Frontline Ltd. (NYSE:FRO) Q1 2019 Earnings Conference Call May 16, 2019 9:00 AM ET

Company Participants

Robert Macleod – Chief Executive Officer
Inger Klemp – Chief Financial Officer

Conference Call Participants

Randy Giveans – Jefferies
Greg Lewis – BTIG
Chris Snyder – Deutsche Bank
Fotis Giannakoulis – Morgan Stanley
Jon Chappell – Evercore
George Berman – IFS Securities

Robert Macleod

Good morning and good afternoon. Thank you all very much for dialing into Frontline’s First Quarter Earnings Call. I will start the call by briefly going through the highlights of the quarter. Following that, Inger will run us through the financials. We’ll then look at the Q1 and Q2 spot earnings and then touch on the exciting and important factors that will govern the market going forward. The call will be concluded by taking your questions.

Let’s get started, please. And we’ll have a quick look at some of the company highlights. Net income for the quarter was $40 million. Adjusted for noncash items, we made $45.5 million or $0.27 per share. For the VLCCs the spot TCE was $35,700 in the quarter. Q2 bookings are at a healthy level. 63% of the days are booked at $34,800. Please note that Inger will make some important comments on this later.

I’ll get back to Q1 and Q2 earnings Suezmaxes and Aframaxes. We have increased our ownership in FMSI to 28.9% and our planning for 2020 is on track. Our new VLCC newbuilding Front Defender delivered that in January and Front Discovery was delivered in April.

With that, I will hand the call to Inger now to take us through the financials in detail.

Inger Klemp

Thanks, Robert, and good morning and good afternoon, ladies and gentleman. Let’s turn to Slide 4 and 5 and look at the financial highlights and the income statement.

Frontline achieved total operating revenues, net of voyage expenses of $141 million, and an EBITDA adjusted for certain noncash items of $96 million in the first quarter. We reported net income of $40 million equivalent to $0.24 per share and a net income adjusted for certain noncash items of $45.5 million, equivalent to $0.27 per share. The noncash items this quarter consisted of $1.4 million unrealized loss on marketable securities and $4.1 million loss on derivatives.

The first quarter shows an improvement of $18 million against adjusted EBITDA of $78 million and an improvement of $19.2 million against adjusted net income of $26.3 million in the fourth quarter of 2018. The improvement in net income in the first quarter of $19.2 million is mainly explained by an increase in result on time charter basis of $18.4 million, due to the increase in reported time TCE rates in the first quarter compared to the fourth quarter. As Robert mentioned, the reported time TCE rates for the VLCCs, Suezmax and LR2 tankers in the first quarter were $35,700 and $28,200 and $24,000, respectively.

On February 28, 2019, the company disclosed that the spot TCE of $41,300 per day has been constructed for 84% of vessel days for our VLCCs in the first quarter. Due to the limited number of additional laden days, at the end of the first quarter additional revenues booked were limited, and as such, the total revenues for the 84% of vessel days contracted was spread over 100% of the days in the quarter, resulting in the lower TCE per day by the end of the first quarter.

Spot TCE estimates for the second quarter are $34,800 per day contracted for 63% of vessel days for the VLCCs; $19,000 contracted for 63% of vessel days for Suezmaxes tankers; and $19,500 per day contracted for 55% of vessel days for LR2/Aframax tankers, respectively. These spot estimates are provided using the load-to-discharge method of accounting.

The rates quoted are for days currently contracted. The actual rates to be earned in the second quarter of 2019 will therefore depend on the number of additional days that we can contract, and more importantly, the number of additional days that each vessel is laden. Therefore, a high number of ballast days at the end of the quarter will limit the amount of additional revenues to be booked based on load-to-discharge accounting principle. We expect the spot TCE for the full second quarter will be lower primarily due to impact of ballast days at the end of the quarter than the estimate days.

Let us then take a look at the balance sheet on Slide 6. The changes to the balance sheet as of March 31, 2019 from December 31, 2018 mainly relate to an increasing cash and cash equivalents of $29 million, which is due to cash generation from operations which currently we’re offset with repayment of debt. A decrease in newbuilding of $26 million due to delivery of Front Defender in January and increased in vessels of $58 million due to the delivery of Front Defender in January and also depreciation in the quarter. A decrease in vessels on the capital lease about $3 million due to the depreciation in the quarter, increased lease obligation and right to use assets under operating leases of $16 million due to change in the lease accounting rules.

Net decrease in depth was $9.4 million in the quarter following $65.2 million in repayments and $65.3 million in drawn down. $29.2 million of these repayments was ordinary repayments or the bank debt and the $6 million was repayment of the $275 million facility in the quarter. A decrease in obligations under capital leases with $3.2 million due to amortization of profit with interest payments and an increase in equity of $14 million representing the net income in the first quarter.

As of March 31, 2019, Frontline has $223 million in cash and cash equivalents, including the undrawn amounts under our unsecured loan facility, marketable securities and minimum cash requirements. Our remaining newbuilding CapEx requirements amounted to $55.9 million related to the last VLCC newbuilding that was delivered in April 2019. And we had approximately $59.4 million in debt capacity under our newbuilding credit facilities – delivery of vessel. We have no near term debt maturities, the first debt maturity is November 2020. When our senior unsecured loan facility are up to $275 million matured. We have drawn down $150 million on the debt facility and $125 million remains available and until after March 31, 2019.

Then let’s take a look at cash breakeven rates and cash generation potential on Slide 7. We estimate average cash cost breakeven rates for the remainder of 2019 of approximately $24,700 per day for VLCC, $20,000 per day for Suezmax tankers and $16,600 per day for the LR2 tankers.

These rates all in daily rates, that our vessels must earn to cover the best at operating costs and dry docks, the estimated interest expenses, TC and bareboat hires, installments on loans, and G&A expenses. The reason for that would be breakeven rates are higher in 2019 than in 2018, is that have included drydock cost for six VLCCs, four Suezmax tankers, and one LR2 tankers in 2019.

However, low cash breakeven rates offers a strong downside protection against the low rate environment and at the same time it creates a great upside potential in a strengthening tanker markets.

Every $1,000 per day in achieved rates in excess of our cash breakeven rates translates to approximately $19 million in incremental net income per year or $0.11 per share, which shows the high importance of maintaining our low cash breakeven rates.

In the graph, on the right hand side of the Slide, we have shown incremental net income per year and per share, assuming $10,000 per day, $20,000 per day, and $30,000 per day in achieved base and excess other cash breakeven rates respectively.

The operating expenses per day in the first quarter of 2019 were $8,200 per day, for the VLCCs, it was $7,100 for the Suezmax tankers and $7,100 for the LR2 tankers. We did not drydock any vessels in the first quarter and we plan to drydock four VLCCs and one Suezmax tanker in the second quarter of 2019.

With this, I leave the word to Robert again.

Robert Macleod

Thank you very much, Inger. I quite like that slide. So every $10,000 is a $188 million, right? We’re lucky in China. Let’s turn to an exciting slide, please. Hopefully, they will – which can make that sort of earning potential come alive. Let’s look at the key factors that are in play. The market pulled back as we move through Q1. One exemption was how the spot market reacted to the sudden increase in U.S exports in February. To me, that’s a clearly a sign that the market is better balanced than the SMAX tank. There are three or four key factors that have impacted the market recently.

First, seasonal refinery maintenance commenced, accompanied by plant refinery outages in the U.S. Refinery maintenance has been more pronounced this year in Asia in particular as refiners prepare for IMO 2020. Next there is clearly decreased crude volumes in the market due to OPEC costs and geo factors in Iran, Venezuela and Libya. As an example, Venezuela production is down 70% since the first quarter. An additional factor is also relevant its fleet growth. Of course, as many new buildings hit the water in the early months of the year.

Finally, U.S crude exports have taken a breather after a prolonged period of consistent growth. Although the market remains soft, we along with market analysts expect the second half of 2019 to improve significantly. Refiners demand crude oil will come back as maintenance and IMO 2020 is expected to create incremental demand growth as greater quantities of crude are required to produce low sulfur fuel.

Some reports show that we monthly could see around 1 million pounds of refining capacity return this summer. Also effective fleet growth is expected to be somewhat offset by increased dry docking in preparation for IMO 2020, and due to ballast water treatment and requirements as well as an increase in long-term storage activity. The market has been very volatile due to production outages and sanctions in Iran and we expect this volatility to continue.

Next Slide, we will look at VLCC order book, it is important to note that we are already – they are currently in one of the highest delivery is for the VLCCs seen in recent times. Year-to-date 26 have entered the market. There will be slippage towards the end of the year, like we saw in 2018 and virtually see every year, but we still expect around 55 weeks to deliver in 2019. To balance that, we have what we refer to as a survey pool of over 100 vessels out of which some will be recycled or converted for permanent storage.

Let’s move to the last one please, which is the summary. Oil demand remain strong and this should be evident when global refineries complete their maintenance and new refineries start production. We also expect OPEC volumes to return to the market, both to keep the market supply and to offset decreases in Iranian exports shut in due to sanctions. The U.S. is well positioned to be a main source of incremental supply to the global market. Meaning tonne-mile demand drove may actually outpace demand growth.

Finally, fleet supply shows a good balance between scheduled deliveries and expected face out schedule for older vessels. But on the flip side, there will still be a high base vessel deliveries this year and scrapping will slow down if the market returns to levels seen earlier this year. Although IMO 2020 will make older vessel even less economical to operate. Higher oil price could cause demand destruction and combined with trade wars slow global growth.

Finally, there’s always the chance that IMO 2020 implementation will not proceed as expected. Some owners will try to cheat through regulations, but at a small scale, and although we believe in the fuel spread that it will widen as we approach 2020. It could of course narrow and diminish scrubber economics.

To conclude, we expect the market to remain volatile, but continue to trend higher after seed prepares to new regulations and oil volumes return. Crude oil tanker demand will receive a significant boost as crude increases in the second half of this year. Although there are always risks related to slowing global demand, multiple possible market drivers should result in strong – in a strong second half of the year.

With that, let’s turn over to questions please guys.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. Now, we will begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Randy Giveans from Jefferies. Please ask your question.

Chris Robertson

Hello, this is Chris Robertson on for Randy. Thanks for taking our call. Just in terms of the OPEC production cuts, I guess there’s been some speculation in the markets recently with some Saudi Arabian news that they might increase production in coming months. So are you positioning the fleet in any way to kind of capture that in the next few months? And how are the current security concerns impacting things?

Robert Macleod

So on the OPEC, I’ve been pretty certain that June meeting would see an increase, but what’s going on lately are decided to be more sort of – let’s see what happens. So, yeah, we’ll just have to see. I’m convinced that we’ll see volumes come back this year. I think the world oil market simply needs it, otherwise the oil price will go to a hundred plus and demand will be – will see some destruction for sure. In terms of how we trade into ships, no we’re not – we’ve not sort of got an OPEC increase in mind. We optimizing as we are triangulating the ships and simply doing the best we can to add as much as possible.

So sometimes a few other markets about to turn and we’ll do shorter voyages and we do assessments on a day to day basis. In terms of the security, the situation in the Middle East is obviously first with the Yanbu and then Fujairah and then the pipeline. So there’s a lot of stuff going on there. So we’ve heightened the security levels on our ships and – but we are in actual fact, we are always on the watch out in the area, so we’re kind of well prepared.

Chris Robertson

Gotcha. Thanks for that. I guess looking at the scrubber retrofit program, are there any updates there in terms of the total CapEx? Is that still the same as previous guidance? And can you kind of walk us through the cadence of installations? Any updates there? And would it be possible to pull any of the retrofits forward in terms of install dates?

Robert Macleod

In terms of the OpEx and CapEx, there’s no change from the last quarter in terms of booking more ships. We are looking to bring some forward given the bad market, some will be docking slightly earlier and obviously being part owner of the factory means that we would have any problems getting that supplied to the ship. So we’re in good position. We have good flexibility when it comes to docking spaces as well given the size of our group. So we drive this around. Obviously when the market is where it is now this is the time you want to be docking.

Chris Robertson

Right, okay, and that makes sense. Then I guess lastly, are there any floating storage opportunities that are interesting out there in the market or something that you’ve considered?

Robert Macleod

We have enough fleet given the renewal we’ve had in recent years. We have very few ships that are actual candidates. So I’d say there’s probably only one, and let’s say in 2002 we obviously see. So, in general, we’re seeing more questions. There’s not a contango driven storage player out there, but there will be surplus products given what’s happening here in 1st of January. The need to find a home and being on a ship makes you more flexible than having on a shore tank where there’s not that much availability.

So I think we’re going to see floating storage increase. And that’s going to be blending and so forth. And we’ve already seen part of the Iranian fleet go on storage. So I think where we are now, we’re at low point substitute the well fleet on storage, we’ll see it increase this year and I think that will be the substitute in what’s going to balance the tanker market, so the fleet growth rather than scrapping/recycling.

Chris Robertson

Gotcha. All right. Thanks for taking the questions.

Operator

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

Greg Lewis

Yes, thank you and good afternoon.

Robert Macleod

Hi, Greg.

Inger Klemp

Hi, Greg.

Greg Lewis

Rob, could you just talk a little bit about, I mean as we look at Frontline, I mean that the fleet, I guess what I’m wondering and I think a lot of people are wondering is there plans, I mean, just listening to your cadence, listening to your comments about the market. It seems like Frontline should have a bigger footprint in the market. Is that something that we can think about addressing, but before this market may be gets away from us?

Robert Macleod

If you look at, Frontline here over the last three, four years, Greg, we’ve had over thirty new buildings deliver. So in terms of the fleet we’re down below five years average. We’ve gotten out of a lot of the old ships in terms of the lease agreements. Are we on the lookout for opportunities? Certainly, yes. And I think we have with the support of our main shareholder we can do stuff that very few others can. And we are in the lookout. But we are also seeing a very illiquid market, where currently, everybody is losing money out there. So, yes, we are looking for opportunities.

And we actually see, we’ve recently purchased Suezmax resale, but we were not one ship process, it is not changing much. So, for the right opportunity we will certainly want to grow. But on the other hand, if we stay as we are, showed on this lucky, lucky in China, graph right, this slide, it shows $188 million for every 10 pounds above breakeven.

So, let’s see what opportunities come-up. But if there are good opportunities and we feel it, they are the right opportunities for our shareholders we’ll be there to capture it.

Greg Lewis

Is it really just the lack of, is it a lack of willing buyers or is it, are we looking at asset prices and think that there’s an opportunity for asset prices to maybe drift lower?

Robert Macleod

Asset prices have certainly come up a bit. At the same time, you’re seeing very little activity on the new building. So new building prices are likely to follow, are falling as we speak, but our focus here will be on the resales or modern ships on the water. And there will be opportunities out there but it is a very liquid market. This compared to the dry cargo, this, as many, many transactions for the month on dry as there are now on tankers in a year.

Greg Lewis

Okay. And then just one more for me. Could you talk a little bit about, and maybe a little bit more color around in the press release, you highlighted, the Q2 forward fixtures, but then you can, there was this one language about the vessels, potentially being on a ballast legs for longer. Is that sort of a function of how the fleet has been positioned or is it more a function of, is that more an indication of the fact that the spot market in the – the current spot market is really weak and that’s just limiting opportunities to fix vessels.

Robert Macleod

This is related to the accounting rules and the change in accounting rules. And if you look back at Q4 you saw us with a low number given because of the high number of ballast day, so they’ve been a sort of repeating what you said, then please look at the transcript of the call and you’ll have a explanation of the factors.

Greg Lewis

Okay guys. Thank you very much.

Robert Macleod

Thanks.

Operator

Thank you. Your next question comes from the line of Amit Mehrotra from Deutsche Bank. Please ask your question.

Chris Snyder

Good afternoon. This is Chris Snyder on for Amit. So just following up on the conversation around the company’s footprint, you mentioned there is support from the largest shareholder and with shares trading at a premium to peers. Kind of how do you think about using shares as a currency to add vessels, as we’re starting to see rates deflect above cash break-even levels?

Robert Macleod

Yes, sure. We’ve got that as an option, absolutely.

Chris Snyder

Okay, fair enough. And I mean, you kind of mentioned, one vessel doesn’t do much for you. So is it fair to assume that if you do something that would be more substantial than just one-off transactions?

Robert Macleod

We look at both. If we think it creates value. Then we’ll go for it.

Chris Snyder

Okay. Fair enough. And now like, you guys talked a lot about refinery maintenance. The industry is kind of on the verge of coming out of these elevated downtime. Has there been any enquiry from charters looking to lock the vessels away as demand is kind of said to pick up here.

Robert Macleod

I think what we’re seeing now in terms of the finest close. So let’s start to a few days and obviously we’ve known that more will go out of service here in Q2, or we’ve expected. Looking at, for example, Asia has normally in Q2 has about 1.5 million barrels a day of capacity out. Now you’re almost double. So the fact show that refiners will be coming back, they’re out now and those then will be coming back. In addition, you’ve got more refinery capacity coming on in 2019 and 2020 than probably haven’t seen in the world. So that factor, I think, is huge.

When it comes to the chartering activity, we’re seeing more activity now in the Middle East given the political unrest and people will probably want that barrels out quicker. But the overhang off tonnage is not there to move the rates yet, but we’re obviously watching that space closely. And I think the one to really watch closely is what’s happening in the Atlantic. So I expect the volumes in the Atlantic in June and July to be a lot, lot higher than what we’ve seen recently. So that could be the start of the turn, in the market, but it could also be into Q3. I’d just say it depends on how much time it takes to clear the overhang.

Chris Snyder

Yes, it makes sense. And then just lastly, you guys have done a good job kind of laying out all the headwinds the industry space year-to-date. And I think in the release you said you kind of culminated in seaborne crew trade being down about two million barrels per day, which is, very meaningful. But still Q2 bookings are coming in at healthy levels. Have you been surprised at how resilient the market has been, in light of the aforementioned headwinds? And what has been the driving force kind of helping to keep the market tight?

Robert Macleod

We had expected the markets come off the first half of 2019. So it did surprise us a bit in February when we saw it shoot up. And that was obviously the U.S. volumes that came back, it suddenly was three million barrels in February. So to me that was a very good sign because it shows that the tanker fleet, the tanker market is better balanced than many you say.

Chris Snyder

Yes, fair enough. That is it for me. Thanks for the time.

Robert Macleod

Thanks.

Operator

Thank you. Next question comes from the line of Fotis Giannakoulis from Morgan Stanley. Please ask your question.

Fotis Giannakoulis

Yes, hi Robert. Thank you. Robert I want to follow-up on the trade situation in UAE tension. If you have seen any increasing risk premium both from insurers, but also from the ship owners to trade in this region. And if you share your experience, what has happened in similar situations in the last – to the tanker market?

Robert Macleod

So the situation in the area in terms of risk levels to say they’re mostly often we’re racing the alerts from the ships. But in terms of insurance not a great deal has changed. In terms of the markets you look historically for this then these sort of events it’s normally something that triggers a quick a turnaround in the market. But we’re not seeing it, it could happen any time. But I think the overhang of tonnage is just too great to move the rate. We’ve seen a lot of activity this week. People want to balance out, but it is one of these surprising facts, it could see the market suddenly move 10, 20, 30 points in a week. But I haven’t seen the firm signals yet.

What I do expect is that with the pull of barrels out in the Middle East and the concerns around the Middle East, then if I was a refiner in anywhere in the world, really, I would be looking for alternative supply. So I reckon the demand around West Africa will increase and obviously, possibly, the U.S. Gulf as well.

So I think people will be looking at alternatives there, which for the tanker market would obviously in terms of most of the refineries being in Asia then you will be positive for the ton mile. But we’ll see over the next couple of months. But I would not be surprised if this is what turns things around.

Fotis Giannakoulis

So at the end of supply comes from further locations, is that correct?

Robert Macleod

Correct. It is one of many factors. It has to work along with other factors, right. And something like [indiscernible] which has been talked about for decades, but never really happened. And I don’t think that sort of scenario will happen either. But it needs to be that extreme to turn the market quickly. But I think this is the fact that it can work along other factors.

And then we’ll start seeing healthier markets. As you know, we really are at the bottom, especially in the VLCCs, the earnings are awful. But we remain hopeful here. And let’s see if this – a few factors play together, we’ll get our projection right, that the second half will be good for us and the rest of the tanker markets.

Fotis Giannakoulis

And the market is awful as you said at this point, but you still reported a 63% of your days at around $35,000 in this quarter, which is a very high number and much higher than your peers. Can you give us a little bit more color how this was achieved, if you can give us a description about your ballasting schedule, how should we think that the remaining close to 40% of your days that we are opening in the second quarter?

Robert Macleod

No, I think we are happy with the earnings. And obviously, the headline numbers always to VLCCs but we’ve obviously got almost as many VLCCs, Suezmaxs and VLCCs and looking at those earnings, especially I’d say Q4 last year, very, very strong earnings on the Suezmaxs. These I think we are pretty much aligned with our payers being this year and year and a half. So not a huge difference, we are ahead on Suezmaxs. I think chartering guys are doing generally a really good job and that’s what it’s all about that it’s always single figure – fixtures put together that creates these numbers. So and then also Aframaxs a really good job, if you look at where are we guiding now on Q2. It’s – I really don’t think it’s bad.

So but again, on the VLCCs we have own asset that ballast days will come, we’ll bring that number down. So if you have a ship that’s open end of June and also end of May and loads early July, you will have to go book all the ballast days in June. So that will affect as per Inger’s explanation. And in addition, the spot market is very, very low levels now, right. We’re down at average for the fleet is probably 12 or 13 a day. So this will bring the number down on the balance 37 or what else, yes.

Fotis Giannakoulis

Thank you. Robert. One last question about supply and about asset prices, we have seen the last 12 to 18 months, a significant increase in asset prices, particularly for VLCC is growing from a 80 to 95 approximately for a new vessel. How do you see asset values developing, back in the previous cycle in 2014, we saw values increasing ahead of the improvement of the market. And then when the market was improved, they actually stopped growing and they even declined. Are there any similarities with the 2014, 2016 market or this time it’s different?

Robert Macleod

I think what we saw in 2015 was something, we haven’t seen ever, the 25 years prior, the spot and the values were very much aligned, but I mean, what happened then was the finance and other factors were made it different. And I think this time we’re seeing the values move up on expectations of a stronger market, expectations that I think are right.

But I don’t think it will be go to levels in the last bid cycle, but we might see a one or two go to [indiscernible] but I’m not saying there’s not potential for it, but for me it seems a bit subdued, how the price are reacting. We’ve seen very few transactions and we know that there are certain opportunities out there at lower figures than what the headline numbers say.

So let’s see but I think there’s going to be the more money made the next couple of years for companies running a good chartering, more money made on the chartering income than speculating this deal.

Fotis Giannakoulis

And in terms of ordering new ships or your group’s appetite, the entire Fredriksen’s group appetite in increasing its asset base by buying your assets. Do you see this coming both from your company, but also from the overall market? Why this time we haven’t seen new buildings, especially when we have such a large portion of the fleet being above 15 years old?

Robert Macleod

Firstly, your question on the group. I think, it was overall time, where the expression fully loaded comes to mind. I’d say it’s now the JF Group is over 500 now in terms of units if you include offshore and rigs. So, it’s a sizable operation. So, we are well positioned as a group for the hopefully good market ahead. When it comes to VLCCs, I’m very pleased that we’ve seen a slowdown now over the last three, four months. And then I think, as I said on the last call, there are some resource available and normally, we used to very poor markets, right? So, if we have a choice between getting a ship in two months or two years, then we’d say two years, because we’re also optimistic, they will get better at some point. But things are different as everybody agrees that this market, the fundamentals in the various factors look to be in our favor. So, you would want to ship delivering in two months rather than two years.

So, I think we need to see activity and see the results being taken out that are that before we see much more activity. So hopefully, containers in the LNG and the other areas will be active as well in big containerships also consolidation in Korea will probably tighten things. So, I’m just hopeful that we’re going to see less orders. But you know how it is? We – the same mistakes happens every time we make money and then we start building and then we go down the drain again, right? But I’m not going to say this time is different, but I’ll remain hopeful.

Fotis Giannakoulis

Thank you very much, Robert.

Robert Macleod

Thanks, Fotis.

Operator

Thank you. Your next question comes from line of Jon Chappell from Evercore. Please ask your question.

Jon Chappell

Thank you. Good afternoon guys. Robert, I wanted to start where we left off the last quarterly results, which is around the dividend. If we’re going start with pursuant to the company’s stated dividend policy, that’s where it says in the press release. Can you clarify what the company stated dividend policy is? Because two straight quarters of profitability, I think anytime in the last 20 years would have resulted at least in some return of capital. So, what is the stated policy, let’s start there?

Robert Macleod

So we’re going to say, we’re paying down debts given what we’ve drawn, has been to focus. Obviously, the dividend will be up to the board here to decide, but I can guide you as far as that, I think when we become profitable here, the dividend will return sooner rather than later.

Jon Chappell

Okay. And to be clear, I think it’s completely prudent to deliver. I just think there’s also some misperception that as soon as you turn to black, there’s a dividend and that hasn’t been the case. So, somewhat aligned with that the purchase of the new build Suezmax for $66 million, what’s the financing look for that? Are you trying to arrange bank financing? Will you draw from the Hemen loan or is this going to be strictly a cash finance acquisition?

Robert Macleod

No. We’ll – what I’d like to add to do the financing on that. So, we’ll probably draw on Hemen to make the first installment and then we’ll – I think just to comment on the banks, we’ll know how difficult financing is the right. but Frontline remains in a very privileged position. So, our rec in 65% finance it at very extremely good times, I think it has been doing a great job here overtime and the terms will be similar to what we have in the past and we’ll get a very good cost break-even. That’s again, all that matters, right? It’s getting the cash break-even down, so that we have the earnings potential through hopefully a good cycle.

Jon Chappell

Okay. And that’s not obviously, delivering for another year. Are there other opportunities like that – like that vessel, was this just a complete one-off?

Robert Macleod

Yes. this is obviously as a one-off, but similar deals are available.

Jon Chappell

Okay. My final one was around the VLCC charter ins, and you’d mentioned in the release that the charter in rate is lower than current time charter. Is that lower than the one-year time charter in the market right now? Is any kind of guidance as to what exactly you are paying for those VLCC charter ins?

Robert Macleod

Yes. The VLCCs, they are actually below our own cash break even. So, they are probably – we’ve got just under two years exiting options. If we’ve got to just under two years left. I think the average rates for the next years is 22.5. Then modern ships, what’s the charter out rate, mid-30s moving up. So, they probably have a value of $5 million plus each of them per year. So, $20 million to $25 million is what we’re up forward. And we’ve also made decent return for those ships since delivery a year ago, so that was a wise decision to take those ships on.

Jon Chappell

Right. And once again, opportunistic, even though it was a year ago and the optimism in the market, I assume those types of opportunities are a bit more few and far between today?

Robert Macleod

I know they’re not easy to find. We keep looking, right? In the – whether your charter ship for two years, we own – actually, sometimes I prefer chartering it. So, you do see more flexible. So, where we keep looking for opportunities. As we wrote in the press release, which we – I think it’s some time and been not clear for long time, they are on the time charters and the strategy, but we’ve been holding back from that. We’ve got three shifts out now. They all end in Q1 and 2020.

and in Frontline, we believe in trade in the ships. And if we think the market is coming off, then we realize if we get coming off, then we hold back and read, I think you look at taking other ships in and trade around it. But what I can say on this is that when the market gets to the levels that we expect it to get to, then we also, we’ll be prudent and take some cover, so that we have some cover on that one when things come down again, it’s like we did in 2017. The LR2 charters, there are seven LR2 charters we have. In 2017, the market came off and mark-to-market, those seven charters made $50 million more than the spot. So, we’ll make sure to take cover when we think the time is right.

Jon Chappell

Okay. That’s very clear. Thanks Robert.

Operator

Thank you. Next question comes from line of George Berman from IFS Securities. Please ask your question.

George Berman

Hi gentlemen. Thanks for taking my question. the new accounting of load to discharge, way of doing things, does that initially inflate your day waits versus the old way of accounting for it?

Robert Macleod

No. It can inflate or it can deflate. you look at the Q4 number deflated it. So, for us, for quarter-to-quarter, it gets a less precise picture. So, I think it’s important to look our performance overtime as it always is. That’s the simple answer.

George Berman

Okay. And could you give us a little insight on what your plans are for Feen – your Feen acquisition, you own 28%, 29% now. I’m sure that you have some preferential treatment as to the installation of scrubbers there. but as an equity position, did you think you might spin that off like you did years back with Ship Finance, or is it just an equity investment that you look to exit at one point in time?

Robert Macleod

No. I think this, we’ve taken this decision. So, we are tanker people and we’re making money on tankers. but IMO 2020 is such an important event that we wanted some control of our destiny. And as my slide comes up here excellent facility in Indonesia, we know they can deliver – they’re up to almost 50 commissioned up and running and our own ships are going well as well. So, it’s a bit for us, this is not a long-term, or it can be, but it’s not something that we sort of want to woe for others. So, if the right opportunity comes up to exit and we think that’s right for our shareholders, we will do that.

George Berman

That sounds great. Thanks. over the weeks of the years, you have expanded your LR, MR tanker fleet quite a bit. they’re transporting primarily clean product. Is that a market that you think is going to really stop moving?

Robert Macleod

We entered five years ago or six years ago, we went into MRs and LR2s. The MR segments, we’ve gone out of, so we only have LR2s now. they are basically be able to see of the products market as you know. And I think predicting which one makes both break-even and so forth is in a strong market. I think it’s always going to be able to see personally, but I think the clean market is going in towards a better time. So, I think the – LR2s will be the winners. That’s why we hold onto them. We also got the optionality to trade a crude on them, which has been a strong market lately.

So, it gives us good optionality. But I think we’re going to be predominantly trading clean. and I liked these ships, because they do, for example, diesel or jet fuel from the Far East to all Middle East to Europe. And then they go back with [indiscernible] or other products, you have – you have a nice life both way and what’s raised and also, it’s a liquid time charter market there. So, you can read that and you can trade well around and obviously, we’re well financed on the ships and some of the roll size costs. So, I think we are – we’re going to hold onto those ships and make some money.

George Berman

Brilliant. Thank you.

Operator

Thank you. Next question comes from the line of Robert Silvera [ph]. please ask your question.

Unidentified Analyst

Yes, thank you gentleman for taking the question. You addressed a little bit about the dividend and I’d like to know, you said you expected it to resume. Can you give us a little bit on the philosophy, what kind of percentage, for instance, of earnings would you consider like up to a minimum of 60% of the earnings would be a dividend. Give us a little bit of the future philosophy on dividends.

Robert Macleod

I think as you know, it will be the up to the board had to decide. But to guide you, if you look at the historical, it’s been a full payouts and I think when we start making money again and then you’ll see a decent chunk of the income be paid outs.

Unidentified Analyst

A decent chunk, and you got any kind of percentage that you can guide toward?

Robert Macleod

it will be up to the board again to decide this.

Unidentified Analyst

Okay. Thank you. That’s all my question.

Operator

Thank you. There are no further questions at the moment.

Robert Macleod

okay. Then, let’s say thank you all for calling in and thank you to everyone at Frontline for their great efforts. All the best.