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Text: Different from the first quarter this year, second quarter ended up being quite unbeatable.
As many of you have asked quite a few times now, will Frontline try and exploit the weakness in this market to grow further?
And I guess, we have answered that now during Q2.
We are in some way a three-legged shipping platform with VLCCs, Suezmax and LR2s.
Our VLCC leg has been a bit shorter than the others.
Now we're amending that somewhat.
Parts of the challenges in the market this quarter has been the continuous flare-ups of COVID infections in various locations around the world.
Vaccination has come far in the Western parts.
But other parts of the globe are not so fortunate.
We remain vigilant toward our seafarers' well-being and are happy to share that our efforts to arrange vaccines for them is going well.
In addition, I'd like to mention we are very grateful certain port states are being extremely generous, offering vaccines to seafarers literally for free.
So let's move on and have a look at the highlights on Slide 3.
Q2 '21 performance reflects the challenges the market faced this quarter.
It is, however, a further proof that our business model, efficient operations, modern fleet, and a very hardworking chartering team manages to outperform the key benchmarks.
To put this in perspective, an average weighted earnings index I checked recently for oil tankers came in just over $6,000 per day in Q2 '21, the lowest print in more than 20 years.
In order to outperform this, the owners, and in particular, the owners' charters, must fight for every cent and know their position well to be able to play their hands best possible.
Regrettably, this is not always the case as far as we can observe.
Anyway, at Frontline, we do the hard work and managed to achieve $15,000 per day on our VLCC fleet; $11,000 per day on our Suezmax fleet; and $10,600 per day on our LR2/Aframax fleet in the second quarter of this year.
So far in Q3, we have booked 70% of our VLCC days at $14,000 per day; 64% of our Suezmax days at $9,800 per day; and 63% of our LR2/Aframax days at $11,800 per day.
All numbers in this table are on a load-to-discharge basis.
Before Inger takes you through the financial highlights, let me quickly comment on the acquisitions in the quarter.
During Q2, we acquired, through resale, six latest-generation ECO-type VLCCs currently under construction at Hyundai in Korea.
In addition, we acquired two modern ECO-type VLCCs built in 2019 at the same shipyard.
We have for a period of time followed the VLCC asset market closely to look for opportunities.
As we didn't expect an imminent recovery in tanker markets, delivery was a key bargaining chip.
The rallying steel prices and high activity around us for non-tanker assets pushing potentially delivery slots way forward added to our conviction in making these investments.
I'll now let Inger take you through the financial highlights.
Following the acquisition of the VLCCs, as Lars mentioned, we have progressed on the loan financing.
And in August this year, we obtained financing commitments, subject to final documentation, for three senior secured term loan facilities.
They are in a total amount of just $247 million.
And they will partially finance the acquisition on the two VLCCs built in 2019 and three of the six VLCC newbuilding contracts.
All facilities will finance 65% of the market value.
They will carry an interest rate of LIBOR plus a margin of 170 basis points.
And they will have an amortization profile of 20 years, starting from delivery date from the yard.
We intend to establish long-term financing for the remaining four resale VLCCs newbuilding contracts closer to delivery of the vessels.
Then I think we should move to Slide 4 and look at the income statement.
Frontline achieved total operating revenues, net of voyage expenses, of $80 million and adjusted EBITDA of $28 million in this quarter.
And we report a net loss of $26.6 million or $0.13 per share and an adjusted net loss of $23.2 million or $0.12 per share.
The adjustments this quarter consist of a $4.7 million loss on derivatives; a $0.8 million gain on marketable securities; and a $1.3 million amortization of acquired time charters; and lastly, a $0.8 million share of losses of associated companies.
The adjusted net loss in the second quarter decreased $32 million compared with the first quarter.
And the decrease was driven by a decrease in our time charter equivalent earnings due to the lower TCE rates, as Lars mentioned; an increase in ship operating expenses of $9.3 million, mainly as a result of higher dry-docking costs; offset by a gain on marketable securities sold in the quarter of $4 million.
Let us then look at balance sheet on Slide 5.
The total balance sheet numbers have increased with $64 million in this quarter.
The balance sheet movements in the quarter are primarily related to taking delivery of the LR2 tanker from Future and the acquisition of 6 VLCC newbuilding contracts in addition to ordinary debt repayments and depreciation.
As of June 30, Frontline has $257 million in cash and cash equivalents, including undrawn amounts under our senior unsecured loan facilities, marketable securities, and minimum cash requirements.
Then let us take a closer look at cash breakeven rates on Slide 6.
We estimate risk cash cost per daily rate for the remainder of 2021 of approximately $21,800 per day for the VLCCs; $7,500 per day for the Suezmax tankers; and $15,400 per day for the LR2 tankers.
And the fleet average estimate is about $18,000 per day.
These rates are the all-in daily rates that our vessels must earn to cover the budgeted operating costs and dry dock, estimated interest expenses, TCE and bareboat hire, installments on loans and G&A expenses.
The highly attractive terms on the updated financing commitments on four of the acquired VLCCs, which I mentioned earlier, decreases the daily cash breakeven rates with approximately $1,400 per vessel per day compared to existing financing terms of similar vessels.
In the quarter, we recorded opex expenses of $7,600 per day for VLCCs; $8,500 per day for Suezmax; and $9,000 per day for LR2.
We dry-docked three Suezmax tankers in this quarter and four LR2 tankers.
And we expect to dry-dock one VLCC and two LR2 tankers in the third quarter and none in the fourth quarter.
The graph on the right-hand side of this slide shows that if we assume $30,000 on top of the daily fleet average cash cost per daily rate of $18,000, Frontline will generate a cash flow per share after the service cost of $3.51 per year.
And the cash generation potential will increase after acquisition of the eight VLCCs.
With this, I leave the word to Lars again.
So let's look at Slide 7 and recap the second quarter tanker market.
So global oil consumption averaged 96.7 million barrels per day in Q2 '21.
That's up 2.1 million barrels per day from Q1 '21.
Production averaged 94.9 million barrels per day.
Hence, the world continued to draw about 1.8 million barrels from inventories.
Just to put that in perspective, when you go from inventories, you're not really using that much transportation.
And as a rule of thumb on tanker utilization, you need about 30 VLCC equivalents in order to transport 1 million barrel of oil per day.
So this kind of draw represents a loss of 30 to 35 VLCC equivalents in demand.
The tanker rate gradually slipped throughout the quarter and volatility faded.
OPEC+ did increase supply by more than 1 million barrels per day during Q2 '21.
The key OPEC producers also went into higher-demand periods, typically in the Middle East, where summer hits and you start to basically burn oil or fuel for electricity generation.
U.S. and Brazil added another 900,000 barrels per day.
Most of the Brazilian additions came out as exports.
Demand rose sharply in North America and Greater Europe while Asia, that led the recovery, saw a far more muted development in the second quarter of the year.
As illustrated in the two charts below, where we basically isolated North America, Europe, and Eurasia, we see that during Q2, demand there rose sharply while the rest of the world, and in particular Asia, and as I mentioned that led the recovery toward 2021, has performed kind of -- performed less first half this year.
So let's move over to Slide 8 and look at the tanker order books.
New ordering has naturally been muted during the second quarter of '21.
We've observed that the delivery window for ordering a significant number of VLCCs or Suezmaxes is now firmly into 2024.
This is obviously due to all the ordering activity for asset classes kind of outside of the tanker space.
The overall tanker order book for VLCCs, Suezmax, and LR2 has shrunk 10% year to date.
The overall order book for tankers above 10,000 deadweight tons stands at 8% of the existing fleet.
And this is, in fact, comparable to levels seen in Q1 1997.
In absolute deadweight terms, we are at a 20 years low.
I'd also like to put this in some perspective.
Twenty years ago, the global oil consumption was around or at 76 million barrels per day.
A normalized market now is closer to 100 million, if not above.
So it means that the oil market is 30% larger now than in early 2000 and the order book is just about the same size.
The VLCC order book is now at 81 units, give or take.
At the same time, 124 VLCCs will be above or past 20 years in the same period.
For Suezmax, we are at 41 units and 123 passing 20 years on the same metrics.
Let's move to Slide 9 and look at oil in transit.
This is a very important indicator to us.
We monitor this basically on a monthly basis to see where we are.
Oil in transit is basically oil being transported, so in essence, excluding whatever is on storage.
And as you can see on -- I've kind of circled in 2020 in a red rectangle here.
And as you can see, 2020 was a very noisy year for oil transportation.
We started off the year with the Saudi-Russian price war, which distorted Q1 and Q2, and we had a massive production increase and transportation increase.
Then the COVID-19 pandemic hit, and we had -- and we saw a demand shock that suddenly kind of took away a lot of production and also then transportation needs.
And Q3 and Q4, the transportation needs diminished almost back to 2017 levels.
Floating storage did save tank utilization at the time.
First half of '21, the tanker markets have -- well, basically, volume has increased and transportation has grown.
But we've been facing increased fleet supply by vessels released from storage and delivery of newbuilds, together with seeing deep inventory draws.
Now -- where we are now, this is obviously, July and August for Q3, we're back to Q4 2019 levels.
OECD commercial inventories are now down to 2019 levels.
And I believe or we believe that's a fair proxy for global inventories.
There is also another thing to note, when inventories are no longer drawn, transported oil will come into play.
As an example of this, EIA are currently estimating us to build 1 million barrels of oil per day for September.
But then come October, we're supposed to draw half a million barrels per day from inventories.
That gives you a delta of 1.5 million barrels, which then needs to be transported.
That's equivalent to the demand for 45 to 48 VLCC equivalents.
And I think this gives you kind of a notion of how quickly this can turn.
Now let's move to Slide 10.
And I call it the VLCC fleet paradox.
This is almost the same for Suezmaxes.
But I decided to point out this for the VLCCs.
We may all speculate in what the older generation of VLCCs are doing.
But it is undisputable that a 20-year-old vessel will struggle as a very limited number of charters accept them.
And this is purely on age.
With the challenging trading environment we've had during first half this year, earnings achieved on non-ECO, high-consuming vessels have been zero or negative.
And mind you, 51 vessels are above 20 years as we speak.
Year to date, eight VLCCs are reported sold for recycling.
The average recycling price in Asia has risen 70% in the same period and is now close to $25.5 million for a VLCC.
Well, one of the typical exits for an older vessel in the tanker world is crude oil storage.
Well, crude oil curves turn into backwardation in Q4 last year and are not at all supporting floating storage.
So far this year, we've seen three VLCC spot fixtures reported on a vessel that's either 20 years or older than that.
And this is out of the 660 VLCC fixtures we recorded.
So again, I want to highlight this because it is important and it's very important looking at the previous slide, where we are in the cycle on oil being transported.
If it is so that the effective tonnage actually hasn't grown over the last couple of years, then we're closer to balance than we might think we are.
So let me sum up on Slide 11.
Demand and supply of oil continues to rise.
But we have to admit the Delta-type infections cloud the outlook, in particular in Asia.
We see asset prices remain firm, steel prices continue to rise.
And the activity is very good on the yards but for non-tanker assets.
At the same time, the tanker fleet continues to age, the overall order book shrinks and the potential delivery window moves further out, should demand for tankers pick up.
OPEC+ plan to add about 400,000 -- no.
400,000 barrels per day each month until the end of the year.
This means in total 2 million barrels per day of increased supply.
And go back to the math for -- we then would need 60 to 65 VLCC equivalents by the end of the year.
Oil in transit continues to rise.
And the big question mark is obviously, when do we reach the inflection points?
I would like to draw your attention to the chart at -- below or at the bottom of the slide.
I showed you this last quarter as well.
And as the orange dot indicates, this is where we were in March this year.
So we're -- basically, we're gradually digging ourselves in from negative year-on-year growth in global oil trade into positive territory.
And since last, Frontline has increased its position significantly.
We have secured attractive financing and are ready to capitalize as we sail on toward the expected recovery.

user
frontline q2 net loss of $26.6 million.
q2 net loss -26.6 million usd.
q2 diluted loss per share 0.13 usd.
net loss of $26.6 million, or $0.13 per basic and diluted share for q2 of 2021.

assistant