Frontline CEO Robert Hvide Macleod On Crude Tanker Markets (Podcast Transcript)



Editors' Note: This is a transcript of the podcast we published yesterday with J Mintzmyer and Frontline's CEO, Robert Macleod on Value Investor's Edge Live. We hope you enjoy.

J Mintzmyer: Good morning everyone. Welcome to another edition of our live Tanker and IMO 2020 Forum. Today, we’re hosting Frontline CEO, Robert Macleod, who’s going to join us to talk about their tanker operations. Frontline has a modern fleet spread across VLCC’s, Suezmax’s and LR2’s. Frontline is traded at a strong valuation compared to peers, which Robert sees as a strength and will get Frontline multiple options in this market.

Some disclosures before we begin. I have no position in Frontline stock, however, I do have ancillary positions in multiple crude and product companies. This recording is taking place in the morning of 14th January, 2020. So, if you’re listening to this recording on a later date some of those disclosures may have changed. Nothing you hear this morning constitutes investment advice or company guidance in any form.

Listen to or subscribe to The Investing Edge on these podcast platforms:

Robert, thanks for joining us.

Robert Macleod: Thank you, J. Thanks for having me.

JM: Yes, absolutely. It’s a – we wouldn’t be able to not have you here representing one of the largest crude and product tanker companies and such an interesting tanker market. So, we wanted to kick off the discussion here talking about how Frontline’s positioned for IMO 2020 and how that’s impacting your daily operations and whether or not there’s been any sort of surprises in the market lately?

RM: In terms of the interesting times J, I think you’re bang on. I’ve now been in shipping for almost two decades and I have been looking forward to 2020 and we’ve had high expectations and a lot of the expectations are playing out. So, we started planning for IMO 2020 back in 2017. I would say, in terms of developments, it’s been pretty much as expected. We’ve had very much focus on scrubbers. We invested in the scrubber company in 2018 and we now – we’re about to merge that company into Clean Marine, which will then be one of the biggest scrubber companies in the world.

Along with Scrubbers, we’ve also done a lot of testing on fuel. So, we’re comfortable with various grades, we’re very careful. So, if you don’t find the right grade on the low Sulphur we will go for diesel. A part of our plan was also to join focuses with Trafigura when it comes to fuel procurements. So, we’ve got a JV with Trafigura that starts operating here on the 21st, which basically will secure the fuel for our fleet and a John Fredriksen Group at the right time, the right quality, and the right price because it’s very clear that we’re seeing a lot of challenges when it comes to fuel supplies. So, we expect delays to go up worldwide, but hopefully we will be in a better position to the rest.

JM: Well, excellent. It’s good to hear that you’re ahead of the curve there and I know it’s been on your minds for a couple of years as you mentioned. Just checking in on you, can you remind us what your current scrubber update process is? I know a lot of the vessels are still getting fitted as we speak, and also not just for your fleet, but also for the global fleet at large, do you know what the current percentage of uptake is roughly?

RM: So, for our own fleet it’s one out of three vessels and that would increase to about half the fleet within this summer. The luxury we have being as scrubber producer. So, we own 15% of the combined or the merged company Clean Marine. So, we have access to scrubbers quicker than most and at a better price. So, we can install scrubbers within about 3.5 months. So, there are decisions to be made later this year. When it comes to the overall worldwide fleet, I don’t have the updated numbers in front of me here, but obviously the number has increased. We saw a lot of ships being installed in the second half of 2019. In terms of new orders from scrubbers, we’ve been very quiet lately. So, what I expect is that the fuel spread, I expect to remain strong and I would not be surprised if we’d see a lot of orders on scrubbers in Q2 and that the world fleet percentage starts increasing.

JM: Definitely. It sounds like there’s a lot of ship owners kind of holding their cards close to vest on one hand, but also still kind of accessing the market, maybe there’s a little bit of uncertainty about where the spreads are going to go, and of course we know the spreads right now are about $100 higher than the futures market have predicted. Of course, there’s futures in the last few days have been coming down a little bit in terms of the spreads. How do you think about that spread when you look at maybe that second wave of scrubbers, right, Q2, Q3, Q4 of 2020? Is it like a $200 long-term spread or what is sort of the area where you say, okay, this makes sense to expand my scrubber program, beyond say, 50% of the fleet?

RM: When it comes to the spread, obviously, I run a shipping company and not a fuel trader, but obviously we have used and we follow it very closely. One of the biggest surprises I saw in the second half of 2019 was how the spread gets – how low the spread was in Q3. So, I was getting a little bit sort of, okay, what’s going on – did we make the wrong call and so forth? Because I was convinced that the spread will come out. So, I was saying early last year that I wouldn't be surprised if we see a spread going up to $600 in Q1. We’re not up to that level, so I still think certain case in the world will see that extreme, but I think it’s playing out – while we didn't have a plan, in terms of play-out, in terms, and so we didn't put a bet on, but we're not surprised where it is.

I believe personally that the spread will remain pretty strong, and I also think there’s going to be some ships that we will have challenge with the low Sulphur that will then get a decent amount up. So, I think people will order when it comes further into the year, but what we shouldn't forget is that if you have a VLCC then one thing is the actual equipment of about $2 million. The full cost of installing the scrubber if you are not docking it the same time for other purposes, if you’re just going into do the scrubber, you could be in a territory of $8 million to $10 million. So, it’s a huge call and that is obviously due to the off high costs given how high and strong the tanker market is at the present.

JM: Right. The total cost of installing a scrubber actually has more than doubled, right? Because it’s the cost of the actual equipment and the installation of the dry dock, but also the opportunity cost, right over the offerings that you are foregoing?

RM: Absolutely J. So, when we were doing instalments on our V’s, some of the V’s last year then we were losing say, $20,000 a day, but every day we were in talk. Now, we’d lose $600,000, $700,000, a week.

JM: Yes. It’s a phenomenal shift. Can you talk a little bit about what you’re seeing in the current spot markets and also how that translates into charter markets because we’ve seen strong and steady rates in the spot markets basically straight since October, right? It’s been four months straight up strong spot rates, but we haven't really seen those time charter rates come up. I mean, we’ve seen, you know Clarksons puts out an index that shows that time charter rates for one year and two year, but – and those have risen, but we haven't seen a lot of public announcements, can you talk a little bit about that market and what you expect to see there?

RM: First to answer your question on spot, we’re seeing a slight easing on the V’s and we’re seeing the same on Aframax’s. The Suezmax’s seem fundamentally stronger at the moment, but we are not surprised. The things have been very strong. They are coming down from very high levels to high levels. So, I think the overall investor concern seems from what I’ve seen on the stock market is pretty high, but I am not worried about the spot market. I think the market is fundamentally looking strong. So, the Atlantic to the Far East move is definitely here to stay and the markets are tight. We see it daily in our position lists and we also believe that there will be a cold of winter here further into the year.

In Europe, it’s been very mild. It’s been the same here in the States. So, I think we’ve got some upside there, and I think that yes, volatile and I’m not going to guess where we are going to end the market in terms of average earnings for the V’s. I don't think it will be $100,000, but if it is 60 or 70 or 50 it’s still fantastic earnings. When it comes to the time charter markets, I was very clear in my Q3 reports that we’ve stayed – at Frontline, we’ve stayed spot on the whole fleet. We have believed in the fundamentals of the market. We have believed that things would get better.

So, rather than fixing period in the low rates, we have been waiting and we’re seeing now rates increasing a lot, but for some purposes it’s more a sort of a theoretical value because the liquidity remains low. It is on the rise though. So, I have been saying to the guys in the office that I thought the first half of 2020 would be extremely busy on time charters, now I think it’s going to be more towards the second half of the year, but we are going to see more deals still, the first half of 2020 than we saw in 2019 for sure.

JM: Yes, Robert. I think it would be good to see some more time charter deals in the market because right now you see the spot rates and a lot of folks are skeptical, right? They are seeing these spot rates and saying, well, you know they are going to come down next month and of course they might come down a little bit for seasonality, but I think a lot of investors, especially the mainstream market just doesn't believe in the long-term strength of this at all. And I think if they saw a two-year, three-year charter speaking to our net handy levels say, you know $50,000 for the three years, I think the mainstream market might have a little bit more faith. So, we’re hoping to see that. We’ll see how it transpires. We’ve seen some interesting trends in the spot earnings for both Suezmax’s and Aframax’s. As you mentioned, Suezmax have just been remarkably strong for the past few months. Can you talk a little bit about what’s driving that Suezmax strength? And then secondly, Aframax’s are wildly out earning LR2s, right? The dirty trade is just doing phenomenally better. Is there anything in particular that’s causing that and do you think that’s going to cycle back a little bit the clean side. So, Suezmax’s and Aframax’s there?

RM: Yes. So, to begin with the Suezmax. Obviously, we’ve been extremely pleased with the earnings in those. We have a – we have 28 ships in the water as you know. We did the 10 Suezmax’s from Trafigura in Q3. So, that markets we are seeing a lot of activity out of West Africa. We’re seeing a lot of activity out of the Black Sea as well. We’re seeing these moves to the Far East with fuel being very busy on Suez. So – and also there’s been a lot of delay. So, that fleet has definitely been our best performing fleet relatively in 2019, and if you look at the various segments or the three segments we operate in, you can compare our Suezmax earnings to any of the peers and you will see that we had a stellar year in 2019. We’re also off to, obviously start this year.

Over to the Aframax’s. We have 10 LR2s of which we own. We’re now trading seven of them dirty and 11 clean. And I probably made a mistake of not going [dirty on more] in Q3. I’ve been very optimistic on the products market coming into 2020. So far, it’s been disappointing and I think this will, I’m more optimistic now because a few ships or quite a few ships that have gone dirty. So, I think we will see better earnings going forward, but the Aframax’s just remain performing really well and you’re seeing them being used for record high number of cargos there. For example, in the Baltic, the highest month I have ever seen in Aframax cargos has been 77.

We got to be well into the 80s there for January. So, volume that’s answering part of the question, and the same goes for U.S. goal. The other part of the answer goes down to the barrels being moved on Aframax are moving further. So, they are just – the utility of this fleets is up. So, very promising indeed, but again, I do think the LR2s will increase going further out to the year and we will continue to monitor how we spread between clean and dirty, but for now we’re going to stay with 7 and 11.

JM: Alright. Thanks Robert. Good color there on the splits, of course 7 and 11 of course you wish it was 15 and 30 with hindsight, but of course you’re still doing very well with those 7 and the clean LR2s are all modern, right. All the LR2s and Suezmax’s you order are pretty much on new ships. How does that impact your TCU results having those eco builds, is that just a few thousand dollars or how does that kind of play into things and then tying that into the scrubber strategy right, you said 50% of your fleet, now is that all only VLs or you're also installing little bit on some of the Suezmax’s?

RM: So, on first to take the fleet, we’ve gone through a fantastic renewal over the last three, four years. We’ve had about 35 ships delivered. So, we’ve gone from having a pretty high average age to having the lowest in the industry. So, we’re down to 3.9 years now and as you rightly say, we only have more than – our oldest Suezmax is 10 years and most of them are between 1 and 5. So, that I think is playing out very well for us.

JM: Yes. Most definitely. Just kind of a follow-on on the scrubber strategy there. You said about 50% of your fleet will have scrubbers by mid-year, is that mostly or all of VLCCs or are you also installing scrubbers on some of the Suezmax’s?

RM: No, sorry. The overall fleet, we’re installing and I don't have the numbers in front of me, but on the Vs and the Suezmax we are overweight. So, I think on the Suezmax’s we are more than 50% already, whilst on the LR2s we only have scrubbers on two ships. So, you should look at the fleet and say the bigger the ship, the bigger the chance of Frontline having a scrubber on board.

JM: Yes. Definitely makes sense. I know some companies have disclosed, which ships had scrubbers and which ones haven’t. I know you haven’t done that yet. Hopefully, maybe in the future you will have a list and kind of breakdown which ones have scrubbers and I think that would be helpful for investors. But yes, definitely makes more sense on the larger ships of course and then of course if you have 50% of your fleet installed the scrubbers, but it’s VLs, maybe the cargo capacity would be even higher right 70% or 80% covered by scrubbers. So, you’ll see some benefits there. You know, your stocks have been trading really well relative to peers. Of course, all of the tanker stocks have found a little bit of resistance the last couple of weeks. Are you hearing any sort of concerns in the broad market? Any reasoning why you think some of the stocks are kind of hitting the road block if you will?

RM: I mean. There’s been – stocks have moved a lot lately right, and whether this is – obviously one part is profit taking and another part is the nervousness of rates falling 15%, but as I said earlier falling from [100,000 to 85,000] or whatever the latest would be, it’s a correction where you are going from great fantastic earnings to really good earnings, and I think you will be volatile. So, what I think – the stocks there, I wouldn't be surprised if you see them trading around the present range and then it’s going to be very interesting when all of that’s come out with the Q4 numbers, and I will make sure to include the scrubber updates and that’s a good idea.

So, we will get that in and then we will tell you how well we did in Q4 and guide the Q1, and then companies would start guiding on dividends and so forth, but then hopefully there’s going to be a second one for this stock. So, because back to what I said, my initial comment is this is 2020, I have been really looking for to it and it’s playing out so far as we thought and we are confident that Frontline will have the best earnings year in more than a decade.

JM: Yes, Robert. We definitely hope to see that as well and hopefully to see that bigger dividend as well. I think that will bring little bit more investor interest into the market and I know some of your peers are also gearing up to do the same. What are your capital allocation priorities besides obviously you’ve mentioned a dividend in the past, what else are you looking at, are you looking at any sort of second-hand acquisitions? Any sort of mergers perhaps or any sort of new builds or what are some of the things you're looking at with the rest of your capital?

RM: We are constantly looking for, just to tell you capital first, you are right. We don’t have any debt that’s maturing anytime soon. We don't have any concerns. We have an outstanding loan to our main shareholder, Mr. Fredriksen at 120 million. There’s no pressure from him to how that’s repaid. So, things are good on that side. We constantly look for deals that we believe that will benefit our shareholders. You saw the Trafigura deal in Q3. That sort of deal, we obviously would like to repeat and there are opportunities out there. There are also opportunities on single ships here and there, and for us it’s all about us being convinced that it’s right for our shareholders. We never run off the deals. We do what think is right and that’s also why we have been the only tanker company that consistently has been able to use our shares effectively and you look at the history and that’s probably part of the reason why we are priced as well.

JM: Yes, you definitely have a strong premium and it’s given a historic premium in the last couple of years actually, compared to most of our peers and you know Robert, we were talking the other day about your stock in, you know I mentioned the stock traded at a short premium and you admitted yes, we do trade a little bit higher than our peers in terms of price NAV and some of those other multiples, but you argued of course that that was a strength. So, for the folks on the call today, do you want to kind of elaborate on why you think Frontline kind of deserves that premium and why you see that as a strength perhaps?

RM: I think if you take the strength, obviously it enables us to do deals like the Trafigura deals and do similar going forward. And I think in terms of explaining this, [indiscernible] point to, but I think – I will take the most important one first. Being part of the John Fredriksen Group has tremendous benefits. We run a very lean organization, we keep our cost down, we enjoy tremendous support from Mr. Fredriksen. He’s been in the business for 55 years and I wouldn’t be able to name anyone that’s been in this business for that long without going bankrupt. So, his track record is incredibly good. As a group, we are very, very strong and if you asked him, which company would be his Number 1 company in terms of what he enjoys and what he puts at this towards, he would definitely say Frontline. So, that part is extremely important. And I think, our track record is also important.

If you invest with us, then you’ve invested long side. There’s no hidden stuff. So, I think the clean structure is very important. Our access to finance and our low cash breakeven levels is also something that people appreciate and I think this NAV focus, if you are looking at NAVs then it’s easy to look at Frontline be expensive, but if you start going below that and look at what I believe are the more important things because we’re not going to sell all our ships tomorrow and hand us all the cash, we’re in just for the long run. So, what’s important is to look at how much capacity - in Frontline. How much earning capacity does that have? And then you will find that Frontline is Number 1.

You can also look at the track record in terms of how much dividend we’ve paid and you will see that the figure is including spinoffs and cash and all-in is more than $6 billion. So, I think that track record is important and I also think it’s important to see that we’ve renewed the whole company, we have a fleet that was below four years. So, we’re simply in a really good position here to monetize on this very interesting and strong tanker market and we’re coming into this without having taken time charter cover. We will do now, but that’s then going to be locking in some really good bottom line numbers instead of having done it last year or year before and not having locked in anything. So, I think we’re really well positioned now.

JM: Yes., thanks Robert. I appreciate you diving into a little bit. You mentioned being in it for the long-term. So, I am a little curious what you see as a sustainable proper leverage for the long-term, what sort of debt to assets ratio that would be and also what sort of goal you have for the fleet in terms of longer-term time charter versus spot. Of course, right now you are 100% spot, because the rates are very strong, but what is your goal for that percentage of the fleets to be locked away on say, two-or-three-year time charters and then what is your ultimate leverage goal in terms of debt to assets?

RM: So, in terms of the leverage to say that first, we’re now below 60. That’s going down, so I understand nothing is going to keep coming down here, So, I do believe that we’re going to have a run here on the asset values. So, that part we’re obviously really positioned for. When it comes for to the time charters then we actually, we do have the percentage is probably 13 or 14 now because we have the Trafigura ships, we did take back on time charter, but that’s with proper share and it’s at levels that’s basically locking about $3 million per ship per year. So, that part is, we will increase, we’re not setting a percentage as such, but we will keep looking for the right deals and we will look at two and three as definitely rather than the shorter period because we believe we have good visibility as to where the market would be for the next 12 to 18 months.

JM: Yes, definitely understand the charter thing just kind of depends on what other counter parties are willing to offer and sort of what rates you’re seeing in the spot market and so on. Just to drill down a little bit more on leverage, you mentioned your below 60% is there a certain level at which you are comfortable, is this below 60%, do you think sustainable here maybe in the mid-50s or is that something that you want to see come down? And then drilling in a little bit more on that, you did have a related party facility with Fredriksen to help you out, you know few years back when liquidity was tighter, I’ve noticed you’re paying that down is the goal to eliminate that facility this year or is that going to be part of your longer-term capital?

RM: So, to take the [indiscernible] below the 60%, plus or minus 5% from here. This is a territory where we’re comfortable with. With this [L to V], we enjoy a fleet wide cash breakeven of 20 and for us the cash breakeven is the important one. And then we played the time charter market so that we average it down and then we are positioned for the cycles. So, if you look back at our track record in the last five years, we were very active with time charters in 2015 and 2016 that saved us in 2017. So, you look at all the very effective companies then we lost $10 million, which is a lot, lot less than the rest.

When it comes to the loan from Mr. Fredriksen, it’s down to 120, and we will address this on the Q4 call, but as I said earlier, there’s no pressure from him, he’s not concerned about this and so there’s no immediate pressure to pay this back.

JM: Alright, Robert. We’ll just continue to watch that facility each quarter and I’ve noticed that over the past year of course each quarter you report it seems like the balances are coming down. As we would expect because it’s one of your more expensive sources of debt, we got some folks on the call posting some questions and one of the follow-ups we wanted to hit Robert is, is talking a little bit more about sort of the difference between LR2 weaknesses and sort of the strength we’re seeing in the Suezmax and Aframax market, I guess, kind of a why and maybe we don’t know exactly why, but some of the details in what would be driving that strong crude market right now versus that weak LR2 product market?

RM: To go further into that, I think we – if you look at the crude markets than the crude flows, the ton-mile is high and the volumes are up. I think if you look at the estimates as to crude supply in 2020, I think when we get the answer after the year on how much crudes actually have been moving, I think that the numbers will surprise everyone. So, I think there’s a hidden IMO 2020 effect on crude volumes that will take people by surprise. I wish I could give a good answer as to the LR2 weakness.

I am surprised and there is a point we haven’t seen it yet. I do think it will get better though as more ships go dirty and I also think that there’s going to be more diesel moving and more demand through the year here, but the products markets is very, very difficult to analyze because the barrel needs to move not just from A to B, but it needs to trade, it needs to be more movements of the barrel and products is actually the market, I should know the best because that was what I was working when I was a Glencore. So, I’ve been doing it for many, many years, but it’s a very, very difficult market to analyze. So, let’s see how it has developed, but we should be in for some positive surprises later this year.

JM: Yes, thank you Robert. I appreciate your transparency on the difficulties of the market. I think sometimes we get boiled down into simplicities and a lot high probably and it’s good to kind of see how things will actually develop in the market and you know product markets have been – from the investment standpoint they have been disappointing for basically decade straight, right. It’s always the big surge is coming and then it never quite arrives, whereas crude tankers, you know we had a couple of good years back in 2015, 2016 and then now we’re seeing some very good rates in crude and we’re hoping products are going to come along for the ride, the supply demand fundamentals look good, but we just need to see the right alignment of those. You know Robert as investors are looking at you know the crude tanker markets and even products and we’re starting to get excited and the stock valuations are starting to lift a little bit, it is important, right, to look for some of the risks or some of the concerns in the market. So, as we enter 2020 and we start [ploughing forward] I realize you are bullish, but what are some of the things that investors should be looking out for? What are some of the risks or uncertainties out there in the market right now?

RM: I [don’t think] it’s extremely important to look at the risk, right, and I’m spending more time looking for the potential risks and the potential black swan then looking for the positives because as this market is put together now, we’ve all been analyzing it coming into 2020 and one thing actually worries me is, how similar every view is. So, does that mean that we are alright or does it mean that we’re missing something. So, what I’m worried about is, obviously if the demand is destruction, right, so if you have a economic slow down that would not be good because we’re balancing on a fine line, if you – some of the news say 2 million barrels of demand then suddenly we will go from being very well balanced from a owners perspective to suddenly having too many ships.

Another thing is that, you have the spike in oil prices, which then will hit demand the other way, which also can hit us and these are risks that always will be present. Another one is the supply side. As I said earlier, we’ve had a lot of ships deliver, right. So, we are part of the reason that the market was bad, as bad as was for quite a few years. So, if we have a new wave or ship ordering taking place that would be a worry. My personal view on this is that we will not see that many ships being ordered and part of the reason is that I believe we need to see the ships that can deliver this year and next year.

I think we need to see those being done deals on because there’s still a quite a few of those ships for sale and obviously we keep a close eye on this and if you have a normally as a ship owner, if you can chose between getting a ship in two years or in two days we’re so used to bad markets that we always say two years, but now with the fundamental markets you would rather have to ship now. So, I think we need to see those ships that can be delivered prompt on. They need to be sold before we see a new way, but that’s the way when a supply – that’s always the concern and that’s also the reason why, if we do time charters, two or three years than we are taking cover into some of that risky area. If I do 12 months or 18 months, I am not covering that risk at all.

JM: It definitely makes sense. We’re looking at plurality of factors, but definitely global macro stuff in terms of demand, in terms of oil prices, and then obviously they’re looking at the order book and making sure folks don’t get carried away. In terms of looking at the order book, and I know you’re not placing orders at this time and you’re not – you’re shying away from new builds of course and looking more so towards resales or other deals in the market, however if you were placing a new build order, what kind of our ship would you look for? In terms of future regulations and long-term survivability of that ship, is it going to be L&G dual fuel, is it going to have a scrubber attached or not, what sort of considerations would you take into account if you’re placing a new build order today?

RM: I think you’re touching on some of these very relevant J, and I should have included on my previous answer. So, part of the reason why we’re not seeing that many orders is uncertainty around this in terms of propulsion and we are not looking at the ordering and we will refrain from that – the thing in this market is, Mr. Fredriksen goes out and buys two ships then you can be pretty sure that some body is going to run after and do some more. We will focus on resales and we will focus on ships under water. Had we got out and done something, we as an organization we are not first movers when it comes to energy and that sort of thing. I think we should leave that to the oil companies and other to do first. So, I would probably just go for the same ordinary ship, the same style as we got delivered in 2019, I don’t think these ships will be out of service within 10 years’ time, but this is only theoretical because we are not looking at ordering ships.

JM: Definitely makes sense, Robert. And then final nuance on that, if you are really looking at say those eco ships, but the conventional, right, conventional field, would you look to have a scrubber installed if it was say a late 2021, early 2022 delivery or do you think by that point the economics might not make sense anymore?

RM: I would go for a scrubber and obviously part of the reason is that when you’re building a ship and also you produce scrubbers like we do then the cost would be minimal, and also you’re looking to spread in 2022, I would still be able to on that spread, which I wouldn’t be surprised if it ends up being higher because it does take time for the refiners to upgrade and make the scrubbers obsolete. So, I don’t think the scrubbers would be dead by 2022 and I would have put one on.

JM: Alright. Well we’ll see how that develops. There was some interesting news this morning in trade wins about a particular owner that had bought some VLCCs and Suezmax’s that were conventional fuel and without scrubbers it was definitely sort of a surprise if you will and some we will look into and see how that new story develops. Looking into your scrubber operations, I know you did that partnership with Feen Marine and you have a pretty good scale on that, I know you’re really busy, right, in Q1 of 2020. How far out does that sort of order book of work go, is that just until Q2 or Q3? How long basically just for Feen Marine, I guess, and also just for the entire industry? Is this something that is mostly just a Q1 off hire and then we are done or does that go throughout most of 2020?

RM: So, to remind everyone on the scrubber investment, it’s an investment we’ve had now since 2018, and our capital cost is very close to zero. So, we’ve got now 14 or when the company merges with Feen Marine we’ve got 14.45%, and as for all scrubber producer side it’s been very, very slow on ordering orders here the last six months. So, I think people are sitting back and I do believe we’re going to have a second round of orders from Q2 onwards, but the honest truth is that Q2 and Q3 onwards the order book is very, very slim.

JM: Yes, so if anything, we’re looking at Q2 and Q3, of course Q3 is normally the weakest quarter and would be a fantastic time to send your ships into the doc to get those scrubbers done, but considering the order books really thin, perhaps the rates will not be very weak, right, so there’s definitely a lot of a gambling in terms of opportunity cost and what that total impact would be? Robert as we near the end of our call here, just wanted to ask one more time, we talked a little bit about some potential second hand purchases, what do you see as the potential for consolidation in this sector, is that something that we could see in the tanker sector to a greater degree and if so how do you foresee Frontline playing a role in that?

RM: Frontline believes in consolidation, and I think consolidation is very healthy for the markets. So, we’ll keep looking for opportunities and I think we will see more consolidation in the industry.

JM: Yes, as investors we hope to see that and I guess we just kind of have to see what happens on that. There’s been a lot of talk about these Cosco sanctions over the last couple of months, there was that of course that huge pop in October, when folks didn’t know what happened and then that came back pretty quickly, now that the U.S. and China are looking to solidify their Phase 1 trade deal, it’s kind of surfaced again. And I think we’ve seen that as sort of a corner stone of a short thesis as well, right, that once those Cosco sanctions come off, we’re going to see rates come down significantly. First of all, just looking for some color, do you know how many ships are still impacted by those Cosco sanctions and what do you think the impact to the market is, is this a major deal that we need to be looking out for?

RM: I don’t have the exact number, but I believe it is 23. It’s within the reach of 23. We’ll certainly have an impact on the market and the phycological effect should not be underestimated, but what we shouldn’t forget is that when that deal comes around than the U.S. is likely to sell more or start selling volume to China, right. So, you will see Atlantic than take Middle East and market share on Chinese deliveries. That is, it seems to me pretty obvious. So, you will have ships come free on one side, but you have this positive effect on the other side. I think overall it would probably still be a negative, but we shouldn’t forget the other part of that equation.

JM: Yes, thanks Robert. It’s definitely kind of a tradeoff right, because you have, you said, up to 23 and of course that’s an estimate, but we’ve heard that number from several sources at least in the low 20s there. Those are all VLCCs correct and then do you know what those ships are doing at the moment, are they doing any sort of storage operations or are they doing regional trading or are they literally just sitting empty in the water. You know, it’s kind of hard to believe they are just sitting empty, but is that the case?

RM: I believe most of them are sitting, most all of them are sitting empty and I think they’re sitting [indiscernible] and not to be too technical, in our industry you need to have an approval and inspect from what you ship frequently that has done report and this report will be looked at by the oil companies. This inspection report must never be more than six months old. So, a lot of these ships because they have been sitting for some time now, a lot of these ships will have reports that are above value. So, that will limit them. So, it will take time for these ships to get back trading.

So, to conclude on cost cutting, you’re going to have a near term reaction, but it does look very healthy. If you look at the long-term and you look at the number of ships that are above 15 years that number is now more than double of the ships on order. So, this nice balance that we finally have, which is in owners favor, I think we’re going to have maintained here. It will be a volatile year, but we will – at Frontline and the industry, we will average very good rates this year and I am hopeful and I spent a lot of time in making sure that we can actually have, do make the best decisions and have the [best TCs] amongst our peer [indiscernible] because it’s really important now to [indiscernible] most of the fleets.

JM: Yes. We’re certainly looking forward to the earnings results and then we’ll have to see how the Costco sanctions transpire. Looks like the U.S. and China are set to sign their trade deal tomorrow. So, we will see if anything comes out of that. We definitely heard sort of the similar rumors that any sort of deal with the Costco sanctions would also have to do with massive crude oil, massive LNG, and LPG and other sort of purchases. So, I think the overall impact on the long-term market of course would be positive, but there is a sort of maybe short-term supply impact there. As we wrap-up our call Robert, thanks again for joining us. One final question, is there anything in the market right now that you think folks are missing in the broad market, whether that’s folks that are long currently, people that haven’t decided to buy yet, or people maybe even that are short? What are one or two things that you think the broad market isn’t quite getting right or doesn’t quite understand yet?

RM: I think it’s the confidence of this actually happening and being real. And because you see how nervous people get as soon as the market drops. So, my message is that, we believe in the fundamentals of the market and I had a sort of slogan that was introduced two or three years ago that where we started saying that the headwinds were turning to tailwinds. It did take some time, but so that has now happened and now the new moto, which I’ll premier here with you now J is that Frontline believes this market to be stronger for longer. And I think the investors will over a couple of quarters start seeing dividends being paid out and then we’re going to see the fleet balance remain in owners favor and then we’re going to have people gaining confidence and then we just have to look out for the risks as we always do and to look out for the order book and hopefully staying down, but if that starts exploding like it did in 2017 that would be a cause of concern.

JM: Alright. Excellent Robert. We’re going to stay vigilant. We’re going to stay prudent, but want to see strong for longer. Alright, excellent. Thanks again for joining us Robert.

RM: Thank you very much J.

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.

Additional disclosure: J Mintzmyer has no positions in any stocks mentioned. Robert Macleod is employed by Frontline. Nothing on this podcast should be taken as investment advice.