Executive Summary / Key Takeaways

• Strategic Positioning for a Compliant Bull Market: Frontline plc ($FRO) is strategically positioned to benefit from a tightening compliant tanker market, driven by widening sanctions, muted fleet growth, and increasing demand for long-haul oil transportation from compliant sources. The company's modern, spot-exposed fleet, comprising VLCCs, Suezmax, and LR2/Aframax tankers, is designed to capture upside in this evolving landscape.
• Robust Financial Health and Shareholder Returns: Frontline maintains a solid balance sheet with strong liquidity of $844 million as of June 30, 2025, and no meaningful debt maturities until 2030. Recent refinancing efforts have reduced borrowing costs, and the company's commitment to returning capital to shareholders through dividends underscores its financial discipline.
• Technological Edge with ECO Vessels and Scrubbers: Frontline's 100% ECO fleet, with 55% scrubber-fitted vessels, provides a significant competitive advantage through enhanced fuel efficiency and the ability to utilize cheaper, high-sulfur fuel oil, leading to superior earnings potential and reduced operating costs.
• Favorable Supply-Demand Dynamics: The global tanker fleet is aging, and newbuilding orders are at historically low levels, with deliveries extending to 2028. This supply constraint, coupled with growing global oil demand and shifting trade patterns towards longer voyages, creates a compelling backdrop for sustained strong freight rates.
• Geopolitical Tailwinds and Risks: While global conflicts and trade policies introduce volatility, they are also driving a re-routing of oil flows that favors compliant, long-haul shipping. However, the "parallel tanker market" and challenges in scrapping sanctioned vessels remain key risks to monitor.

Frontline's Strategic Foundation: Riding the Waves of Global Oil Trade

Frontline plc, established in 1985 and headquartered in Limassol, Cyprus, has long been a prominent player in the global seaborne transportation of crude oil and refined petroleum products. The company's core business revolves around the ownership and operation of a substantial fleet of Very Large Crude Carriers (VLCCs), Suezmax tankers, and LR2/Aframax tankers. As of December 31, 2024, Frontline operated 81 vessels, a fleet that by Q2 2025 consisted of 41 VLCCs, 21 Suezmax tankers, and 18 LR2/Aframax tankers, maintaining a modern average age of approximately 7 years.

Frontline's overarching strategy is to maintain a modern, spot-exposed fleet, positioning itself to capitalize on market upturns. This approach is rooted in the conviction that the tanker market is entering a period of sustained strength, driven by fundamental supply-demand imbalances and evolving geopolitical landscapes. The company's disciplined capital allocation prioritizes returning value to shareholders through dividends, rather than committing to newbuilding orders at current elevated prices, which would require consistently high daily rates for a reasonable return.

Competitive Landscape and Technological Edge

Frontline operates in a highly competitive global market, vying with other major tanker operators such as Teekay Tankers Ltd. (TNK), Scorpio Tankers Inc. (STNG), Euronav NV (EURN), and DHT Holdings Inc. (DHT). Frontline's large fleet size and global network provide a significant qualitative advantage in operational efficiency and customer loyalty, potentially leading to stronger margins and more robust growth through reliable service delivery. For example, Frontline's extensive global presence allows it to access diverse routes, enhancing its pricing power and market share in key regions, which can be a differentiator against competitors like Teekay Tankers, known for its operational agility in short-term market shifts.

Frontline's fleet is 100% ECO-compliant, with 55% of its vessels fitted with exhaust gas cleaning systems (scrubbers). This technological differentiation offers tangible benefits. ECO vessels are inherently more fuel-efficient, reducing operational costs and environmental impact. The scrubber-fitted vessels allow Frontline to burn cheaper, high-sulfur fuel oil (HSFO) while complying with IMO 2020 regulations, which limit sulfur content in marine fuels. This creates a significant earnings premium; in 2022, scrubber-equipped ECO VLCCs saw a $24,200/day earnings premium over non-ECO vessels, with Suezmaxes and LR2 tankers also benefiting from substantial premiums. This ability to leverage fuel price differentials directly enhances profitability and provides a competitive moat, particularly against rivals with less technologically advanced fleets. While some competitors like Scorpio Tankers focus heavily on eco-friendly vessels, Frontline's balanced approach across crude and product tankers, combined with its ECO and scrubber technology, provides a broad market appeal and cost advantage.

Industry Dynamics: A Constrained Supply and Shifting Demand

The broader tanker industry is characterized by an aging global fleet and a historically low order book. The conventional tanker fleet (VLCC, Suezmax, Aframax) stopped growing in 2022, leading to negative fleet growth in the compliant market for nearly three years. Newbuilding orders placed today typically face delivery times extending to 2028, as shipyards are heavily booked with orders for container ships and other vessel types, showing no urgency to discount tankers. This supply constraint is a critical tailwind for existing fleet owners like Frontline.

Global oil demand continues to grow, with the EIA projecting consumption to reach 105.4 million barrels per day by December, up from 101.5 million barrels in January. This demand growth, coupled with increasing compliant oil exports from regions like the U.S., Brazil, and Guyana, is lengthening trade routes. Notably, India's increased presence in the Middle East market has driven up prices, making U.S. crude barrels more competitive for Asian buyers. This shift is expected to result in a significant increase in U.S. Gulf fixtures for September, potentially boosting freight demand by approximately 6% without even accounting for ton-mile increases.

Financial Performance Reflecting Strategic Execution

Frontline's financial performance in recent quarters reflects the dynamic market environment and its strategic focus on the spot market. In the second quarter of 2025, Frontline reported an adjusted profit of $80.4 million, or $0.36 per share, a $40 million increase from the previous quarter. This improvement was primarily driven by higher Time Charter Equivalent (TCE) earnings, which rose from $241 million in Q1 2025 to $283 million in Q2 2025. Daily TCE rates in Q2 2025 were $43,100 for VLCCs, $38,900 for Suezmax tankers, and $29,300 for LR2/Aframax tankers.

While Q2 2025 TCE rates were "somewhat short of expectations," the sequential increase demonstrates the company's ability to capture improving market conditions. This contrasts with Q1 2025, where adjusted profit decreased by $4.7 million due to lower TCE rates, with VLCCs at $37,200/day, Suezmax at $31,200/day, and LR2/Aframax at $22,300/day. The fourth quarter of 2024 also saw a decrease in adjusted profit by approximately $30 million compared to the prior quarter, largely due to lower TCE earnings, though partially offset by reduced expenses.

Frontline maintains a robust financial position, reporting strong liquidity of $844 million in cash and cash equivalents as of June 30, 2025. The company has no meaningful debt maturities until 2030 and no newbuilding commitments, providing significant financial flexibility. A key refinancing of 2024 VLCCs in Q1 2025 reduced interest margins from approximately 200 basis points to 170 basis points, further strengthening the balance sheet.

The company's average cash breakeven rates for the next 12 months are estimated at $28,700 per day for VLCCs, $22,900 per day for Suezmax, and $22,900 per day for LR2 tankers, with a fleet average of approximately $25,900 per day, including drydock costs. This indicates a healthy margin above operating costs, even at current rate levels.

Outlook and Guidance: A Compliant Bull Market on the Horizon

Frontline's management expresses a strong conviction in an emerging "compliant bull market." The CEO, Lars Barstad, believes that "Shipping and tankers from our vantage point is still in the eye of the storm in relation to global conflict and trade policies," but sees "the contours of change" favoring the compliant fleet. This outlook is supported by several factors:

• Q3 2025 Guidance: Frontline has already booked a significant portion of its Q3 2025 days, with 82% of VLCC days at $38,700 per day, 76% of Suezmax days at $37,200 per day, and 73% of LR2/Aframax days at $36,600 per day. This provides a degree of revenue visibility for the near term.
• Growing Compliant Demand: Global oil demand growth is now surpassing what sanctioned molecules can satisfy, meaning incremental supply will increasingly come from compliant sources, benefiting Frontline's fleet.
• Lengthening Trade Lanes: Shifts in trade policy, particularly India and China balancing feedstock exposure due to U.S. pressure, are leading to more long-haul voyages. The pricing of Atlantic Basin oil for eastbound delivery to Asia is a significant driver of increased ton-mile demand.
• Muted Fleet Growth: With the tanker market effectively sold out for newbuilds until 2028 and a significant portion of the existing global fleet either aging or sanctioned, the effective supply of compliant tonnage is shrinking. This creates a favorable supply-demand dynamic for freight rates.
• Cash Generation Potential: Frontline projects a substantial cash generation potential of $648 million, or $2.91 per share, based on current fleet and TCE rates as of August 28, 2025. A 30% increase from current spot market rates could boost this potential by approximately 64%. Analysts project Frontline to earn $2.23 per share for the fiscal year ending December 2025, representing a year-over-year change of 25.3%.

Management acknowledges the historical volatility and an "artificial ceiling" around $50,000 per day for VLCCs, partly attributed to short-term traders. However, recent market behavior, where rates found support despite charterer efforts to push them down, suggests a potential for a higher floor. The CEO believes that "maybe it can be the norm of a proper VLCC market over the next 6 months."

Risks and Challenges

Despite the optimistic outlook, Frontline faces several pertinent risks. Geopolitical conflicts and trade policies remain a significant source of market volatility, with Lars Barstad noting the industry is "still in the eye of the storm." The existence of an "ever-increasing parallel tanker market" that operates outside conventional regulations continues to "steal margins from the law-abiding citizens of the tanker trade."

A critical challenge highlighted by management is the "clog in the recycling world" for sanctioned vessels. The recycling industry's reliance on dollar transactions and KYC requirements means it cannot easily purchase vessels from sanctioned entities. This could lead to a growing fleet of older, non-compliant vessels becoming "floating environmental bumps" if a mechanism for their responsible recycling is not established.

U.S. tariff pressures, particularly on key trading partners like India, could also influence crude sourcing decisions and trade volumes. While Frontline's modern fleet and strong balance sheet provide resilience, the company's spot-market exposure means it remains sensitive to sudden shifts in freight rates and global oil demand. Investor sentiment, as noted by the CEO, has shifted, with investors now demanding "proof in the pudding" before pricing in future expectations, contributing to a discount to NAV and higher short interest.

Conclusion

Frontline plc stands at a pivotal juncture, poised to capitalize on a fundamentally shifting tanker market. Its core investment thesis is firmly rooted in its modern, technologically advanced fleet, robust financial health, and strategic focus on the compliant oil trade. The company's 100% ECO and 55% scrubber-fitted vessels offer a distinct competitive advantage in fuel efficiency and operational flexibility, translating directly into enhanced profitability and market access.

While geopolitical complexities and the persistent "parallel tanker market" present ongoing risks, the broader industry trends—an aging global fleet, a constrained newbuilding order book, and growing demand for compliant, long-haul oil transportation—create a compelling backdrop for sustained strength in freight rates. Frontline's strong liquidity, minimal debt maturities, and commitment to shareholder returns underscore its resilience and disciplined approach. As global trade policies continue to evolve and demand for compliant tonnage intensifies, Frontline's strategic positioning and operational excellence make it a compelling consideration for discerning investors seeking exposure to the long-term upside in the tanker sector.