Frontline plc (NYSE:FRO) Q4 2023 Earnings Conference Call February 29, 2024 9:00 AM ET

Company Participants

Lars Barstad - CEO

Inger Klemp - CFO

Conference Call Participants

Ben Mohr - Deutsche Bank

Jonathan Chappell - Evercore ISI

Greg Lewis - BTIG

Sam Bland - J.P. Morgan

Operator

Good day and thank you for standing by. Welcome to the Q4 2023 Frontline plc Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note that today’s conference is being recorded.

I would now like to hand the conference over to your speaker Mr. Lars Barstad, CEO. Please go ahead sir.

Lars Barstad

Thank you very much dear all, and thank you for dialing in to Frontline's fourth quarter earnings call. The last quarter of 2023 did not deliver the full on crazy off the hinges bull market we all wished for, but still gave us decent returns. We also started to take delivery of VLCCs from Euronav in December. And we are very happy it's all been smooth sailing as they have come under the Frontline flag. I would especially like to praise our project, technical and operations team that effortlessly and professionally have incorporated these vessels into our fleet proving our company's very scalable business model.

Before I give the word to Inger, let's look at our TCE numbers from Slide 3 in the deck. In the fourth quarter from plan achieved ph $42,300 per day on our VLCC fleet, $45,700 per day on our Suezmax and $42,900 per day on our LR2/Aframax fleet. Both Suezmax and LR2 markets performing well above the previous quarters as they came to an end -- as the [indiscernible].

As our press release shows, the full year 2023 came in firmly as we earned $50,000, $362,600 and $46,800 per day on our VLCCs, Suezmax and Aframax/LR2 fleet, respectively. [Indiscernible] we made over $650 million in full year [technical difficulty] and this is deemed respectable in some circles. In fact, the best year we've had in 15 years.

So far in the first quarter of 2024, 81% of our VLCC days are booked at $55,100 per day, 72% of our Suezmax days are $52,800 per day, and 69% of our LR2/Aframax days at a whopping $67,800 per day. Again, all this numbers in this table are on a load-to-discharge basis and they will be affected by the amount of ballast days we ended up having at the end of [technical difficulty].

I'll now let, Inger, you can take us through the financial highlights.

Inger Klemp

Thanks, Lars, and good morning and good afternoon ladies and gentlemen. Let's turn to Slide 4, profit statement and look at some highlights, Frontline achieved total operating revenues in the fourth quarter of -- sorry, operating revenues net of voyage expenses of $207 million and adjusted EBITDA of $198 million in the fourth quarter.

We reported a profit of $118.4 million or $0.53 per share and adjusted profit of $102.2 million or $0.46 per share in this quarter. Adjusted profit in the fourth quarter increased by $21.4 million compared with the third quarter, and that was primarily due to an increase in our TCE earnings due to higher TCE rates, partially offset by fluctuations [ph] in other income and expenses.

Then I think we should turn to Slide 5 and look at some balance sheet highlights. Frontline has strong liquidity of $416 million in cash and cash equivalents including undrawn amount of the senior unsecured revolving credit facility, marketable securities and minimum cash requirements as per December 31, 2023. We have no remaining newbuilding commitments and no meaningful debt maturities until 2027.

Then, let's turn to Slide 6 and look at fleet competition, cash breakeven or OpEx. Following the delivery of all the 24 VLCCs acquired from Euronav and expected sale of the 6 older vessels in the first quarter of 2024, the fleet will consist of 41 VLCCs, 24 Suezmax tankers and 18 LR2 tankers, will have an average age of 5.8 years and consists of 99% ECO vessels, bear [ph] 57% will be scrubber fitted.

We then look at the graph at the right hand side, we estimate average cash breakeven rates for 2024 of approximately $28,800 per day for VLCCs, $23,700 per day for Suezmax tankers and $21,200 per day for LR2 tankers with a fleet average estimate of about $25,700 per day. This takes into account the expected sale of the 6 older VLCC -- older vessels sorry, and also the 24 VLCCs acquired from Euronav in the first quarter of 2024.

The fleet average estimate includes drydock of 4 Suezmax tankers and 5 VLCCs in 2024. [Indiscernible] two Suezmax tankers will drydock in the first quarter of '24, 2 Suezmax tankers and 1 VLCC in the second quarter; 2 VLCCs in the third quarter and then 2 VLCCs in the fourth quarter.

We reported OpEx expenses including drydock in the fourth quarter of $9,400 per day per VLCCs, $12,500 per day for Suezmax tankers, and $7,100 per day for LR2 tankers. This includes drydock of six Suezmax tankers and two VLCCs. The Q4 '23 fleet average OpEx, excluding drydock was $7,300 per day.

Then, let's turn to Slide 7 and look at the financing of the acquisition of the 24 VLCCs. When we entered into the agreements with Euronav to acquire the fleet of the 24 ECO vessels and also in our Q3 '23 presentation. We said that our ambition was to minimize the need for cash from the Hemen shareholder loan through transplant capacity to releverage the existing fleet due to the historically low loan-to-value and/or sale of all the non-ECO vessels.

In January and in February 2024, we executed on this with the agreement to sell 6 older non-ECO vessels and the ongoing process of refinancing 24 vessels on what we believe are attractive terms, expecting them to generate net cash proceeds of approximately $646 million. This will enable us to fully repay the Hemen shareholder loan and the amount drawn under the $275 million senior unsecured revolving credit facility with an affiliate Hemen in relation to the acquisition and also to maintain our competitive cash breakeven rates.

With this, I leave the word to Lars again.

Lars Barstad

Thank you very much, Inger. So let's move to Slide 8 and look at the current market narrative. So, as you all know, the headlines are covered by the Middle East tension. The situation in Israel and Palestine. Following that the Red Sea/Aden situation and its ton miles implications, looking at it from a tanking perspective.

We're also seeing that U.S are increasing the pressure on what's referred to either as the Dark Fleet or the Grey Fleet, and also increasing their focus on potential Russian price cap evasions. It was quite interesting to read earlier in the week [technical difficulty] that they've analyst -- analyzed the tanker fleet and found that according to them, the Grey Fleet now consists of 135 VLCCs, 92 Suezmaxes, and 150 Aframaxes. These are vessels [technical difficulty] on dark trading in Iranian barrels, trading to North Korea and doing all sorts of stuff, and including the Russian fleet. That's a 375 vessels in total in the segments that we worked in. As a total, all [indiscernible] to 700 vessels involved in some sort of shady activity, that amounts to 8% of the total tanker fleet. So these numbers are quite shocking.

Another thing that's kind of played a part in the last few months has been the high activity in the contracting market. Well, especially so for Suezmaxes and VLCCs, actually to the extent where [indiscernible] now is that 2027 is starting to become somewhat tight. Also another kind of important thing to notice, we've been through a long period of OPEC voluntary cuts, particularly sold by Saudi Arabia. This has maybe or potentially lead to non-OPEC production being allowed to grow quite remarkably.

Year-on-year, according to EIA [technical difficulty] has grown by 2.9 million barrels per day. And as you listeners would know, most of this OPEC production is not in the Middle East, of course, it's further far. And I'm connected to that [indiscernible] basin. And this continues to kind of confirm our ID that trading lanes are gradually extending U.S., Brazil, [indiscernible] and other countries are able to increase their production going forward. And China and Asia, still is where the [indiscernible] growth is happening.

Looking at the shots on this slide, so global oil trade has kind of paused a little bit. Also, global oil in transit has paused a little bit. But on kind of a more frequent indicators, we do see that in oil in transit is on the rise. What we -- and we expect it to be due to the longer ton miles around Cape of Good Hope, avoiding Suez Canal.

On the bottom three shots, you'll see how kind of the market has been, the volatility has increased in this market. I like to look at this by drawing a line at the bottom and I think we are or hope we are in what looks like a rising territory. Kind of real time, what we're experiencing right now, particularly so in the VLCCs is that we seem to kind of find a bottom at marginally higher place that we were before. And also there are indications that volatility is increasing. And particularly so we've seen on the [indiscernible] markets, where the volatility has been violent so far in Q1.

Let's move to Slide 9 and dig a little bit further into the Red Sea situation. So the straits between Yemen and Djibouti, Djibouti is very unsafe for passage. With -- at the start of this kind of conflict, or unrest, the ships that were targeted were predominantly Israel-linked. But attacks are now randomly targeting anyone, even Russian-linked fleer, which we thought were kind of safe for disruption, due to kind of Russia's support for some of the -- to some of these groups have also been targeted. So I think kind of we should categorize this as random attacks.

I'm not a political analyst, but obviously learned a lot over the last month around this conflict and the Houthi movement is also very fragmented. It's just -- it's not one uniform group. What we're understanding from the region is that they're also getting support from Somali pirates. So this is like a proper mess, I would say and creates extremely unsafe condition for seafarers and also for our assets. So Frontline is not [technical difficulty] and we'll continue on that position as long as the security situation remains as it is.

Traffic through Suez Canal is now down 40% to 50%. Some might kind of expected to be far more than that. But you need to remember also an export region. So it means that actually oil coming out of Saudi, for instance, still pass through the Suez Canal because they invoice them. This above el Mandeb straits into the Gulf of Aden.

We also see now the trade patterns are adjusting to Cape of Good Hope routing. This takes time because basically ARBs [ph] and kind of oil price differentials have been based on Suezmax. Going through the Suez Canal will need to be readjusted to basically account for VLCC volumes coming going around Cape of Good Hope. So when we see more barrels already move on the VLCC, and the product side is now kind of to a greater degree favoring the big lifters being a [indiscernible]. And for those listeners that don't know what [indiscernible] Suezmax. They're not that many of them in this world, about 19, according to Clarkson, but you can also clean up a Suezmax in order to get into this market.

Just visiting the graphs, as you look at the right hand side of this slide, you basically see on top you see oil tankers that are going around. And you see it's been a [indiscernible] rapid increase since December 2023. And you see the oil tankers in the year many, so basically, not Suez, but more specifically, the barbell among them, straits have fallen sharply since December 2023. And what this creates for the tanker industry is widening trade lanes. So basically, more oil is going around the Cape, and less oil is going to shortcut via Suez Canal.

So let's move to Slide 10, and look at the order books. I mentioned in my introduction that this has been one of the big themes, kind of over the last few months is that ordering is picking up. These -- new orders are not reflected in this slide, because we use a very cautious and conservative approach to new orders. Because in the shipping market, there are rumors on their LOI, and their options and their all sorts of kind of discussion points around new orders. So we've chose to listen to firmly to register a kind of new builds when the IMO number is issued. So that's basically what is regarded a confirmed order. So you should expect going forward that particularly on the VLCC and to some extent on the Suezmax, these orange columns to increase.

But we need to keep in mind that currently on the -- in the VLCC fleet 15% of the existing fleet is about 20 years old. We have 133 VLCCs that either are or will pass 20 years in 2024. If you also look at the generations, we're kind of moving into here, the 29 VLCCs were built in 2004, i.e. becoming 20 years. So this year, 31 VLCCs , [technical difficulty] 2005, becoming 20 years next year. The total of 60 vessels just this year, next year, are passing this 20-year threshold. If you add 2007 deliveries as well, you get to 79, or close to 80 vessels that will increase this pink negative columns in the [indiscernible] how we portray it.

Suezmax more or less the same picture, we're hitting these generations, where you have deliveries of 25, 23, 25 vessels respectively in 2004, 2005 and 2006. So you're basically up to the same numbers as the VLCCs, 73 vessels that over the next 3 years will pass this magical threshold of 20 years.

For the LR2s, that's where we kind of potentially could be worried about the order books, and actually quite a significant amount of [technical difficulty] looking to be delivered in 2025. Well, again, have a look at the left hand side of that graph, and look at -- and also consider the fact that when LR2 becomes less effective as a product carrier when it reaches the age of 15, and look at the generations we're hitting now in 2000 -- from 2008, 2009 and 2010 builds, there's actually more than 92 LR2s that will pass the 15-year threshold over the next 3 years.

Let's dig a little bit further into this because this is after all what I kind of regard a supply story rather than a demand story. [Technical difficulty] more in the period from 2004 until 2008. This kind of what we hope to be a prolonged bull market is more related to supply.

So let's move to Slide 11. And here at the top we're highlighting -- putting the highlight on the VLCC [ph]. So if you basically look at the VLCC fleet development as is expected with the current deliveries that are confirmed in the order book, we see a gradual kind of increase of the fleet up to 900 vessels or above 900 vessels. If you adjust for the vessels that are turning 20 years, you get a completely different curve. Some of you might have seen us using this chart before, here is just updated.

And then what implications does this have. So if you look at the shot on the top right hand side, you'll see average VLCC utilization. VLCC [technical difficulty] half the time, and then the others think -- the other half of the time, but then you need to deduct some more utilization for positioning, doing bunkering operations. So doing all the other stuff that you do that is not really related to the voyage and also some waiting time to load cargoes. So you get kind of close to 50-50 laden ballast ratio.

But when you look at this for the various generations of ships, you see that already from 17-year olds, the utilization of the VLCC start to diminish. Some [indiscernible] have a hard stop at 15 years. This is namely the Chinese, for instance. Others are starting to be hesitant or would rather prefer a modern ship, when they're facing a ship that’s 17, 18 or 19 years. And obviously from 20 years, you're taking away most of your clients. And this -- so even though the ships actually survive longer than 20 years, the utilization is falling.

Another interesting shot, which is more general overall for tank is looking at the left hand side and it's kind of an observation we wanted to show this time is that if you plot kind of all the orders that's been placed, look at the time from ordering until delivery, you'll see that there is a linear lucky [ph] growing trend or high -- the trend is kind of the lead times are getting longer. And specifically so from the tankers, which is the blue dotted line, in December 2020, it was on average, 1.8 years from the order was placed and when the ship was delivered. Now, we're actually closing in on three, this is a big change. And also you need to keep that in the back of your head considering the orders being placed now.

There are large order backlogs, but not so much for tankers, which the bottom right hand slide -- sorry, is showing. So basically most of the deliveries that are coming in 2024 and 2025 are related to bulkers and containers. And crude tankers is just a very small portion of the overall deliveries coming in. It's only in 2026 we can expect to see some kind of deliveries of some magnitude, looking at the crude oil tankers.

So with that, let me wrap it up before we open up for questions on Slide 12. So I think one of the highlights of our presentation for Q4 is that we delivered on the long-term financing of the $2.4 billion after the transaction we did in Q4. And mind you guys, this is probably the largest single pure tanker deal ever concluded. We've sold 5 non-ECO VLCCs and one non-ECO Suezmax as we indicated in the last quarter and [indiscernible] to refinance significant part of our fleet very competitive terms. And without really moving the needle too much on our LTVs, we're obviously being helped a little bit by the prices rising during the period as well.

And I think more importantly to you who are listening in here, we have not printed one single share. So all vessels are delivered and this doubles our VLCC footprint and increases our earning days by more than 30%. And I'd like to remind you earlier in the presentation where, Inger explained our average cash breakeven of fleet wide is $25,700 per day, every dollar above that number hits the bottom line. We have obviously a grave security situation in the Red Sea Gulf of Aden. And this seems to be adding to ton miles and [indiscernible] the larger carriers that are offering greater economies of scale basically, because they can lift higher -- larger volumes.

We are seeing increased activity in contracting for especially for Suezmax and VLCC. But it's actually so that the fleet age composition in the tanker fleet is the [indiscernible]. Otherwise [technical difficulty] short and medium term oil demand remains [indiscernible] () and non-OPEC supply is growing. And then again, Frontline scalable operational platform has digested this fleet expansion quite easily as the markets positive growing continues.

And I also think it's important to put your eyes on the bottom shot here at this summary. These are kind of the earning averages, weighted earnings averages for oil tankers quite far back. And we do expect that we are nearing or potentially already in something that resembles the 2004 to 2008 period. And at least in the numbers, although, you get kind of [indiscernible] a bit by the fact that the VLCCs underperforming, or at least not performing as prominently as they normally would do. We have actually had both 2022 and 2023 has given remarkable returns to the tanker industry. And we're looking quite okay coming in to January this year.

And with that, I will open up or ask the operator to open up for questions.

Question-and-Answer Session

[Operator Instructions] And the questions come from the line of Amit Mehrotra from Deutsche Bank. Please ask your question. Your line is open.

Q - Ben Mohr

Hi, yes. Thanks for taking our question and good morning. This has Ben Mohr on for Amit here at Deutsche Bank. Can you talk about your conviction levels around the FLCC segment now that we're 2 months into 2022? How do you see the segment for the tanker market shaping up so far? And what's your current thinking about the rest of the year?

Lars Barstad

Well, we're quite confident. But pretty short trade events is going to have a field day on this observation. But what we're observing is kind of the market is tight, it is very tight. But owners are potentially competing against each other, which we shouldn't really do in this kind of [technical difficulty]. So -- and the shockers are playing their cards extremely well. Basically just feeding the market with cargoes, and pinpointing the owner and the schedule for that ship in order to make it appear quiet. Whilst we have a significant position in this market, so we always could pick up more information on most, and we see that activity is actually very, very good. So we -- the activity is good, but for the owners to translate that into significantly higher earnings have been very, very hard.

But apart from that I use the word grind in this presentation, I do believe [technical difficulty] in the firming grind on utilization, and this is going to continue. I still think we're going to have the seasonal kind of slowdowns and seasonal upward movements, normally has to come into the summer season with refinery turnarounds and so forth. But I think it's quite kind of positive to see how quickly the VLCC market went for say, from $35,000 to $40,000 a day, going all the way up to 90 -- north of $90,000 per day. And this is for [indiscernible]. And then obviously falling back [technical difficulty] this market, when kind of the parents of certain type pockets come this market is on fire.

So I think the general -- we're only receiving one VLCC this year, and potentially 5 to 6 VLCCs next year. It's many, many, many years since we've had the [technical difficulty] supply growth and we're losing quite a few vessels to age. So I'm positive, but it's very difficult to kind of gauge, are we going to go straight into $100,000 per day market? Or are we going to grind $50,000, $60,000, $70,000, it's anybody's guess.

Ben Mohr

Great. Thanks. [Technical difficulty] follow-up. Have we seen [technical difficulty] as it relates to the ships [technical difficulty] or do you think there is more to go?

Lars Barstad

I think there is more to go. We're already seeing what normally used to be Suezmax cargoes going through [technical difficulty] being put together and put on the VLCC in a passing Cape of Good Hope. We've seen exactly the same happening in the med, kind of East med barrels that normally would go through Suez is now being put together on VLCCs. So we are actually seeing that, or expecting that VLCC utilization is going to continue to go up. And I think kind of in this slide deck, you can look at the shot where we kind of measure the amount of ships going or passing Cape of Good Hope. Yes, it has kind of plateaued and maybe potentially [indiscernible] a little bit down. But I believe this is going to just increase obviously, assuming that the situation continues to -- kind of the security level continues to be as bad as it is now in Red Sea on the Gulf of Aden.

Ben Mohr

Thank you.

Operator

Thank you. We are now going to proceed with our next question. And the question come from the line of Jonathan Chappell from Evercore. Please ask your question. Your line is open.

Jonathan Chappell

Thank you. Good afternoon. Inger, you've accomplished a lot in a short period of time, both with modernizing the fleet and then doing that financing pretty ambitiously and quickly and in a good way that you didn't change the LTV. As we think about 2024 in the market that Lars has laid out pretty detailed, the cash flow generation that's coming, is their deleveraging that you'd like to see, post this whole transaction of the 24 VLCCs and the refinancing? Or are the terms favorable enough for you that you're just happy to let it kind of amortize in any cash flow generation would then be kind of the old Frontline manner of aggressive dividends?

Inger Klemp

Yes, a you said, I mean, we are happy with that, we are deleveraging the fleet order, the [indiscernible] ordinary amortization going forward. So I mean, we are happy with this -- comfortable with this loan-to-value that we have after this refinancing. If not higher at all, it's about 53.5% something in that respect, or market values. So I think we're happy with just -- I want to say amortizing the depth going forward on a ordinary way.

Jonathan Chappell

Okay, great. And then Lars, I asked you this 3 months ago, and then you went ahead and sold 6 of your oldest vessels. How do you feel about some of the remaining older vessels in the fleet? Is there still a pretty decent arbitrage opportunity where you think you can monetize some of your older non-ECO ships [indiscernible] they maybe, and kind of help with the cash flow generation? Or do you feel like you're pretty content with the fleet and you enter this multi year period of strength?

Lars Barstad

I'd say we're pretty content the way we set out to be quite honest. It's kind of, well, you called an arbitrage it is maybe, but I think the -- there is a lot of risk in the elevated prices we're seeing on second hand tonnage. So, kind of just looking at the book values are able to kind of take out here, or the money we're able to take about book values tells us that we are at the very elevated point in the curve. So obviously, I can't exclude anything, but we are very much or pretty content now.

Jonathan Chappell

Great. Thanks, Lars. Thanks, Inger.

Lars Barstad

Thank you.

Operator

Thank you. We are now going to proceed with our next question. And the question come from the line of Greg Lewis from BTIG. Please ask your question. Your line is open.

Greg Lewis

Yes. Hey, thank you and good afternoon, everybody. And thanks for taking my question. Lars, I was hoping you could talk a little bit about the dynamics around the new build market. I mean, we saw a competitor order a couple of that, a couple of these, I want to say last week, just kind of how you're thinking about it, I mean, you kind of highlighted the outlook for the order book [indiscernible] really thereof and you laid out a bullish outlook for the next few years. I guess, at this point, how its Frontline thinking about the opportunities in the new build market?

Lars Barstad

That’s a very good question. It's still so that kind of basically due to the cost of capital and the long lead times that the delivered price is kind of a bit higher than the -- or actually significantly higher than the kind of list price that you pay. And I obviously note that one of our competitors ordering quite a few vessels recently at very, very -- or fairly high numbers historically. I think, kind of the dynamics in shipping, and this is probably what makes shipping quite fun is that when one actor gets his feet wet, and suddenly every other actor is competing to get their feet wet as well. I think kind of the new build market has been a little bit muted for the bigger sizes for a while. And it's almost like who's going to go establish the new level of Korean built and Chinese built. It's actually been quite a lot of transactions that gone through now that seemingly is happening on kind of as per [indiscernible] levels. You see China new build being done between $115 million and $120 million. And then you see Korea, which is actually for the first time in a very long time, establishing the $128 million to $130 million for conventional vessels [indiscernible]. So, we're obviously watching this, but a little bit from the sideline with a hope you [indiscernible] little bit busy in the last quarter and a half. So although we monitor this, we haven't taken an active role yet.

Greg Lewis

Okay, great. And then you mentioned that the Dark Fleet or the shadow fleet, kind of curious, realizing you see a lot more data than we do. Is there any kind of way to pick up the sub sectors in that fleet? I mean, I've heard 700 vessels in the fleet. I don't know -- I mean, I think you said that earlier in the prepared remarks. Any kind of color around, if you had the kind of best guess, what types of vessels are in that fleet? Because I think a lot of people are trying to figure out, hey, they're in that fleet and that means going forward, the efficiency or utilization of those vessels is going to be permanently constrained regardless of what happens. So any kind of use around that or what actually is in that dark shadow fleet?

Lars Barstad

I think you can just start with -- just assuming every ship above 20 years is one way or another apart from very, very few exceptions that are storage units are playing a part in the Dark or the Grey Fleet. So that doesn't add up to 700 ships, so you need to kind of move into the 17.5-year category as well. I think you have to understand that even though we do make quite a bit of money in tankers these days, we're not making this. So it means that when you have a 15-year old ship, obviously, we'll take you through class, than you need to do your 17.5-year class, then you start to think how much is this going to cost me. How many million dollars that need to put kind of in kind of trading, at least in their own fleet, or you start to look at the second hand market.

I think also the door is closing a little bit for those who've kind of been say, a bit frivolous in considering either selling the tonnage too. I kind of applaud the recent efforts by U.S authorities and how they're really now tracking down and penalizing actors that are dealing with either directly or indirectly with ships that disappear into the Dark or the Grey Fleet. Also kind of the latest regulations from EU have also kind of put the pressure on this. So -- but it's kind of identifying these ships, it's actually fairly easy, but obviously they use all the tricks in the books in order to avoid getting detected. Where we'll see the kind of end game of this is when we start to see extended scrapping. And to this day, we have not seen that.

We've seen one or two ships kind of being sold for scrap. But it's been extremely muted in that industry and that's kind of what I would look for. To say that, okay, so this market is now gradually kind of coming [indiscernible]. And also a trigger in this market would obviously be a catastrophic environmental event. We already had that actually in the Caribbean. It's obviously not been -- well not obviously, but it's maybe not been covered enough by the media. But they're nobody actually knows who the ship was or who it was owned by or whatever it was, but you just have a massive sheet of oil drifting into [indiscernible]. So -- but it's -- I think the easiest way of identifying these ships is basically [technical difficulty] a portion of the fleet that has doesn't actually have normally the ticket to trade anymore, which is plenty threshold.

Greg Lewis

Okay, super helpful. Thank you for the time, everybody.

Lars Barstad

Thank you.

Operator

[Operator Instructions] We are now going to proceed with our next question. And the question come from the line of Sam Bland from J.P. Morgan. Please ask your question. Your line is open.

Sam Bland

Thanks for taking the question. First one is we look at the order book on Slide 10, and it looks very high for the LR2s, 22%. Do you tend to look at that number, just for the LR2s? Or do you somehow wrap it in with sort of crude Aframax and get one order book across the two of them, given that you can -- I guess, you can try to [indiscernible]. What's the best way you think of looking at it?

Lars Barstad

Well, that’s a good question, Sam. We've actually been if you follow our presentations over some years, we've actually been a little bit kind of confused ourselves of how we're going to do that. The thing is that the Aframax order book for like non-coated kind of tankers is extremely limited, almost negligible. So -- and since the LR2 is kind of what we're trading. We've just decided to focus on it. But I mentioned that 15-year kind of -- [indiscernible] not the limit. But charters tend to not prefer a more than 15-year old ship, because it's the precious cargo, and the quality of coating will actually be reduced -- the quality of the coating will reduce over the years. So the way I think about this is that kind of this vessels leaving the LR2 fleet, they become Aframax. So that's the Aframax fleet growth for you kind of you can almost say, and I love to that's passing 17 years is for sure, not trading clean anymore, or at least in most cases. So, that's also kind of why we've just focused on the LR2s. The Aframax fleet is obviously large and there's a lot of various levels of quality there and various levels of trade they're engaged in. We tend to focus on the LR2s, there's a bit north of the 300 LR2s, and then we roll the monitor [ph] [indiscernible] who are kind of trading clean on trading dirty. And right now, at least the last intelligence I saw were about, of that 300 plus fleet, we're at least up in 80% trading fleet in this place.

Sam Bland

Okay. And so the other one was, you made a comment earlier in the presentation around how rates sort of around Red Sea locations may have some sort of -- I'm not sure you phrase it, like some kind of reset needed to kind of reflect the new trading patterns and roots. Is it like some of the disruption linked to the Red Sea, some hasn't, it hasn't caught up in rates yet.

Lars Barstad

Yes, it's -- no, no, it's -- you're absolutely right, I was probably not clear. But the thing is that when you retrade and your booking of cargoes going forward, killing your shorts or lifting along so whatever you do. It's -- obviously everything is quite a few days forward, if not months. And then suddenly, you need to adjust to the fact that you can't pass through the Suez Canal, and your freight costs will increase. So basically, freight costs will suddenly shock the arm. So oil will stay in the West, or stay in the East, because the cost element is not accounted for, in whatever kind of structure you have set up kind of on the trading side. So that takes a little bit of time before it comes together.

And also you have to some extent, logistical constraints, because obviously it's easy to take the VLCC [indiscernible] to early Europe, but which port are you going to discharge the barrels into. Then you need to start to think that, well, I have a VLCC now, not a Suezmax. The Suezmax is far more nimble and easier to place in as far more options on the port side. And the same goes for clean. Although, kind of you would love to fill up the Suezmax with a product, well, you can't really discharge that say into Rotterdam, because the birth doesn't fit a Suezmax. So that's just an example. That's -- so all these things take time before you [technical difficulty] kind of pursue it. So I think the initial movement, which is so on the clean side where the red rocketed was basically the renowned ships coming from left to East because the trading was constrained basically, on this long art. And as some of you were empty with ships in the Middle East region and you had to price for freight at a price to level where ships would actually go empty from Europe to the Middle East. And -- but obviously, we see now that that's now kind of normalized and corrected, I think. And this is just me thinking, I’ve limited visibility to the trading books of the various kind of majors and traders. But what we at least looks like is that we see these stems now being collected and put together. Product moving from the East to the West, and from the West to the East, in larger bulk.

Sam Bland

And that will tend to mean that the sort of you get a little bit more strength in the larger ship.

Lars Barstad

Yes.

Sam Bland

That's the implication.

Lars Barstad

Yes.

Sam Bland

Okay. Understood. Thank you.

Lars Barstad

Okay. Thank you, Sam.

Operator

Thank you. We have no further questions at this time. I will now hand back to you to closing remarks. Thank you.

Lars Barstad

Thank you very much for dialing in. And it's an exciting market we're in, maybe too exciting times. But, again, I would like to highlight that I think we are in a grind, a gradual grind going in the right direction. And there are kind of -- signs in the [indiscernible] that will have volatility going forward. So with that, thank you very much.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.