Frontline(FRO) - 2023 Q2 - Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations General Overview and Recent Developments Frontline completed newbuildings, adjusted its 66-vessel fleet, and is in arbitration regarding the Euronav agreement - As of June 30, 2023, the Company's fleet comprised 66 vessels, including 65 owned and one commercially managed Aframax tanker[9][14] - In H1 2023, three vessels were sold for $145 million gross proceeds, yielding $91.8 million net cash and a $22.0 million gain[10][11] - The company concluded its newbuilding program with the delivery of two VLCCs in January 2023[9] - The combination agreement with Euronav NV was terminated in January 2023, with ongoing arbitration on the merits of the termination[13][14] Tanker Market Update Global oil consumption and supply increased in H1 2023, with an aging tanker fleet and low orderbook suggesting favorable supply dynamics - Global oil consumption averaged 100.6 million barrels per day (mbpd) in H1 2023, up from 98.8 mbpd in H1 2022[16] - The tanker fleet is aging, with 12.2% of VLCCs and 14% of Suezmax tankers over 20 years old in 2023, while orderbooks remain low[20] - The price cap on Russian crude has complicated compliance as Urals prices rise, leading some owners to abandon the Russian trade[18][19] Results of Operations Frontline reported significantly increased profitability in H1 2023, driven by higher freight rates despite increased expenses Revenue and Expense Comparison (H1 2023 vs H1 2022) | (in thousands of USD) | 2023 | 2022 | | :--- | :--- | :--- | | Total revenues | 1,010,095 | 517,881 | | Voyage charter revenues | 971,049 | 463,195 | | Time charter revenues | 30,908 | 48,451 | | Voyage expenses and commissions | 315,437 | 254,906 | | Ship operating expenses | 87,490 | 84,867 | | Administrative expenses | 24,339 | 15,767 | | Depreciation | 112,642 | 80,780 | - Voyage charter revenues increased by $507.9 million due to higher market freight rates and newbuilding deliveries[23] - Depreciation expense increased primarily due to changing the estimated useful lives of vessels from 25 to 20 years effective January 1, 2023[35] - Finance expense increased by $75.6 million, mainly due to higher market interest rates and a smaller gain on interest rate swaps[37] - The company recognized an unrealized loss of $24.0 million on marketable securities, primarily from its Euronav shares[41] Liquidity and Capital Resources Frontline's liquidity strengthened in H1 2023 with increased cash from operations, significant debt activities, and dividend payments Cash and Liquidity Position | (in millions of USD) | June 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | 306.8 | 254.6 | Cash Flow Summary (Six months ended June 30) | (in millions of USD) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | 553.2 | 91.7 | | Net cash used in investing activities | (9.1) | (89.6) | | Net cash used in financing activities | (491.7) | 4.6 (provided) | - Financing activities in H1 2023 included $259.4 million in debt drawdowns, $356.6 million in debt repayments, and $394.0 million in cash dividend payments[64] - The company transitioned $1,788.4 million of its loan agreements from LIBOR to SOFR due to LIBOR's discontinuance[57] - Estimated average daily cash break-even TCE rates for the remainder of 2023 are approximately $27,000 for VLCCs, $23,400 for Suezmax tankers, and $16,600 for LR2/Aframax tankers[62] Quantitative and Qualitative Disclosures about Market Risk Frontline manages interest rate, foreign currency, and equity price risks, utilizing interest rate swaps to mitigate floating-rate debt exposure - The company is exposed to interest rate risk on $1,689.8 million of variable-rate debt, where a one percentage point increase would raise annual interest expense by approximately $16.9 million[69] - Interest rate swaps are used to minimize floating-rate debt risks, with an aggregate fair value asset of $52.7 million as of June 30, 2023[73] - Exposure to equity price risk arises from marketable securities held at fair value through profit or loss[72] - The company faces transaction and translation risk from subsidiaries reporting in British pounds, Norwegian kroner, or Singapore dollars, despite most transactions being in U.S. dollars[70] Unaudited Condensed Consolidated Interim Financial Statements Condensed Consolidated Statements of Profit or Loss Frontline reported a significant profit increase to $430.3 million in H1 2023, driven by nearly doubled revenues Consolidated Profit or Loss (Six months ended June 30) | (in thousands of USD) | 2023 | 2022 | | :--- | :--- | :--- | | Total revenues and other operating income | 1,033,775 | 523,526 | | Total operating expenses | 539,908 | 435,697 | | Net operating income | 493,867 | 87,829 | | Profit for the period | 430,300 | 80,243 | | Basic and diluted earnings per share | $1.93 | $0.39 | Condensed Consolidated Statements of Financial Position As of June 30, 2023, Frontline's total assets slightly decreased to $4.70 billion, while total equity increased to $2.30 billion Consolidated Financial Position | (in thousands of USD) | June 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total assets | 4,701,735 | 4,768,443 | | Total current assets | 897,575 | 881,050 | | Vessels and equipment | 3,622,364 | 3,650,652 | | Total liabilities | 2,405,448 | 2,508,544 | | Short-term debt | 362,547 | 277,854 | | Long-term debt | 1,932,610 | 2,112,460 | | Total equity | 2,296,287 | 2,259,899 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities surged to $553.2 million in H1 2023, with significant financing outflows for dividends and debt repayments Consolidated Cash Flows (Six months ended June 30) | (in thousands of USD) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | 553,154 | 91,736 | | Net cash used in investing activities | (9,152) | (89,603) | | Net cash provided by (used in) financing activities | (491,704) | 4,605 | | Net change in cash and cash equivalents | 52,298 | 6,738 | | Cash and cash equivalents at end of period | 306,823 | 119,811 | Notes to the Unaudited Condensed Consolidated Interim Financial Statements Note 2: Use of Judgements and Estimates Effective January 1, 2023, the company revised vessel useful life from 25 to 20 years, increasing depreciation expense - Effective January 1, 2023, the Company revised the estimated useful life of its vessels from 25 years to 20 years[97] - This change was driven by stricter charterer age requirements and increased environmental focus, favoring vessels under 20 years[97] - The change increased depreciation expense by approximately $29.3 million in the six months ended June 30, 2023[97] Note 6: Marketable Securities As of June 30, 2023, marketable securities totaled $212.3 million, primarily Euronav shares, with an unrealized loss offset by dividends - As of June 30, 2023, the Company held 13,664,613 shares in Euronav[112] - In H1 2023, the Company recognized an unrealized loss of $24.9 million on Euronav shares and received $25.0 million in dividends[112] Note 9: Interest Bearing Loans and Borrowings Total debt decreased to $2.295 billion as of June 30, 2023, following new drawdowns, significant repayments, and a LIBOR to SOFR transition Debt Movement (H1 2023) | (in thousands of USD) | Dec 31, 2022 | Proceeds | Repayments | June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Total debt | 2,390,314 | 259,375 | (356,625) | 2,295,157 | - In H1 2023, the company drew down $130.0 million for two new VLCCs and $129.4 million to refinance an existing facility[119][120][121] - The company repaid $134.4 million of its $275.0 million senior unsecured credit facility with an affiliate of Hemen[122] - The company was in compliance with all financial covenants in its loan agreements as of June 30, 2023[126] Note 12: Commitments and Contingencies Frontline has no remaining newbuilding commitments, a $47.8 million bunker purchase commitment, and ongoing arbitration with Euronav - The Company has no remaining vessels in its newbuilding program and no further commitments as of June 30, 2023[153] - The company is engaged in arbitration proceedings with Euronav regarding the termination of their combination agreement, maintaining its lawful decision[154][155] - The company has a commitment to purchase bunker fuel from TFG Marine for a total of $47.8 million through December 2024[152] Note 13: Subsequent Events In August 2023, the Board declared a cash dividend of $0.80 per share for the second quarter of 2023 - In August 2023, the Board of Directors declared a dividend of $0.80 per share for the second quarter of 2023[156] Cautionary Statement Regarding Forward-Looking Statements This report contains forward-looking statements subject to significant uncertainties and risks beyond the company's control - The report contains forward-looking statements based on management's current views and assumptions, subject to significant uncertainties[75][76][77] - Key risk factors include world economic strength, charter rate fluctuations, oil production changes, financing availability, and geopolitical events[78][79]