FRONTLINE’S purchase of 24 VLCCs from Euronav in October was a transformative event. As Pareto Securities said at the time: “Frontline is raising the stakes — and risks — sharply here, and will completely dwarf all publicly listed tanker competition.”

This transformation is now almost complete, with the remaining 13 Euronav VLCCs delivered in the first quarter, leading to a modest, temporary headwind for Frontline’s rates.

Frontline’s ex-Euronav tankers achieved a time charter equivalent rate of $42,300 per day in 1Q24, with the rest of its VLCC fleet at $54,200 per day. TCE rates on the ex-Euronav tankers were brought down by repositioning voyages and ballast days, and by fewer scrubber installations.

“The repositioning of the final 13 VLCCs acquired from Euronav — and spillover from the first 11 VLCCs acquired in the prior quarter — ate into revenue-generating days,” said Jefferies analyst Omar Nokta.

Frontline chief executive Lars Barstad said on the conference call that 2Q24 results will also likely see some spillover from the ex-Euronav ships due to the time lag in revenue recognition for longer voyages, but to a lesser degree than in the first quarter.

“By the third quarter we should be running a normal show,” Barstad said.

Frontline reported net income of $180.8m in 1Q24, compared with $199.6m in 1Q23 (Frontline’s best first quarter since 2008). Adjusted earnings, excluding vessel sales, were $0.62 per share in the latest period, below the consensus forecast for $0.77, a miss Nokta attributed to the ex-Euronav VLCC repositionings.

Spot TCE earnings for the company’s VLCCs overall averaged $48,100 per day in 1Q24, up 14% from the fourth quarter. Its suezmaxes came in at $45,800 per day, flat quarter on quarter. however, its LR2/aframaxes earned $54,300 per day, surging 27% quarter on quarter.

Barstad said VLCC rates “seem to be in this kind of positive grind” of rising rates as non-Opec flows supplant curtailed Opec flows, while suezmaxes “seem to be very range-bound and don’t really have legs to go anywhere”, and LR2s “are the ones to shine, as they are most affected by disruptions in the Suez Canal passage”.

Frontline’s spot earnings since 2020 show the changing rate relationship between the vessel classes. Prior to the pandemic effect on consumer demand and refinery utilisation, VLCCs outperformed mid-sized tankers, as was historically the case. The spread between larger and mid-sized tankers shrank during Covid, as all segments suffered.

Then, after Covid, geopolitical disruptions — the Russia-Ukraine war and Red Sea attacks — supported mid-sized tanker returns, not VLCC returns, keeping the spread tight between asset classes, with mid-sized tankers now earning the highest rates.

Frontline sees long upcycle ahead

So far in 2Q24, Frontline has 78% of VLCC spot days booked at $60,400 per day, 73% of suezmax days at $46,400 per day, and 72% of LR2/aframax days at $64,700 per day — representing big gains for VLCCs and LR2s versus the prior quarter.

The caveat is that Frontline recognises revenues on a load-to-discharge basis and does not recognise revenue on ballast days, meaning full-quarter results will likely come in lower.

“These are all strong figures that are likely to come down due to the revenue-recognition impact of ballast days at the end of the quarter,” said Nokta, who is modelling Frontline’s 2Q24 spot earnings at $55,500 per day for VLCCs, $45,000 per day for suezmaxes, and $60,000 per day for LR2s.

In general, Barstad sees strong earnings ahead, as oil demand continues to increase; vessel capacity is structurally constrained by limitations of Asian yards; and the tanker market hits a wall of replacement needs as “a monster of deadweight built between 2004 and 2011 comes of age”.

“We’re in for a longer one here,” he said of the current upcycle.

“What’s very interesting in Q1 and following into Q2 is that the period markets have really started to show some strength, with three-year charters for eco-scrubber VLCCs closing in on $55,000 per day.

“This is the intelligent money coming into the market. This is the oil majors and national oil companies — the big boys.”

Given its faith in future spot rates, Frontline itself is not rushing to lock away ships on three-year deals. “We’re in no hurry. When we get out of a cycle we always want to have some proper coverage, but we’re not aggressively pursuing this right now.”