,000 a day sort of narrow, [ph] then it’s important to highlight that even without time charter coverage, Frontline will still be making money. So I reckon, the modern ships will be in a much better position than the market presently fear for the future, given the fleet dynamics.

JM: Yes, it’ll be interesting to see one of the metrics we’ve tracked for several years. Of course, it’s the balance of the modernity of the fleet, right? It’s getting older and older and also the order book, which is getting smaller and smaller. And we did not see the Costco sanctions coming, for example, I don’t think anybody did, right? And then we didn’t see coronavirus coming, right? I don’t think anybody really did. But we did see the tightness of the fleet, right?

So the tightness of the fleet positioned us to be bullish on crude tankers, because we could see, right, that there was a very small gap between demand and supply and the supply was only going to get better. It seems like that’s unfolded, right, different ways and maybe we thought it would, but it’s unfolding that way. It also seems like when oil recovers and the price starts going back up, the bunker fuel prices are going to surge, which would further widen the window between what a modern VLCC can do in the market versus an older VLCC.

Let’s talk about that real quick. Let’s talk about IMO 2020 and the spread between VLSFO very compliant fuel and the high sulfur fuel oil. The spreads have collapsed, right? The spreads are like $50 a ton, right? So scrubbers are not doing what we thought they would do. Do you think that’s going to change? Or was the scrubber investment kind of a failed one for the industry?

RHM: I think it depends on how you’ve done the investment. For Frontline, I don’t think, oh, that the investment has not been a bad one, because we did in a different way. We took part on – of a company and we made money from other people ordering and we paid it a little bit differently. We also had a very high pay down ratio of everybody in the beginning of this, because we still – we have to start shifting in November.

So from November through to January, we were saving in the region of $400,000 a day on the scrubbers. So we had a lot of payback. Probably half our investment was paid back before the spread came down. Now we are paid back, I reckon about $60,000 a day, it’s come down a lot.

So the current spread, I think, our investments will be paid back end of 2022 early 2023. But – so it’s not unfolding the way that we were expecting. But the other side of this with the money that we’re making on the spot market now and the opportunities that are ahead of us, then that is the least of our concerns.

And I think when we were on this bunker – bunk same, then we’ve had, I think, that probably – it might have been the best thing Frontline did in 2019 in terms of strategic decisions. We entered into a JV with Trafigura on fuels and they owned 75% and our group owned 25%, and this has been fantastic, because we have access to fuel timely, the right quality and the right price all over the world.

Monday this week, we were given a license to operators bunker suppliers in Singapore. The Singapore has been very, very strict over the last few years. They used to have two years ago, three years ago, they had more than 50 licenses. And now, they’ve cut it down to the 20s. And we were one of the two who got a new license for the first time in many years.

So it puts us in a good position in terms of fueling our ships, because delays are present. And in the present market, a delay of a few days in a VLCC is obviously extremely costly.

JM: Yes, it’ll certainly be interesting to watch. It did not quite unfold like a lot of us thought it would. But, of course, we also didn’t see the coronavirus impact happening to the markets. Do you think that spread is going to increase and balloon back out? Or is $50, $100 sort of the max?

RHM: No, I think it will – they will be very closely in correlation with the oil price. So when the oil price recovers, which is obviously will do at some point, then you’ll see the spread go straight out. I expect for the next – for – but that will be the case for next 12 to 24 months at least further out, then refineries might adapt and then the availability of the low sulfur will then increase potentially, and then the pricing could or will change. But for the next 12 to 24 months, I think, spread will follow the crude.

JM: Make sense, Robert. So it’s a percentage that we need to look at not a nominal dollar amount. So if oil prices and bunker prices doubled, then you think maybe the spread would double from, say, $50 back to $100. Okay, interesting.

RHM: Yes, yes, yes.

JM: Kind of the question, sure, maybe you don’t have exact insights on it. But in your opinion, what do you think could happen to the oil prices going forward in the next couple of months? Do you think we’re going to see more pressure on the markets? Are we going to see more of these zero or negative pricing headlines, or already think of those kind of behind us in the markets more normalized now?

RHM: I mean, this is minus and this – I’m not going to pretend to be an old trader, but it’s shipping in freight that I should know a few things about. But when it comes to oil, I think that the minus and all that you look at the 6 billion barrels were traded, is very much a technicality. And yes, it could happen on the next roll.

And – but I think, overall, it’s looking at the oil price. It’s going to be a very, very simple answer, and it’s going to be related to when this world demand come back? Because the only way this oil price will come up is for the obvious reason, which is demand returning.

When that happens, there’s probably many other schools that have a much better educated guess than I do. My simple guess and this is why I think the inventory build will continue through 2020. I think it takes time before the market comes back.

Yes, China and Asia is coming back here, but Europe and U.S., we are 35% of the world consumption and countries are in a terrible state with the virus and this will take time. So I think the sort of a quick V recovery in oil price and then they’re coming back in Q3, for example, I don’t see that is likely. But again, it’s a guess. I don’t have the answer.

JM: Yes. I don’t think any of us do. So I appreciate you being honest with that and we’ll see how things go forward. Very good questions overall about the market and dialogue back and forth. I appreciate it, Robert.

Before we wrap our call up, I do want to shift a little bit to Frontline specific and talk about capital allocation. So you have a record cash flows coming in. The fleet is basically fully delivered. You have a handful of just a couple of LR2s coming up, I think, in 2021, but other than that the fleets fully delivered. So what are your capital allocation priorities? Are we looking at any more newbuilds, any more acquisitions, deleveraging, dividends, how should we think about that?

RHM: So, to – in specifics, I will address all these points in our call coming up in May, of course. So just generally, on Frontline, the simple numbers. We have 24 VLCCs. We are actually getting one more here on – in June. We have 28 Suezmaxes and we’re getting one more in May. So it’s two ships very soon. And then as you rightly say, we’ve got some new buildings that are forward 2021 and 2022.

The average fleet age in Frontline is four years. The history of the company is that, we’ve paid out more than $6 billion since listing in the U.S. in 2001. Investing in Frontline, it’s 100% investing alongside, Mr. Fredriksen. So there’s no sort of hidden commissions or anything to that. We have the best balance sheets that’s we’ve ever had. We also have access to finance, which I can confidently say that it’s second to none the best in the industry.

So coming into 2020, we got a cash break-even across the four-year average fleet age, cash break-even all in without taking time charter cover into the numbers, $19,000. And above $19,000, we make close to $23 million on an annual basis. So the earnings potential of the company is fantastic. So I think we’re in great position. And all the points of your question, J, I will be very specific on when we do the May call.

JM: All right, Robert, keeping us on a cliffhanger. I'll have to dial into that call and maybe throw a few questions in there if they don’t get asked. So we're looking forward to that report.

RHM: Yes, that’d be great. I like your questions. I think your questions are excellent and they are far better than many that are asked. Or what are currently being asked from us. We need some fresh blood coming on the calls.

JM: Well, thanks, Robert. I appreciate you patting my back a little bit and we’ll see if we’ll make it onto the next call and get some more clarity on that. One more question for you, and I know you’re probably and, say, deferring some of this. But consolidation in the global fleet, right?

There’s the public players and so on, some of them are trading at much cheaper valuations. How can we think about consolidation? Is that something Frontline would look into? I know a couple of years ago, you tried to acquire DHT and that didn’t quite work out. Is Frontline perhaps looking at shareholdings in other companies, or only focused on Frontline at this moment?

RHM: No, we’re focused on Frontline. And what we’re doing as a company, we are – we feel the fleets we have is a good one. We got the size. If there are deals out there that are clearly very accretive, then we will consider them. But we’re very much focusing on what we have at the moment.

I think normally, when markets are as good as they are now, then people focus on cash rather than focusing on consolidation and that’s probably the case this time as well. But we are firm believers in consolidation. We are firm believers in size. We believe we have it, but we could add if we feel it’s right for our shareholders.

When it comes to what’s happening in the fleet otherwise, as I mentioned earlier, about 10% of the fleets was contracted for six months time charters across Suezmaxes and VLCCs. What happened then is that, these ships went to quite a few hands. So in terms of who is controlling the ships now, it’s going to be traders and oil companies.

So I would call this a temporary consolidation. So – because of these going from individual owners to large trading houses, for example, but that’s just a temporary one. And the other consolidation story, I think is ahead of us.

JM: Yes. Thank you. Robert. We’ll have to watch that play out. It’s definitely interesting to see some of the different tanker companies trading at different multiples. What about newbuilds, Robert? Is – I know you mentioned, we probably won’t see a lot of those. But you did take a couple of LR2 newbuilds. Are you in the market for those at the right price? Or are you swearing off newbuilds at this point?

RHM: We’re off newbuilds. The newbuildings we’re getting out there the Suezmax and VLCCs, for example, there were resales that we found them attractive. They had already started building them. So we got them in a good price.

The Aframaxes are more of a – they are ice class. So it’s a niche market. We see a lot of ice class ships now being north of 15 years old, which will take them out of the most important businesses. So this is more a niche trade, where we think there’s going to be a demand for this specific ship. So new buildings, in general, is off our radar.

JM: Excellent. Thank you, Robert. Hopefully, it’s off the radar for most of your competitors and peers as well. And we’ll see – we haven’t seen a lot of newbuilds in the last six months or so. We’ll have to keep tracking that.

Final question before we wrap it up here. Your stock is trading around $11. As we’re talking, it’s up a little bit pre-market now. But it was $13 something at the start of the year. And so, what is going on here – a lot of other of your peers as well are trading much lower today than they are in January, even as earnings are basically at all-time highs and the current market is very strong. What is the disconnect there do you think? Why are – why is the stock not trading up to these higher prices? Why is there even a discount to NAV in some cases?

RHM: Not – we are surprised. And obviously, there are the obvious answers. There’s well situation. There is also, say, people hold five stocks and four of them are performing really very bad and getting margin calls, we’ve seen that in Norway. Especially a month ago, there was – we have a lot of private investors. It looked like there were some margin calls here and there, which in the way the stock reacted.

So for us, we look at the earnings potential. We have a great EPS potential here, and that’s how we can bring value back to shareholders. And we are surprised as well how the industry is being priced. And an all special would ask, because we have over decades had a premium pricing. And that is obviously down to the factors that I mentioned before, where the support of Mr. Fredriksen and the finance and the fleet and all this is very important factors.

So let’s see. I mean, if this carries on, then well, hopefully, there’s going to be more faith in the stocks further down. But for us, it’s day-to-day operations and we’re making money and that’s the important thing.

JM: All right. Thank you, Robert. Well, we’re looking forward to the quarterly results in about a month, and I’ll take you up on that call. Parting fun question for you, you mentioned on an interview about a month ago that if rates dropped below, I think, you said 30,000 a day in Q2, you’re going to basically run all the way across Norway. Do you have any…?

RHM: I’m not gonna run, I play a little squash, I'm not super unfit. I’m semi fit. But I’m – it’s 300 miles. So I’m not going to run. But I will walk it, and I’m going to guess basically, the bet was, we had a – it was a podcast I did. And the analyst that was hosting it had a very, very bearish outlook you know?

And I started the call by inviting him for the bets, where I said, if we get back to the level seen in end of January, early February in Q2, then I will walk from Moscow to Bergen, which is 300 miles. And then he said, “Yes, this is an easy bet.”And I said that “Look, I’ll throw Q3 into this one.” And so we did – and I’m swimming mildly. I’m very confident with that bet. I don’t think there’s going to be any walking across the country. And I think, there’s much higher chances that he is going to be buying Frontline a nice dinner.

JM: Wow, well, you beat me to my follow-up, because I was going to say, are you going to double down and say Q3 as well? And it sounds like the answer is yes.

RHM: Got it. I’ve already referred it in there. And I probably refer Q4 in as well, but you haven’t asked me yet. But I’ve got a lot in my sleeve.

JM: So you’re ready to go all the way out to Q4 and say, it’s not going go below 25 or 30 a day. And if it does, you will walk across the country. You’re not going to run, you’re not Forrest Gump!

RHM: Yes. Now I’m looking around, and then I’m going to spend my share of the dividends here. And I’m going to buy myself a very nice American camper van like a proper sized one, you can park a small car in the back of. I’m not sure it’s going to work in the region roads, but it’s not –it’s our dream. So I’ve never seen any proper camper vans in this country. So it’s important there. If you’re going to walk that far, and I think you need to have some comfort as well.

JM: Very exciting. Well, hopefully, you won’t have to walk through that far. But we’ll see how it plays out. Thank you very much, Robert, for joining us this morning. We really appreciate it.

RHM: I appreciate being with you, J. Thank you very much, J.

JM: Thank you, everyone, for joining us this morning on another live call. We hosted Robert Macleod, CEO of Frontline. Stock symbol, FRO. I have no current position in Frontline, but this call is taking place in the morning of 23 April 2020. If you’re listening to recording at a later date, those positions may have changed. Nothing you heard on the call today constitutes official advice or company guidance in any form.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Comments

[badabin]

So there’s actually not a business here in transporting crude. All these tankers stocks are in reality scam penny stocks not worth anything except their dubious dividends that will be suspended at any time. Price is gas is only relevant if it is close to -or below/ zero.
Got it now.

[mustangs]

really enjoyed the podcast. You really did your homework. Don't understand why FRO is so unloved? It should have a big day on Wednesday!

[aeneasd]

Excellent podcast well done.

[Dividend Investor 101]

Again, thanks for the interview!

[damonbrooks45]

Thanks so much for this, Insane that the current share price for these tickers havent moved up north much? Seems that tankers move down when oil goes up but in real term these should not correlate as nothing has changed, more and more barrels on tankers in the ocean

[Yves Summons]

An opportunity to just buy more very cheap stock. The price is bound to go up again soon.

[LuckyLuke_213]

I'm sitting on Frontline and EuroNav.
Shall I double up?

Are they still cheap?

[Roger Thaat]

Great Stuff. Very interested in seeing how long it last