Frontline Plc (FRO) 2004 Q2 法說會逐字稿

I welcome you to Frontline's Webcast today, August 19. With me today I have Oscar Spieler, CEO of Frontline management, and Oscar and I will both do part of the presentations, which you should have downloaded already.

The agenda today will be a basic introduction of where we stand with the Company, the fleet size etc. Then they will go through the latest news from the Company on the partial spinoff of Ship Finance and corporate financial status and market update, before we sort of round off with a question-and-answer session.

Please note that in addition to Frontline's Webcast, there will be a separate Webcast for Ship Finance in about an hour's time. For practical reasons, the Ship Finance Webcast will be shorter than this one. We will not do the market part of the presentation more than once today. So with that, I leave a word for Oscar.

Good afternoon. Good morning to everybody. Let me go to the fleet development. We are operating today at 34 (ph) VLCCs, including two JVs, equalized to 33.9 vessels. We have done in third quarter two newbuildings, a reserve (ph) contract with delivery in 2006. We operate 19 Suezmaxes and eight OBOs, which is trading and dry (ph). In addition, we also have two Capesize.

The oldest vessel is from 1989. The reason behind that is that we have bought three vessels from Denmark, which the oldest vessel is from 1989. Average age is 8.4 years compared to industry average 8.3 with a double-hull tonnage percentage of 70 percent.

Going over to the next slide, the main events for Q2 and Q3 have been (indiscernible) allowed $5 per share in Q1, in addition to the partial spinoff of Ship Finance. As I said earlier, we have done a reserve contract for the delivery of two VLCCs in 2006, for a total price of $158.5 million.

Also as I mentioned, three Genmar vessels we did under this quarter. And in addition, we have up placed 25.2 million in new equity in Ship Finance and (indiscernible) 21.95 in Frontline in July. We have also been able to cancel the (indiscernible) for the New Vanguard and Vista, which will be leading to higher (indiscernible) to earnings for those two vessels from now on.

Going over to the next page, we are, in this quarter or second quarter, (indiscernible) for 10 percentage of the shares in the Ship Finance to Frontline's shareholders. It means you will get one share for every 10 shares in Frontline, approximately, or that will equalize to $1.6 additional dividend from Frontline. The dividend from Frontline will be $1.6 per share. Then I will leave the word to Tom and I will come back with more later.

Thank you. We are now on slide 6, the profit and loss accounts. Basically, as explained last quarter, BSC has told shipping companies to present operating revenues on a gross basis -- that is, including income to cover voyage expenses. So therefore, you will see operating revenues are slightly grossed up compared to what they used to be. However, on one of the next slides, we will also show you everything calculated on the regular time charter equivalent basis.

Total operating revenues of $357 million. We had an operating income, or EBIT, of $183 million. Adding back depreciation of 45 brings us to EBITDA of $229 million. I will get back to the different operational cost levels in the next few slides. So just briefly on the finance side, interest income substantially up from what it used to be in Frontline, which is of course due to us consolidating Independent Tankers Corporation, or ITC. ITC has approximately $300 million in cash deposits that have been placed on long-term interest-bearing accounts. Incidentally, the ITC balance sheet is in the back of the presentation, in the appendixes.

Also interest expense is up substantially from what it used to be, let's say a year ago. And this, of course, in addition to consolidating ITC, it is also due to the fact that we have geared up in Frontline or Ship Finance by issuing the high yield bonds, and also that combined with the bank facility has increased the debt level in, let's say, the core Frontline.

Share results from associated companies is substantially down. Actually, it's only one vessel left that is accounted for this way. I guess this time last year it was probably something like 10 or 11 vessels. Other financial items, positive in the second quarter, $25 million, mostly due to a mark-to-market of interest rate swaps. As you know, a five-year swap basically increased from 3.1, 3.2 percent around end of March this year up to 4.1, 4.2 percent at the end of the second quarter.

Then we have foreign currency gain posted of $6 million in the quarter, which is due to us keeping an exposure against Japanese yen. It used to be in the form of loans. Now all the loans are in U.S. dollars but we have certain forward contracts for yen, which led to a positive posting in the second quarter due to the yen weakening from 1.05 against the dollar to 1.08.

So after minority interest of 4.5 million, we end up with a net income of $169 million, $2.29 per share. And as Oscar said, we are paying out $1.60 in cash dividend in addition to the 1-for-10 shares Ship Finance handout of shares.

Briefly on 2004 -- excuse me, on the six-month 2004, net income of $383 million, EPS of $5.20 and again, a cash dividend of $6.60.

Just a little bit on the profit sharing scheme that we have with Ship Finance. As long as Ship Finance is consolidated, that is we hold more than 50 percent, the profit sharing will be eliminated. Frontline has traded its vessels that are rented from Ship Finance in such a way during the first six months that if the profit split had to be paid today, it would be in the amount of $40 million. And so actually, the only thing you then see in the P&L here is really under minority interest, where $1.25 million out of this 40 mentioned is in the accounts.

Moving on to slide 7, income time charter basis, we posted $58,500 per day for VLCCs. This is split between VLCCs and spot market, which is most of the vessels, and a few vessels that we have either on TCE or (indiscernible) contracts.

Then we have the Suezmaxes, where we posted $36,700 and the Suezmax OBOs that were $27,000 per day. The OBOs, all eight are on time charter contracts. Some of them are being rolled over during the third quarter, so you should see in the third quarter a slight increase, close to $30,000 per day, for that segment. The Suezmax segment, the regular ones, that is, on the other hand, all vessels are in the spot market, so that will naturally fluctuate that way. So far in the third quarter, we have fixed 75 percent of the VLCC capacity at average earnings of $62,000 per day. And the Suezmaxes have been fixed at 65 percent of capacity at $38,000 per day.

Moving on to slide 8, ship operating expenses. As you can see the operating expense level is steady at 5,700, $5,800 for the total fleet. Off-hire days during the first six months was 132 days, compared to the full year last year of 303. Also the slide at the bottom shows you that we will be taking out four vessels -- or expect to take our four vessels during the third quarter for drydocking, and in the fourth quarter there will be another three vessels.

Moving on to slide 9, total expenses. Again the top line there, voyage expenses, is basically covered by the charters sort of back-to-back. Ship operating expenses we just went through on the previous slide. Charter hire expenses has now boiled down again to only four vessels, which we are renting from German KGs or limited partnerships, and that's what we expect to be on that line going forward.

The last line, administrative expenses, posted 5.2 million in the second quarter or 11.4 so far this year. Included in the six-month figure is $4.2 million which is related to the employee share option program. All share options have been exercised, so there is no more of that type of expense to come, at least for the time being. So basically, subtracting the 4.2 million that was related to the stock option program, you end up with approximately going rate of $3.5 million per quarter in general and administration, which we think is very competitive to other shipping companies.

Moving on to the next slide, slide 10, the balance sheet. You see that we had cash and cash equivalents at the end of June of $112 million. That is free cash. Some of you may think that is low, but please keep in mind that just 14 days before that, we paid out $370 million in dividends to shareholders.

Further down on the liability side, you see that the short-term interest-bearing debt and current portion of obligations under capital leases sums up to approximately $205 million. That compares to the going depreciation rate of $180 million per year. So as a rule of thumb, we feel comfortable with that level of repayment.

If you look at the second to last line, you see stockholders' equity is standing at $786 million. That is down from more than $1.25 billion at year-end last year, that is, of course. Of course, that is explained by the fact that during the period, we paid out $9.50 in dividends, equal to $700 million. And in addition to that, we have spun off 25 percent of Ship Finance, which has a book effect of almost $170 million.

Slide 11 shows you the interest exposure and the foreign exchange exposure. As mentioned earlier, we have a number of forward contracts in yen totaling $156 million. After all, that is no more than 5 percent of the total debt portfolio. But still, we felt that through the years it has been appropriate to have such an exposure.

Floating-rate debt stands at $458 million. That is substantially down from it what used to be in Frontline. This is partly due to the fact that we have put vessels under long-term contracts with German KGs. It's due to the high-yield bond that we issued in December last year of $580 million. And finally, it is also due to the agreement on the big banking facility was that were to hedge another $500 million on five-year swaps. So all this has led to us currently only having 15 (ph) percent of the total debt portfolio is floating-rate exposed.

My next slide is slide 12, which shows you the breakeven rates, both before spinoff of Ship Finance and what it will be at the minute when we go below 50 percent. And as you can see we will basically have an increase of $4000 to $5000 per segment, except for the dry boats, that will go down during the spinoff.

What is Frontline now? Slide 13. Pretty much the same as last time. We got -- ITC (indiscernible) got the 47 vessels on the contract Ship Finance. The Ship Finance investment will be reduced by this next round of dividending down to 63.4 percent. We have 18 other vessels. As mentioned in the quarterly report, we plan to -- out of the 18 vessels, 12 vessels are hired in from German KGs under capital leases. And in all of those 12 contracts we have options to buy back the vessels. And two of those vessels are now, let's say, well in the money and seem to be increasingly interesting to consider either renegotiating or simply buying the vessel and then trying to refinance it. And of course, one of the most interesting options then would be to put the vessel into Ship Finance and then rent them back to Frontline. By doing it that way, Frontline should be able to get the lower charter rate and/or release cash from such a transaction.

Finally we have free cash in the Company which stood at $113 million at the end of June, but keep in mind that we are basically making between 2 and $2.5 million on the bottom line every day.

Going forward, which will be my last slide this time, we have also announced today that we intend to spin off the drybulk assets. That is not a big transaction. What we're talking about is basically three drybulk vessels that we have. Total equity in those is probably something like $50 million. In addition to that, there's contracts. We have chartered in other vessels and also chartered them out again, sort of back-to-back with a profits. And so basically, this Company should expect to be making profitable from the first day of operation.

We intend to try to create a drybulk company which will try to grow pretty much the same way that Frontline has grown throughout the years, realizing that that may be more difficult now that many people are on a buying spree, while when Frontline was growing back in '96 up to 2001, we were basically all alone in the industry doing this. We plan to come out with more detailed information on this during the next few months.

We also hold 20 percent in the International Maritime Exchange, which is a paper-based trading exchange. Imarex really started to make nice money now. We're going to leave it to the company to announce how much, but we see this as an interesting asset for Frontline, which could be either sold, or for that matter, just spun off to the shareholders and thereby having Imarex becoming listed.

I mentioned the next point, and my final point is really when Frontline -- before Ship Finance spinoff, Frontline was very keen on saying that we were only involved in modern vessels. With the latest acquisition of three vessels from Genmar, which incidentally is modern single-hull Suezmax tankers, we have probably shown you that we are willing to take a little bit more opportunistic approach to investing in the tanker business.

And then finally, I should mention that the Board has confirmed in its announcement today that the Ship Finance spinoff, that is a complete 100 percent spinoff, is still very much a commitment from the Board's side.

So with that, I leave the word again to Oscar to do the market slides.

Thank you, Tom. If you look at the short-term market outlook, all fundamentals are pointing in the right direction, more or less. We see that we are going into a season now where historically the demand is approximately 3.3 million barrels per day higher than in Q2. We see increased (indiscernible) situation due to decreasing production in Venezuela, North Sea, Alaska and so on. And the IEA are upgrading their forecasts for 2004 to 3.2 -- for 2005 off the (ph) 2.2 percent.

And another thing we saw today is that the stocks in the U.S. are going down. And that means that even though we have a very, very high production, the stock bidding has been extremely low during the last year, meaning that most of the production is going directly to consumption.

Going over to the next slide, since last time, there has not been any major change in the order book and we are not very scared about the system outlook (ph) since most of the growth in oil demand we could haul from Middle East and be transported on VLCCs and Suezmaxes. In 2005, it is estimated that approximately 70 Suezmaxes and 90 VLCCs will be phased out due to IMO rules.

Going over to the next slide and going a bit back into the Tomar (ph) situation, certain analysts have done calculations on if you have a growth of energy of 3.2 percent in 2004, that will lead to increased Tomar of 7.5 percent in 2004, due to the fact that 40 to 45 percent of all crude products is seaborne, and as I said earlier, most of the increased production is going out from the Middle East and will be seaborne. And as I said also, this closed production (ph) is replaced with long-distance crude. In addition to that, we also have seen quite a lot of congestions during last few years in certain places (ph), which I will come back to.

Going over to slide number 18, that is showing growth -- showing the oil consumption per capita as a product of GDP. And as you see, U.S. have approximately 25 percent higher consumptions than China. And as you look, the growth of oil consumption is exponential in the first 5000 -- in the lower end of the graph, meaning that it should be very, very little growth in GDP before we see a quite high increase in oil consumption in China and in India and the surrounding countries. If you only take increase in China and India of two barrels per capita, that means an increased consumption of 12.6 million barrels per day in consumption.

And if you also go back and look at the development in Japan and Korea in the '60s and '70s, we saw that the GDP was very exponential early in the stage.

Going over to the next page, I made a slide comparing the seaborne capacity, the required to seaborne capacity, which is the yellow one, and the fleet growth, which is the blue one. The assumption here is that 46 percent of the global oil production is seaborne and the 8 percent decrease in oil production is seaborne up to 2004 and 95 percent up to 2011. We have assumed an increase of 1.9 percent oil production from 2005 and 2011. And as you see, since 2001, the fleet growth has not followed the required (indiscernible) tonnage, which can explain the existing market and the market of the few last years. And there will still be a gap out to 2007 before these two are more balanced. This means that we are fairly positive for 2005 and 2006. And of course from 2006 and onwards, it is very much up to the players in the market, how they treat the order book and so on.

I will show you some -- if you go over to the next slide, we will have an effect in 2011 -- there will be a phaseout of the single-hull tankers provided that all companies are ratifying the IMO rules. And there are rumors that countries like the U.S. and Japan are considering whether they will ratify it or not. And if they accept it, there will be a life for single-hull tonnage after 2010.

Another uncertainty is how are the owners going to react on this phaseout? Will they start to order vessels for delivery in 2008, 2009, and 2010? Then we can expect overcapacity of tonnage in that period. And if they wait until delivery for 2010, there will be new (indiscernible) at that time. But time will show.

And going over to the next slide, I have shown this several times before. And there is a very strong link between the OPEC output and the tanker market. And as we see today, the OPEC output is very high, explaining the tonnage. And going into the heating season and the high consumption, we will expect a quite interesting few coming months, up until new year and after new year.

Going over to the next slide, we will -- that slide is showing the correlation between the waiting time in Bosporus and the Suezmax rates. And as you can see, in the few last years, it has been a very, very close correlation there, and we expect that waiting time will be back in coming months. There was a forecast from the agent that they expect the five days' waiting time in and five days' waiting time out in September, increasing to 10 days in and 10 days out in December, which hopefully will lead to good rates.

So what can go wrong? Of course, the oil price may cool down the (indiscernible). We do not know. There can be a lack of oil supply, and thirdly there might be a (indiscernible) or terror attack or something like that. That's what we can see as threats today. Thank you very much, and then I think we will just --

Okay, operator, we're done, so we can take the Q&A session please.

Magnus Fyhr, Jefferies & Company.

Congratulations to a great quarter. Just a couple of questions maybe related to the profit-sharing and Ship Finance. Can you maybe update us on that a little bit? I know you had some discussion there with the auditors on how to recognize that, and I don't know if there's been any changes here recently.

Basically, what the auditors have claimed is that as long as the profit-share is not realized one way or another, then none of the two companies should be booking any income or expense, depending on which party. What we at least managed to tell them or convince them about this time is that we could actually lay up all of the vessels from July 1 and for the second half of the year, and still Frontline would have to pay a profit split. And that is really the reason for us posting 5 million out of the 40 million, which is the true calculation of the story. But 5 million has been posted in the accounts this quarter. But then again, you get into the complications of consolidation, where even 5 million disappears because we own 75 percent of Ship Finance.

Going forward, it is quite obvious that in the third quarter, there will be a substantial expense, and of course, as we spin off more and more of a company, there will be a larger and larger minority, and all of a sudden it will be a complete expense, if you understand.

And this annual profit-sharing, is that going to be recognized first quarter?

No. The annual profit-sharing will be recognized at the latest in the fourth quarter, and it is payable early March.

Very good. And just one more question relating to this drybulk company. Where do you see that, if it is spun off to shareholders, where do you see that listing? Would that be similar to Ship Finance, where you would list that here in the U.S.?

No. I think in all fairness, as it stands today, it is too small to be an interest for U.S. listing. We're talking about initial equity of $50 million. Of course, we would hope to get some of the ship bonus to put in some stuff and we could provide them with a reasonably broad shareholder base. But our plan was to initially put it on the Oslo Stock Exchange. But this is very much on the drawing board still, so if you have any good thoughts, please give us a call about them.

All right. Thank you.

(OPERATOR INSTRUCTIONS) (indiscernible).

Good quarter. I just want to ask a few questions about the dividend policy going forward. So the payout ratio is a bit less than 100 percent this quarter -- it was about 80 percent, based on some catch-up from the higher dividend paid in the first quarter. Going forward, can we expect basically 100 percent payout? Also, as you do add ships, will you use cash, which would eat into the dividend -- ability to pay dividends.

I think basically you should assume that we are going to have close to 100 percent dividend payout ratio. To the extent that we buy a vessel or get into projects where we don't issue new shares, then of course we will have to hold back some of the investment. But interestingly enough when they did these three vessels that we acquired from General Maritime, we issued shares at the same time, which we feel is a pretty accretive way of doing business for the shareholders. The reason for that is that our shares are priced above NAV, which in a way you can say gives the shareholders an access to an even cheaper price on such vessels.

Okay, thank you.

There seem to be no more questions.

Okay, that's great. Either we were pretty good or people are sleeping, but --

Just one moment, please. This is (multiple speakers) JP Morgan.

Not letting you off that early. I want to ask a question about the oil price situation. Clearly in this mid $40 range WTI I consider it kind of a sweet spot whereas OPEC is economically incentivized and also under political pressure to produce as much as they possibly can. But if it continues to rise based on speculative nature and it gets to the $50, maybe $60 level, is there a concern that the impact of that high oil prices could impact the demand elasticity maybe in some of the developing countries like China and India?

That is just plain macroeconomics. It should have an impact, shouldn't it? Of course the best thing for us would be that OPEC was able to put out even more production or barrels so that we could keep the price down and demand up. So this is just a classical cyclical situation where we all need to keep our eyes open, so to say.

But has it really had an impact yet? On its run from, say, low 30s to high 40s, have you seen any many demand slowing in the Chinas or Indias of the world because of this latest run?

No, actually as Oscar said on the contrary as he showed in one of his slides, normally you would have a drop from the first quarter to the second quarter and then you should have a substantial increase after that. But there really hasn't been a drop in the first quarter. Excuse me, there hasn't been a drop from first to second quarter. There has been a slight increase, which is very unseasonal. So it has basically been steady in the third quarter and we still expect the strong increase during the fall. So it definitely does not look like a setback. And in a way what I think is going to be more the case is not going from let's say 8 to 12 percent growth in China down to negative, it's probably going to be more question of going let's say from 12 to 6 percent, and in that case we would still see an increase in demand for transportation.

Okay, and one more question, and I'm sure if or how you can could answer this one, but the purchase of the Genmar ships I think is a pretty bullish sign if you are going to add single-hull tonnage at this point, and I think most of your presentation is extremely bullish. One of the things that has seemed to give some pause to the stock price, although it has been reversed of late, was this filing by Mr. Fredriksen about the possible sale of his stake. What was the impetus for that filing? Is there a possibility that John would sell a significant amount or would he want to keep control, given your bullish stance on where the tanker market should be at least over the near-term.

I guess first of all Oscar and I work for Frontline and not for John, so obviously we can't answer for him. When I can say is that the F-3 was originally filed with the SEC back in July 2001, which you can see on the EDGAR system. For some weird reason it was not called the effective by the company after being approved by the SEC. And so what we really are doing now is simply restating a previously filed document.

Having said that, John holds 48 percent of the Company and I think it would be obviously anybody who knows anything about portfolio theory would say it would be a good thing for him to try to sell down over time. And from the Company's perspective we currently have approximately 52 percent of share capital that is available in the market liquidity-wise. And for the Company it probably would be a good thing if that was increased, that 52 percentage points. So that is really all I can say. Obviously Mr. Fredriksen should speak for himself on that matter.

Right. Okay, thanks a lot, Tom.

Magnus Fyhr of Jefferies & Co.

This is Magnus again. Since you had so few question I figured I would ask a couple more. One for Oscar maybe, maybe a rephrase of a previous question. There was some noise, some concern on growth in China and the government were taking action to slow down economic growth somewhat. Has there been any specific sign of that in chartering activity? I would not think so, but have you seen any changes in chartering activity out of China in the last three to four months?

Not really, we have not seen any change in trading pattern and so on , so negative.

Very good, thank you.

Mrs. Boyden (ph) from Citadel (ph).

I just wanted to follow up on something Tom had mentioned regarding seasonality. As you said, this year we have really not seen a lot of that. Given the strength of demand that we're seeing and that you are pretty bullish going forward in '05 and '06, do we think this is a trend that would probably continue into '05 or do you think that perhaps this year was an anomaly?

If you look at the demand, it is more or less as we said in first quarter, i.e. are generally underestimating the growth in up-filling (ph) economy. And they have been upgrading their oil production constantly now, both for 2004 and 2005. So we believe that this demand will continue, and as the order book -- the newbuilding order more or less fills and there are no spare capacity, the scene is more or less set, so up to 2007.

Okay, great. Thank you very much.

That was the last question on the question-and-answer list.

Okay, ladies and gentlemen. Thank you for listening in. If you have other questions, you can feel free to call over the next few days. We will be happy to help you. And have a good day.