Frontline Bets on Strong Market Rebound once Coronavirus is Contained

John Fredriksen’s shipping company Frontline posted the highest quarterly net income in more than eleven years, reaching USD 108.8 million for the fourth quarter of 2019, the company’s data shows.

The figures point to a major rebound when compared to a net loss of USD 10.0 million in the previous quarter. For the entire year, the company’s net income stood at USD 139.9 million.

“Frontline’s ability to generate significant income has been proven in our fourth quarter results, and the strong market continued into the first quarter of 2020, resulting in the strongest earnings period since 2008 for owners of modern, fuel-efficient vessels,” Robert Hvide Macleod, Chief Executive Officer of Frontline Management AS commented.

“However, primarily due to the effect of the coronavirus, we have a near-term macro headwind with a slowdown in oil demand, particularly in China. We can’t forecast the duration of this impact, but once the coronavirus is contained Frontline is exceptionally well positioned for the strong rebound we believe will follow.”

Frontline said that its performance in the fourth quarter was driven by higher tanker demand as ton-miles increased due to the growing Atlantic to Asia trade, tighter available fleet capacity and early effects of the IMO 2020 implementation.

These factors coincided with the attacks on oil facilities in Saudi Arabia and the sanctions on the Cosco fleet, which further strengthened the market.

“Just a few short weeks into 2020, the market strength reversed as Libya lost 1mb/day of oil production, Nigeria declared force majeure on Bonny crude and the world held its breath during attacks in the Middle East. Then the sanctions were lifted on the Cosco fleet and the coronavirus appeared, having made an immediate impact on world trade, oil demand and the freight market,” Frontline pointed out.

The VLCC segment is particularly weak as ton-miles demand has decreased, while suezmaxes and LR2/aframaxes, two segments where Frontline has significant exposure, are enjoying better earnings on a relative basis.

Despite the negative market sentiment created by the coronavirus, Frontline’s long-term view has not changed, as the company believes that crude demand will continue to increase and that the fallout will be temporary.

“We are cautiously optimistic that the spread of the virus will be contained sooner rather than later, even though it according to news headlines only is getting worse,” the tanker owner commented.

“Rates for modern vessels are still at reasonably high levels compared to the same period in recent years, which speaks to the underlying conditions and the IMO 2020 shift. Last year a very heavy refinery maintenance season contributed to weaker tanker markets before giving way to a surge of demand towards the end of the year. Combined with increasing sailing distance and reduced effective fleet supply, this is in the simplest of terms a powerful combination.”

In Frontline’s view, the impact of IMO 2020 on fuel prices has reshaped the industry by creating a significant competitive advantage for owners of modern vessels.

In particular, scrubber fitted VLCCs are estimated to be earning USD 30,000 per day at the same time as two-thirds of the VLCC fleet will earn around their daily operating expenses after fuel expenses.

As such, Frontline is betting on scrubber installation returns and is planning to fit scrubbers on 50 percent of its fleet. At the moment, the company has 26 exhaust gas cleaning systems in operation and plans to install a further six by this summer.

“Frontline has over recent years consistently been increasing its exposure to modern, fuel efficient vessels and we are now clearly seeing the benefit. We have been able to both grow and renew the fleet while maintaining very low breakeven levels, which now sits at around USD 19,400 across the full fleet, before accounting for time charter coverage, which is a historically low level for Frontline,” the company said.

The company’s newbuilding program is comprised of one Suezmax tanker and one VLCC, which are expected to be delivered in April and May 2020 and four LR2 tankers, which are expected to be delivered in 2021 and 2022.

In February 2020, Frontline obtained a financing commitment for a loan worth up to USD 62.5 million from Crédit Agricole to partly finance the VLCC resale under construction at HSHI.

The shipowner said it was also discussions with banks to finance the four LR2 newbuildings and was confident that it will be able to do so on favorable terms.