Frontline Ltd. (NYSE:FRO) Q3 2020 Earnings Conference Call November 25, 2020 9:00 AM ET

Company Participants

Robert Macleod – Chief Executive Officer
Lars Barstad – Interim Chief Executive Officer-Frontline Management AS
Inger Klemp – Chief Financial Officer-Frontline Management AS

Conference Call Participants

Randy Giveans – Jefferies
Chris Tsung – Webber Research
Jon Chappell – Evercore ISI
Greg Lewis – BTIG
George Burmann – CL Securities

Lars Barstad

Good morning and good afternoon. Welcome to Frontline’s Third Quarter Earnings Call. This is my first call in the hot seat. I’m both excited and honored to serve our companies in this capacity. Frontline’s long-term strategies are well cemented by the board and we run a very professional organization that has easily adapted to this management transition. This has been a volatile quarter and an extraordinary year-to-date. I’m tempted to bring in back zones, but they seem to become common to the shipping industry. The global COVID-19 pandemic has affected us all. And even though we still need to endure the situation a bit longer, there is no glimmer of hope in the horizon.

Let’s have a look at the highlights on Slide 3. Frontline came into Q3 2020 on a high note, but as the quarter progressed, freight rates started to increase. We still landed the quarter of good returns on a load-to-discharge basis earning $49,200 per day on our VLCCs, $25,100 per day on our Suezmaxes, and $12,800 per day on our LR2/Aframaxes. This yielded a net income of $57.1 million, or $0.29 per diluted share. Our adjusted net income came in at $56.4 million, rounded to $0.29 per diluted share.

We are very happy to report that Frontline has entered into three term loan facilities of up to $485.2 million. Inger is with me here today will elaborate more on our financing activities later in this presentation. So far in the fourth quarter, we have about 74% of our available VLCC days of $22,600 per day, 61% of our available Suezmax days up $12,600 per day and 65% of our LR2/Aframax days up $13,800 per day. The booked earnings are a reflection of the challenges this market faces. And although we want to be upbeat from the future, there are uncertainties going forward. Frontline has therefore decided to refrain from paying dividends this quarter to preserve the company’s cash position.

I’ll now let Inger take you through Frontline’s financial highlights.

Inger Klemp

Thanks, Lars. And good morning and good afternoon, ladies and gentleman. Let’s now turn to Slide 4 and look at the income statement. Frontline achieved total operating revenues, net of voyage expenses of $178 million in the third quarter and also an adjusted EBITDA of $108 million in the third quarter. Frontline reported net income of $57 million, or $0.29 per share, and adjusted net income of $56.4 million, or also $0.29 per share in the third quarter. The adjusted net income this quarter decreased about $160 million compared to the previous quarter. And that was primarily driven by a decrease in our time charter equivalent earnings due to the lower reported TCE rates that Lars went through in the third quarter with also more of five days in this quarter due to dry docks of four vessels.

We also recorded a $13.9 million increase in ship operating expenses that was mainly due to increase in dry docking costs of $4.3 million also increased in repairs and maintenance of $2.1 million and we also had $4.8 million additional crew costs due to COVID-19. In addition, we also had a reduction of $12.4 million as a result of that we [Technical Difficulty] in the second quarter [Technical Difficulty].

Let’s then take a look at Slide 5. We have completed loan facilities in a total amount of approximately $920 million during 2020, whereof $725 million out of that was fund to refinance four existing loan facilities, which were due in December 2020 and the first half of 2021. But also, we have completed two financings over $196 million to finance new vessels. All these loan facilities were done at attractive terms with LIBOR plus 190 basis points or even better, maintaining our competitive cost structure.

In November 2020, the company entered into three new term loan facilities in a total amount of $485 million. Where two of these facilities were to refinance two existing term loan facilities maturing in the second quarter of 2021. And then the third facility was in the amount of $133 million to partially finance the four LR2 tankers under construction.

The detail on the refinancing of the two facilities were, first, that we had one senior secured term loan facility done with a strong banking group consisting of largest global shipping banks in the amount of $250.7 million, to refinance the $466.5 million facility, which was maturing in April 2021. The new facility matures in May 2025, and has an amortization profile of 18 years. The facility was fully drawn down in November 2020 and $256.8 million of the refinance facility has been recorded as long-term debt as of September 30, 2020.

Further, we then entered into one senior secured term loan facility with ING and Credit Suisse in an amount of up to $108 million to refinance the $109.2 million facility, which matured in June, 2021. This new facility matures now in November 2025 and has an amortization profile of 17 years. The facility was also fully drawn down in November 2020 and $78.6 million of refinance facility has been recorded as long-term debt as of September 30, 2020.

The slide shows debt maturities prior to refinancing in the grey column and following the refinancing in the blue column. You will notice that following the refinancing, we had no material debt maturities until 2023. And the debt maturities from 2025 onwards have increased substantially.

Lastly, we also entered into a senior secured term loan facility with CEXIM and Sinosure in an amount of $133.7 million to partially finance remaining cost of $142.3 million for the four LR2 tankers under construction. The facility will have a tenure of 12 years and an amortization profile of 17 years, and following that the new building program is fully funded.

Let’s then take a look at the balance sheets on Slide 6. The main happenings in the third quarter affecting the balance sheet were that we entered into the two new loan facilities, which I went through to refinance the two term loan facilities with total balloon payments of $324.4 million, which were due in April 2021 and June 2021. This had led to the short-term debt. And current portion of the long-term debt decreased with $311 million and long-term debt increased with $283 million

Further, we paid $97 million in dividends and we earned adjusted net income of $56.4 million.

At the end of December 30, 2020 Frontline has $423 million in cash and cash equivalents, including the undrawn amount of unsecured loan facility, marketable securities and minimum cash requirements.

Then let’s then take a closer look at cash breakeven rates and the OpEx on Slide 7. We estimate that the average cash cost breakeven rate for the fourth quarter 2020 will be approximately $21,900 per day for the VLCC, $20,400 per day for the Suezmax tankers, and $15,700 per day for the LR2 tankers. The fleet average estimate is about $19,500 per day. These rates are the all-in daily rates that our vessels must earn to cover the budgeted operating cost on dry docks, the estimated interest expenses, TCE and bareboat hire, installments on loans and G&A expenses.

The Suezmax tanker cash cost breakeven rates in this fourth quarter 2020 is impacted by dry dock for Suezmax tankers in the fourth quarter, also dry dock 1 in LR2 tanker in the fourth quarter. As already discussed, the Q3 OpEx was affected by increase in dry docking costs, increase in repairs and maintenance and additional crew costs due to COVID-19.

As usual, we would like to draw your attention to Frontline’s cash flow generation potential. In the graph, on the right-hand side of the slide, we have shown incremental cash flow after debt service per year and per share assuming $10,000, $20,000, $30,000 or $40,000 per day in achieved rates in excess of our cash breakeven rates.

These numbers include vessels on time charter-out, and we are looking at the period of 365 days from October 1, 2020. As an example, with a fleet average cash cost breakeven rate of $19,500 per day and assuming $30,000 on top of the average fleet TCE, then the fleet TCE would be $49,500 per day and Frontline will generate the cash flow per share after debt service of $3.42.

With this, I’ll leave the floor to Robert again.

Robert Macleod

Thank you, Inger. So, let’s move over to Slide 8 and the recap of the third quarter, in the tanker market. So, global oil demand bottomed in May and in June, we’re already in recovery and demand surpassed supply amidst deep cuts by OPEC and other key producers. The oil markets switched from inventory built to inventory draws. This can be seen on this slide at the bottom left with the yellow bars. Subsequently, OPEC+ increased production slightly, which kept the cut significantly below Jan 20 levels and the draw cycle continues.

When in draw mode, it’s normally the expensive barrel that draws first, and this is typically floating storage. The majority of OPEC cuts have been geographically centered around the Middle East Gulf. This has led to recovering economies in particularly in Asia, sourcing their oil from further afar. this incurs longer-term miles. In the end, this has favored the VLCC markets as these vessels offered the best economies of scale. We also saw continued demand for product storage during the quarter and specifically, jet fuel storage, keeping LR2 markets relatively far. This development is well reflected in our results for the quarter.

Let’s move to the next slide, Slide 9 and look at the fleet and order books. Tankers are continued to enter the market during the quarter with many have been engaged directly from yard in product storage. This has limited the impact on crude spot markets, there was report or there has been report of the significant delivery backlog due to the COVID-19 related disruption, but this backlog seems to have been cleared.

There are recent speculations of mammoth orders in clips of five and 10 vessels being placed in Asia. These are yet to be confirmed and not a part of this dataset. However, as a short indicate, there is room for fleet growth in both 2022 and more so in 2023, assuming 20-year-old ships leave the competitive spot markets and oil demand develops on trend in that time horizon. One of the big x-factors for shipping going forward is obviously propulsion technology. Frontline follows these developments closely, leveraging on our extensive business platform, but there is also – there is still a way to go to reach any conclusions.

Let’s move to Slide 10, where we’ll try to explain one of these market’s mysteries. We have a record number of vessels, literally in all asset classes, reaching or passing the 20-year market. Average recycling age for a tanker is very close to this age, sometimes depending on the underlying freight rates. We are now in the markets with relatively higher volumes of inventory still, in addition to a higher amount of sanctioned oil volume. This seems to have supported the demand for tankers in the tail end of their effective lifespan.

In the chart below, we’ve illustrated this by comparing the average price achieved on tonnage transacted age close to 20 years, and the reported price achieved for recycling. The disconnect is pronounced and likely explains the muted recycling activity. Selling for alternative use is currently the preferred option for the illness. I think it’s important to note that for the competitive spot markets where we operate, we are under a strict scrutiny from vetting policies so these vessels play an insignificant part of those balances.

Let’s move on to Frontline approach to ESG. Efficient, safe, and transparent operations have been Frontline’s core values for years. Efficient in order to save costs, that also fuel costs; safe in order to safeguard our seafarers, environment and our physical assets; transparent in order for the investing community like yourself to easily understand our business model. What we have found as we familiarize ourselves with the relevant ESG framework for industry the last couple of years is that for us it’s more about how we structure our communication on policies and routines we already have in place rather than enforcing completely new routines or altering the way we conduct ourselves.

A central part of our business model is for technical management to be clustered or shared, if you wish, with other listed companies we’re familiar with. In this we gained economies of scale as we share knowledge and practices for more than 230 vessels. This collaboration gives us an impressive leverage to shape and influence standards we expect to be mapped, both on social aspects and on the governance. But we also shared synergies when it comes to applying technology to optimize performance, both in the traditional manner as in speed and consumption, but also with respect to our environmental footprint.

Frontline, yet although potentially a bit under communicated, very well positioned to comply with the stricter environmental, social and governance framework. The shipping industry has to get comfortable with going forward.

So let’s move to Slide 12, the tanker market outlook. Increased oil supply is now key in order for the tanker market to balance. We were shielded for a period. Our tankers were employed by storage. Now we’re dependent on volumes to come to the markets and normal trading patterns resuming. The demand for tankers is still kept by the OPEC+ that we find it extremely encouraging to see oil prices performed strongly as the volumes offered increased significantly, particularly by the Libyan exports that resumed in October. This in isolation, so oil demand might actually be firmer than the market in general expects.

Looking at the benchmark Brent oil curve, we see the same pipeline expressed in a dramatic move from contango or carry if you like to near flattening of the curve. This signal inventory draws to accelerate and oil markets potentially finding a balance at an earlier stage. It’s obviously a bit early to call, but just to explain how these mechanisms work. If we are drawing in a territory of 3 million to 4 million barrels per day from inventories now, that’s the volume needed from producers once inventory levels normalize, which in turn can be translated into increased tankers in the month.

Finally, let me sum up on Slide 13. So, Frontline is financially strong. We have no material debt maturities until 2023. The company is very well-positioned towards these three related expectations. Despite extended regional lockdowns oil demand continues to recover. Crude oil price action indicates a change in oil market sentiment, and we expect from the freight market volatility to increase going forward.

Thank you. And then we can move on to the Q&A.

Question-and-Answer Session

Operator

Thank you. Ladies and gentleman, we now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of from Randy Giveans from Jefferies. Please ask your question.

Randy Giveans

Howdy team Frontline, and congrats again on your promotion Lars.

Lars Barstad

Thank you very much, Randy.

Randy Giveans

So first question around the dividend, you brought it back last year paid a $0.10 dividend, despite a loss following 3Q 2019 results. You increased this to 40 or – sorry, 70% of net income following the first quarter fell in the second quarter, now you cut it to zero despite a $0.29 gain. So I guess why has the dividend payment bounced around so much of the last year? And what will cause you to reintroduce the dividend, clearly it’s not just positive net income.

Lars Barstad

Yes, the derives is not only positive net income. We work in an extremely volatile market and we also normally have quite a good visibility on our earnings going forward. For Q3, the earnings were good, but the – our visibility or when we look into Q4, it doesn’t look too great. And we are in the middle of a global pandemic and uncertainties are quite great going forward. So we decided to keep the cash and the low – obviously return paying dividends the minutes we see that the market stabilized and potentially is ready to return to levels where we see that suited.

Randy Giveans

Got it, okay. So more of just a subjective outlook for the market regarding of the…

Lars Barstad

Our dividend policy status in such a manner that we like to use our discretion when we deem it needed. And in this particular case, we found that to be prudent.

Randy Giveans

Got it, all right. And then I guess one more question for your quarter-to-date rates. The VLCC, Suezmax is down from the third quarter for the fourth quarter, which makes sense. However, your LR2 rates are taking up the higher. So maybe what caused this and how many of your LR2 product tankers are operating in the crude trade?

Lars Barstad

Well, we have eight of our LR2s are operating in the crude trade. We have a 10 operating in the clean of which one is on time shorter. The estimated kind of time shorter return for Q4 is probably listen more colored by the returns we’ve seen on the clean side.

Randy Giveans

Okay. And then do you have an outlook for crude verse products here in the next 6 months to 12 months? Which kind of sector do you see most or more attractive, I know I think you mentioned neither a very attractive?

Lars Barstad

Well, it’s a very good question. The thing is that we’ve come through seven quarters where kind of the crude part of the equation form the clean trade. It’s only the last quarter and a half where the clean product tankers have actually outperformed significantly. So it’s really difficult to call the dirty Aframax is – are obviously now being penalized by the fact that Russia kept quite severely together without that and that hurt the North Sea barrel or the Baltic barrels coming out of Russia. I think I would wait to make that call until the trade flows have normalized.

Randy Giveans

Got it. All right. Well, I’ll let you go. Thank you so much.

Operator

Thank you. And the next question comes from the line of Chris Tsung from Webber Research. Please go ahead. Ask a question.

Chris Tsung

Hi, Lars. Hi, Inger. How are you?

Lars Barstad

Hi. We’re good. Thank you.

Chris Tsung

Great. Good to hear. I wanted to ask about the decision to sell SeaTeam, could you expand on that a little bit more. And what do you guys also work to divest other JVs like position in Clean Marine?

Lars Barstad

Well, first of all, to take the SeaTeam to look at that. Kind of SeaTeam has been a really kind of good company for us to have more or less in-house for a period of time. It’s obviously not core business. Our business model is outsourcing services like, SeaTeam were offering. But it’s obviously given us great knowledge and it’s also made us understand the markets or the technical management markets quite well. Deciding to divest from that was more related to an opportunity that came rather than something that we strategically wanted to do quickly.

So an opportunity arrived and we found a solution where OSM will actually continue to run SeaTeam almost in its original form and take care of our vessels kind of that are under management with the same mindset that they were already inside the SeaTeam. So it’s more or like kind of keeping to our strategies – keeping to our original strategy. With regards to Clean Marine, Clean Marine is an investment we’re still holding. We are not kind of an active owner in that. We were more like having a listening post. So I think I will leave that, the scrubber market or ETFC market is a little bit dormant as you probably understand, but the company is still working. And we were just basically looking at it more as a passive investment.

Chris Tsung

Okay, thanks. Yes, that makes sense. And just looking at the – not so much guidance, but fixtures to date in Q4, the other twos are a little bit hard and two as masses hasn’t typically ended this – happened this way. I guess how much of it is driven by the number of clean tankers versus dirty or I guess what factors are allowing to Suezmax trade below LR2 or LR2s to trade above the Suezmax for Q4?

Lars Barstad

Well, in – as I indicated when I summed up Q3. Q3 was a bit of an atypical quarter, when it comes to how freight rates developed. Because in a normal market, Suezmax will perform a little bit kind of below VLCCs and then a lot of your efforts will follow suit a little bit below that. But this year or this quarter, Suezmax is actually underperformed VLCCs by more than 50%. And this is a market kind of look, it’s not for us in particular. With the OPEC cut, we’ve seen that the longer-term miles have been prioritized or grow. This has put to VLCCs in a much greater position due to their economies of scale. And this has been Suezmax in particular.

So I think the rate is a reflection of how severe the situation has been in the Suezmax market, where kind of little opportunity to trade during the quarter and quite kind of harshly hit market. The LR2 have throughout the quarter outperformed literally all the other segments apart from the VLCCs. And this is obviously due to their ability to store clean products and in particular to that.

Chris Tsung

Okay. Just storage clean trade. Okay. And just one last quick question on dry docking. During prepared remarks, you talked about the dry dock schedule for Suez and one for LR2 in Q4. Can you tell me the number of Suezmax in Q4 that are dry dock?

Lars Barstad

The number in Q4.

Inger Klemp

Four for Suezmax.

Lars Barstad

Yes, four.

Chris Tsung

Great. Okay. Four Suez and one LR2 in Q4. Thanks guys. Have a good day.

Operator

Thank you. And your next question comes from the line of Jon Chappell from Evercore ISI. Please ask your question.

Jon Chappell

Thank you. Good afternoon, Lars and Inger.

Lars Barstad

Good afternoon, Jon.

Jon Chappell

Inger, first question for you just quickly on the dividends. So completely prudent given your fourth quarter rates to date, but you guys are also able to refinance a lot of debt at very good terms at a very difficult time in the market. Are there any restrictions on dividend payouts or payout ratios as part of those new facilities that may have played a role in the decision to suspend this quarter?

Inger Klemp

Nope. We don’t have any reductions in our new facilities, so that this made any different.

Jon Chappell

Okay. And then Lars joining at an interesting time. And Frontline has a legacy of being aggressive when others can’t be. So you’re retaining cash through dividend. Inger’s done a great job shoring up the balance sheet. But you’ve mentioned the uncertainty and the pandemic asset values dropping pretty aggressively. How do you kind of view 2021 in your role and in Frontline’s role in the industry, as far as acquiring assets, chartering in assets, just adding more leverage when others are just worried about survival.

Lars Barstad

Well, as you said, it’s already in our DNA to be aggressive win other comps. We also have a very strong shareholder in our back. So it’s obviously – we’re looking – it’s obviously something we’re very excited looking forward. Right now I think the uncertainties are a little bit too great to be quite honest. Although we are upbeat. There are some risks kind of looking into to the next couple of quarters. We think opportunities will probably arise as we churn and we have these levels particularly on the freight side. And I think we – people will find that the Frontline DNA hasn’t really changed, even if I’m in hot seats to fill it out by.

Jon Chappell

Okay. I appreciate it. Thanks Lars. Thanks, Inger.

Lars Barstad

Thank you.

Operator

Thank you. And your next question comes from the line of [indiscernible] investor. Please ask your question.

Unidentified Analyst

Hi. Thanks for taking my call. Two things, one, you mentioned the unwind from the contango storage situation. Could you tell us what you think the percentage of that has occurred? And then secondly, Libya has gone from basically not exporting much of anything, so I read the other day, it’s over 1 million barrels a day. Is that providing us some support before rate wise for the Suezmax market in the Eastern Mediterranean?

Lars Barstad

Thank you. The two really great questions. Firstly, the floating storage. In our presentation on Slide 8, we have some data there from ClipperData or Clipper Data. The way I look at or we look at storage is, we look at the storing for an extended period of time. So we’ve put the bar of 21 days. Those levels peaked north of 100 million barrels. Now we’re down to 60 million barrels. So there is a 40% decrease. How much oil – when kind of that is finished, it’s difficult to tell, because there’s also something about the structure of not only the crude curve, but also of the market itself. As I also think, I mentioned, we have like a record amount of sanctioned barrels or sanctioned production in the world, which probably calls for a bit more floating inventory of oil inventory than we normally would observe. But it’s on its way down. And I think, we’ve at least taken off the 42%, maybe even 50% of the floating storage.

With regards to Libya, Libya has been really exciting and quite surprising actually. So they’ve managed to ramp up and I think the last numbers I saw it was up to – they’ve been able to 1.2 million barrels per day. This has indeed made it far more interesting to be as soon as ex shorter than they have been for the last couple of months. So we do see a lot more problems appearing in the markets. We also see opportunities arising. A lot of these barrels are or have been for awhile now actually been going East. And that is, like a perfect fit for the Suezmax size of vessels. So yes, it has supported the market in the Mediterranean significantly.

Unidentified Analyst

Okay. Thank you very much.

Operator

Thank you. And your next question comes from the line of Greg Lewis from BTIG. Please ask a question.

Greg Lewis

Yes. Thank you and good afternoon and then Lars congrats on the position. I guess, I just had kind of a broad question. I mean, it was kind of talked about people focused on the dividend, rightfully. So I guess I’ll ask it a different way as I look at Frontline and the company looks like it trades on – depending on what valuation metric and I know you don’t want to talk about NAV, but we can look at like something like more Wall Street like EBITDA and the companies that are premium, and the company’s been able to leverage that premium to grow and be opportunistic over time. So just kind of curious, what do you think drives that premium?

Lars Barstad

So what drives our relative pricing to our product is about…

Greg Lewis

Correct. So, yes, like if you wanted to go out and buy a company, I mean, it’s good to be at a premium if you want to do it. And so I’m just kind of curious how you think about that, because it definitely gives you opportunities? So just kind of curious how you think about that?

Lars Barstad

Well, I think it’s – first, there are many factors that decide on our pricing. Some are kind of maybe not in our making it’s – we’re a preferred stock where our liquidity is high and so forth. We also have extremely low cash breakeven levels. We have a relatively high leverage, which gives you relatively quickly bang for the buck whenever the market moves. And historically, we have proven to be quite rewarding towards our shareholders. I know we probably said this every quarter, at least ever since I joined Frontline in 2015. but when you invest in Frontline, you invest together with our main shareholder. You’re not the kind of a sole investor in a big corporation and his history for being interested in your terms on the dollar is well-known. So, I think that’s postulate, I would assume, it’s a difficult number to breakdown.

Greg Lewis

Okay, great. And then just as I think about that as your – as the companies out there, and clearly, you kind of laid out the way to move forward and that hey, the market’s not good now, but there’s reasons to be constructive in the out years. Is the company, I mean, in realizing you have a pretty attractive fleet right now, all good age, big, should we be thinking – are there going to be opportunities to come? Is there any M&A opportunities do you think that could develop over the next six to 12 months, or it’s kind of been all the same players for the last five plus years, and you don’t really see any potential for consolidation?

Robert Macleod

There is always potential for consolidation, but there is always done again, the question of price and opportunity, of course. The markets have actually consolidated, but maybe not in the way that the investors would want it to do and that’s more like in bigger pools are being built on the kind of trading entities are growing and so forth. So, the amount of kind of sole owners trading three or four ships has maybe not reduced, but at least their tonnage have been consolidated in a way.

With regards to M&A, as you know and I know that there is always kind of the usual opportunities or suspects or whatever you’d like to call them. We are constantly monitoring them and we’re always kind of in the markets to look at opportunities. But then maybe, not actually, in this instant looking at how the market is performing right now.

Greg Lewis

Okay, hey, thank you very much. Have a nice day.

Operator

Thank you. And your next question comes from Randy Giveans from Jefferies. Please ask your question.

Randy Giveans

Hey, back for more with two quick modeling questions. First for the loan facilities, we’ve done LIBOR plus 190 basis points, so certainly, pretty impressive there, Inger. But following those recent refis is now the plan to maybe, repay the remaining $60 million on the Hemen facility? And then also with the new recent refis in place, what is your weighted average interest expense and debt amort schedule through 2021, in terms of quarterly payments?

Inger Klemp

Yes. We expect to be – did you talk about the ordinary instalments, was that the question?

Randy Giveans

Yes.

Inger Klemp

Yes. Okay. In 2021, the ordinary instalment based on the current loan facilities we have is approximately $160 million a year, evenly between the quarters. And it will be – some slight increase in these ordinary installments in 2021 as we then take delivery of the four LR2 tankers and drawdown on the new 16 Suezmax tankers facility, which we talked through earlier in the presentation.

Randy Giveans

Yes.

Inger Klemp

And your other question was with respect to the Hemen facility? Was that the question?

Randy Giveans

Yes, the $60 million remaining on the Hemen facility.

Inger Klemp

We do have an agreement there in place saying that it matures in May 2021. So, we plan to follow that agreement and they’re going to repay in May.

Randy Giveans

Got it. All right. And then for the total weighted average interest expense, I see your interest expense came down pretty meaningfully from the second quarter. Just trying to see where’s that runs up to in the third or in the fourth quarter.

Inger Klemp

Okay. At the end of third quarter, I think the average cost was around 2.3%. And I think in the fourth quarter, slightly lower, around the same level.

Randy Giveans

Got it. All right. And then one more last modeling question before we can all get to Thanksgiving, I guess here in the States. For the operating expenses, they had a huge tick up in the third quarter. I know you said most of that was due to some dry docking, some one-time crewing cost, just trying to get a sense for a good run rate there in the fourth quarter in 2021.

Inger Klemp

Other than SFL, it would deliver payer in the third quarter. However, we have 22 in the press release that they would also have a kind of one-off in the fourth quarter with respect to this crew cost in relation to COVID-19 or $1.5 million.

Randy Giveans

Yes.

Inger Klemp

Our reduction is of course down from this quarter, which was $4.8 million. We also have stated that we would have our vessels dry dock in the fourth quarter. So, I don’t think you can expect that the cost would come any down on the third quarter with respect to dry docking in the fourth quarter, probably, it will be a little bit higher. But otherwise I don’t think we would have any extraordinary items in Q4.

With respect to 2021, I don’t foresee that to be extraordinary in a way. The only exception that Frontline has to make is of course the development of the COVID-19 pandemic in a way, I’d be confident to see it, but it seems like it’s active, it’s coming in place and everything should be pretty normal after awhile there as well. So, it shouldn’t be any costs related to crude changes and that sort of things going into 2021.

Randy Giveans

Sure. Let’s hope so. That’s sounds good. Well, thanks so much. Have a good day.

Lars Barstad

Thank you.

Operator

Thank you. And your next question comes from the line of George Burmann from CL Securities. Please ask your question.

George Burmann

Good morning, gentlemen. Good afternoon. Thanks for taking my call. I’ve got a few questions. Number one, you used to be predominantly in the VLCC and Suezmax based. Recently, in two years, you moved into the LR2 Aframax area. Can you comment on the reasoning behind that? Number one.

Lars Barstad

Yes. Over the years, the Frontline fleet has diversified kind of into three key or core segments. The LR2 Aframax market or rather the LR2 market is like the VLCC of the clean trade. That has been for a long period of time being like a development globally where refining capacity has been growing rapidly in the Middle East and also in Asia and the cost of refining capacity in North America and then Northwest Europe.

Obviously that case stumbled a bit on the fracking revolution, meaning that the U.S. refineries ended up having a relatively cheap feedstock. And we are able to maintain kind of run rates and margins for a prolonged period of time. But the investment initially was out of the displacement between supply and demand on the product side. This is becoming kind of increasingly current again with India claiming to double their refining capacity within relatively short time. And we see the tremendous growth of refining capacity in China, meaning in that China could become a significant exporter of petroleum products.

At the same time, we see now refineries in Europe have struggled and are kind of to a largely extent shutting down. So that was – that kind of, it was the key strategy behind. What we experience obviously was that the clean markets didn’t perform as expected. The LR2 has got engaged in the dirty trade, so drawing a little bit below half the feet into the dirty trade. But these ships can be cleaned up and can move back to the LR2 markets, yes.

George Burmann

Okay, great. Next question, you’ve did a pretty big deal last year with Trafigura I believe it was for 10 Suezmax tankers, pretty new ones, 2019 built. Are there still several under time charter – the time charter back to Trafigura and at what rates are those?

Lars Barstad

There’s still five of them on time charter back to Trafigura with a profit-sharing agreement. So – and that’s the level is $28,400 per day.

George Burmann

So, they are good earners for you at the moment, even though we don’t profit share with them, right?

Lars Barstad

Absolutely.

George Burmann

Okay. Then concerning scrapping, you mentioned in your initial remarks that it looks like with the current rate environment, there are many, many companies, if they still transport, they will do so at huge losses. Do you see any openings in the scrap yards recently that have enabled companies to a scrap? And then you made a remark, other than scrapping, what would some company do in buying a 20, 25-year-old VLCC or Suezmax tanker?

Lars Barstad

Well, firstly on the scrapping. As far as I understand, I believe we like to call it recycling. First understand the recycling plants; we’re also heavily affected by the global pandemic, meaning that they have to shut down. There is an increasing activity in the recycling markets right now. And we see more and more vessels being sold for recycling, but not necessarily in [indiscernible]. There were a couple of Aframax that have gone, but very few deals to see some Suezmax is reported.

And as I mentioned in my presentation, there is a disconnect between the price these vintage vessels are able to achieve for not necessarily trading, but for storage and other activities; than what the recycling companies willing to pay you for this deal. So, with regards to what these tankers are used for, I think I would be a little bit kind of courses to speculate, but obviously there is oil that is transported kind of outside of the normal stock market. And there is, as I mentioned there are quite a large amount of sanctioned barrels in the world right now and these needs somewhere to be stored.

George Burmann

Okay. And then lastly maybe you can comment again, I read that you’re divesting your ship management division and you look to book about $7 million gain here in the fourth quarter on the sale. What are the reasoning behind divesting this division, essentially taking your in-house ship management to an outsourced version? Is that cost efficient for you, more cost efficient?

Lars Barstad

Well, let me explain a little bit on our mobile. So we do have in-house technical managers, but we do outsource the crewing effectively the day-to-day handling of the vessels. So it means that we have an organization in-house, technical management departments, a relatively large one actually that oversee third party technical managers. And SeaTeam cleared to be looked upon as a third party technical manager. So indirectly, we were owning a company that that we normally just outsource to be that way.

And this was, maybe explains my comment about it not being kind of a core business and divesting it was basically due to the fact that OSM came in and offered us an opportunity to continue to run kind of the company. The company will be continued to be run in very much the same manner and to the same expectations that we have when it was directly owned by us. And we obviously buy the services of that company going forward, just like any of the other third-party technical managers that we employ.

George Burmann

Okay, great. One last one if I may; what is your average interest rate on the debt you’re absorbing at this point in time? You mentioned that you had a very, very good debt facility there with a very good interest rate and with weights basically worldwide close to zero, I’m wondering what kind of an advantage is that for your company at the moment and how long are those rates locked in for?

Lars Barstad

I’ll let Inger answer your question, those are answer that question.

Inger Klemp

Off the new facilities, which we have put in place now, we went through with respect to term loan facilities there during the call, so that was locked in for – as the margin was locked in for five years on those facilities. And obviously we have also shown our debt maturity profile in the presentation, so you can see how this is going to mature going forward at different facilities. So, the average rate that we are, let’s say having announced today is the 190 basis points in margin and LIBOR on top of that, which is the very low level now. The three months LIBOR is about 30 basis points or 25 basis points in that area, that is what we are looking at. And in addition to that, of course, we have this turn out facility, which we talked about a bit earlier in the presentation, where we have a rate of 6.25%, which we pay on that $60 million, but that is a very small part of our total loan portfolio. So, it doesn’t really mean so much for the average in a way.

George Burmann

So, if LIBOR rates raise, your interest rates – would your interest rate costs would also go up a little?

Inger Klemp

Yes, it will. And we do have interest rate swaps in place as well for $550 million on a certain bit higher level than the 25 basis points or 30 basis points, even though very competitive. So, let’s say, a total expose to raise in LIBOR rates, but does just makes sense? Yes.

George Burmann

Yes. And then maybe a one quick last one, concerning scrubbers, is your entire fleet now outfits with scrubbers where necessary.

Lars Barstad

No. We have about two-thirds of our fleet is fitted with scrubbers as it is right now. We kind of slowed down the pace of scrubber installing with the diminishing kind of scrubber margin to bit of that where the spread between high and low sulfur fuel. I’m going to say it that way, we won’t – we couldn’t easily reinitiate that program in the future.

George Burmann

Do you expect – I’ve recently heard reports about slow steaming. Would that be a positive effect on day weights and tanker demand?

Lars Barstad

It could be. It – I’m not sure what context you kind of – you’re thinking about there. But first of all, during the label leg, when we are empowered, we can many times decide our own speeds. And in this earning environment, we will slow down as much as we can to be quite honest. But there is also a general discussion around when we measure our carbon footprint, how slow speeding could play a role in order for the tanker fleets to comply with the goals of IMO going forward. So – but this is still kind of a bit up in the air. I must admit, we haven’t really looked deep into that as of yet.

George Burmann

Okay, great. Thanks very much for your time here.

Lars Barstad

Thank you.

Inger Klemp

Thank you.

Operator

Thank you. [Operator Instructions] And there are no further questions at this time. Please continue.

Lars Barstad

Okay. Then I just wish to say thank you very much for this call and thank you for listening. Happy Thanksgiving to the ones joining us from the State and stay safe. Thank you.