Frontline Plc (FRO) 2005 Q1 法說會逐字稿

Hello, this is Oscar Spieler from Frontline LLC. I am the CEO and with me I have Tom Jebsen, the CFO of Frontline. And I will start on slide number one.

The market has been lower than we predicted; however, the number for our vessels have generally been better in Q1 2005 compared to 2004. This result has been achieved in spite of that we have not had any events like (indiscernible) investors, hurricanes or (indiscernible). It helps that the market is fairly balanced.

The bottom line for Q1 is better than for Q1 in 2004 and it is $280 million.

Going over to slide number two. Here in the presentation we will go through the main events for Q1 and Q2; corporate financial status. Then I will go over to the market update and if you have any questions we will cover that as well.

Move over to slide number three, the main event for Q1 and Q2 in 2005. During this period we have chartered out four three hull VLCCs up to 2010 with a base hull of 34,500 with a 50/50 profit split at about (ph) $36,000 U.S. Frontline has now five similar VLCC out on ton charter up to 2010 and similar ton charters.

Frontline will charter the two (indiscernible) vessels which will be sold to Ship Finance from three tankers for $92 million each. Frontline will also charter in Front Scilla from Ship Finance. In May 2005 the Ship Finance announced the sale of three Suezmax tankers; Front Lillo, front Emperor and Front Spirit for a total consideration of $92 million. The vessels will be delivered to the buyers within the next few weeks.

At the same time, Ship Finance also announced the acquisition of three similar vessels Front Champion, Front Transporter and Front Traveller from Frontline for an aggregate amount of $92 million. The (indiscernible) charter and management agreement between Ship Finance and Frontline will be canceled for the vessels being sold and replaced with the new agreements on similar terms for the vessels acquired.

I now hand you over to CFO, Tom Jebsen.

We jump to slide five. Thank you, Oscar. Starting off with accounting issues, we still consolidate Ship Finance into Frontline. The view is that as long as we have a Board which is close to Ship Finance (ph) and Frontline, and management which is the same and Frontline continues to own shares in Ship Finance, then we should consolidate according to U.S. GAAP.

In the quarter we started out owning approximately 51% and then decreased during the quarter in two spinoffs to current Frontline shareholders so that at the end of the quarter we controlled 15.8%. We are working on divesting the final holding and we have actually been working on a prospectus for some time; however due to the low freight market and the current pricing of Ship Finance, we have decided to hold back a little.

We still think selling final holding in secondary offering is the proper thing to do. Such a sale would lead to Frontline increasing its cash position by approximately $225 million at today's share price. And also we think that a secondary offering would enable Ship Finance to attract a certain group of investors which we think are proper for a company like Ship Finance that is yield hungry investors.

The spinoff of Golden Ocean late last year was followed by Frontline selling its final 10% holding in January. Both the initial spinoff and the subsequent sale are booked as discontinued operations. Also the Q1 2004 results have been restated to account for the Genmar (ph) operations at the time as discontinued operations.

We declared and acquired the options on three VLCCs which were financed by German limited partnerships in Q1. The vessels were immediately passed on to Ship Finance and chartered back on long-term charters. Since the previous structure was considered a financial lease, the recent transactions are only considered a refinancing and therefore there is no P&L effect by doing this. We understand that some analysts thought we would book a profit of anywhere between 54 and up to $74 million on this, but that is not the case. This should only be a cash effect and no P&L effect.

Finally the sale of three Suezmaxes. At the Front Fighter -- excuse me -- these will be booked as sold in Frontline Consolidated. The transfer from Frontline to Ship Finance of the three replacement vessels is an inherent transaction in Frontline Consolidated and will therefore have no effect. So basically the three vessels that are being sold out of the combined consolidated Frontline and Ship Finance will be booked as a gain in Q2.

Moving on to slide six, profit and loss. Topline shows a small improvement from last year which is explained by four more vessels owned net, plus at the time last year the BP vessels were in. Gaining on sale of Front Fighter in line two is stated at $28 million. Operating expenses I will refer to on a later slide totaled $180 million. This leads to EBIT ending at $309 million compared to last year's 269 million and EBITDA was 357 million compared to 313 (ph) million in the same period last year.

Under financial items we have several non-recurring items, most of them are positive. In the interest expense we have a negative, that is we have charged $11.7 million which is a write-off of fees related the bank facility which Ship Finance refinanced in 2001. The former facility was only 12 months old. It was established last year but with the new one we have added an additional $160 million of additional debt which has boosted our cash position and we have reduced margin by 55 basis points. Again since Frontline consolidates Ship Finance, it ends up in our accounts too. However obviously for Frontline for Frontline that is that cash is obviously not available.

Paper this month, that is the charge of 11.7 million, net interest expense has improved by $7 million compared to last year's first-quarter. Under other financial items we booked $12 million gained on marked-to-market on interest rate swaps due to the increase in the floating interest rates. A $12.7 million gain on realization and marked-to-market of remaining Genmar shares. And finally, a $5 million loss on forward pay (ph) contracts. Also there is a gain on foreign exchange related to Yen debt in the amount of $7 million which I will come back to.

So interest in the month, you will see that the (indiscernible) contracts are here booked in our company under financial items while in some other shipping companies they are booked up higher up on the P&L.

Moving down to the bottom of the page, you see minority interest in the period is $18 million and will increase in Q2 since we now have reduced our holding to only 15.8% in Ship Finance. Discontinued operations is then the final figure at 11.9 million, leaving us with a bottom line as Oscar stated of $280 million or $3.74 per share. The Board has decided to pay out $3.10 in dividend.

We have yesterday opened up a new website which I hope most of you noticed when you logged on to our presentation. And I encourage everyone who has interest in dividend dates, ex dates, distribution dates, etc., to have a look on the front page of our site where they can find all that type of information.

The earnings presented (technical difficulty) contains several non-recurring items such as the sale of Front Fighter, the write-down of fees and other financial items, consolidation of Ship Finance and Ship Tracking (ph) minority, and finally discontinued operations. Adjusting for all this, we end up with $240 million in the bottom line or $2.84 per share.

Moving on to the next slide, income on PC (ph) basis. As you can see we posted leverage in Q1 which were comparable to last year's with VLCC's $2,500 per day better and Suezmaxes $4000 worse. Suezmax OBOs are up close to $10,000 due to most contracts being rolled over at high levels.

Interest markets as you can see in the graph in the low part of that slide indicates $45,000 per day on average for the rest of the year for VLCCs and $30,000 for 2006. For Suezmaxes the same figures are $33,000 per day and $30,000 respectively.

Next slide please. Ship operating expenses. As you will see, operating expenses are substantially up to $7,700 per day per vessel. This is for the most part explained by more vessels being drydocked and not the least by drydockings having been much more expensive than we had experienced in the past. This is especially so for vessels we have acquired from General Maritime last year which were really run down. On one of them we had paid an expense in the accounts, $3.2 million alone. Based on this, we assume that OpEx leverage will fall back in the coming quarters to the range of 6 to $6,500.

Next slide please, total expenses. Here you see the ship operating expenses had increased as mentioned while Charterhire has decreased due to the BP contracts being eliminated and the three VLCCs brought back from German KGs which were all in operation leases were canceled in the first quarter.

Administrative expenses are in line with the $20 million annualized rate we mention last presentation and considering the size of the fleet, it is by far the lowest in the industry.

Next slide please. Moving onto the balance sheet, free cash expense at 194 million at quarter end but only 75 million of that is really related to what I call core Frontline. The rest in Ship Finance. Today core Frontline on the other hand holds close to $300 million in cash and this will increase further in the coming weeks thanks to cash flow from operations and sale of the four vessels mentioned earlier.

Current assets and current liabilities are higher due to Genmar shares and futures contracts on the same. Minority interest has increased substantially since we started to spinoff Ship Finance in June 2004. Equity is of course reduced in parallel, adjusted for retained earnings in the period.

Moving on to the next slide on the Yen exposure, we just want to note that or draw your attention to the fact that we have Yen that equaled $147 million at the end of the quarter.

And then next slide please, cash breakeven rates. The table shows that the rates, assuming that Ship Finance had already been spun off and in fact, the two companies do operate on complete arms link as it is today. And the column on the right take into consideration the fixed contracts that we have on VLCCs and Suezmax OBOs and shows that Frontline can sustain very low rates and still have a positive cash flow. Basically those figures are what we need on the remaining spot charter vessels to achieve a positive cash flow.

Moving on to the next slide please or my final one. So what is Frontline now? As mentioned, we are working on divesting the final 15.8% investment in Ship Finance which will make the middle box disappear. Box number one from right has been filled up to close to $300 million currently.

Box number two on the right, we are working on and we scaled it down with three vessels in Q1 and will do a further three in Q2 and one in Q3. At the same time we're working on the box out on the left, but this will take time. Here we hope you see that we are progressing towards making Frontline more and more a clean operating and trading company where more and more of the vessels will be owned by other parties.

Going forward, we continuously study and consider business proposals. But currently, we don't have anything to report on. Some of you have asked us what we want to with the shares that we hold in the International Maritime Exchange, IMEX. This holding, while a great success is only worth $20 million at today's prices. We have no plans to divest it and we definitely will not dividend them out to our shareholders. The value of an IMEX position is worth $0.29 per Frontline share.

With that, I leave a word again to Oscar.

Thank you, Tom. Going over to slide 14. The fixed outlook (ph) is under control as the scrapping is limited for the years to come, and our other book is fixed at least up to 2008. So far it is fuel (indiscernible) for 2008 and 2009 with regard to tankers. And what we believe could happen is that the new building yards are filled up with LNG and container vessels and bulk (ph) carriers and it could be problematic to place orders for delivery in 2008 and 2009 due to capacity problems.

Due to the extreme volatile tank market we are seeing, some owners are becoming more and more skeptical to order vessels for delivery in 2008 and 2009. Knowing that, VLCC at $125 million needs approximately $45,000 U.S. for the next 25 years in order to go breakeven. 34% of today's VLCC fleets are seeing a (indiscernible). And it is possible that the industry managed to replace those 44% by 2010 in addition to the fleet growth which is required to take the increase in oil demand and (indiscernible) marks. We do not believe so.

A lot of people in the industry are talking about the difference between single hull earnings and double hull earnings. For curiosity, our best earner on the VLCC in Q1 was from seaborne. She made $129,000 U.S. per day and averaged single hull vessels made $600 more than the double hull on the VLCC segment. For analysts to mark to compare, we made 64,500 on the double hull Suezmax, and $44,000 on the single hull.

Moving to slide 15. IEA estimates a growth of $1.8 million barrels per day, a 2.2% growth based on the consumption of $82.5 million barrels per day in 2004. OPEC had increased their production by $0.5 million in March and it is not unlikely that they will have to increase further later this year. The Genmar situation is progressing in our favor with less production. They are close to the consumer and most of the increase from oil is coming out of OPEC, Middle East, and West Africa.

So far the private consumption of oil has not so far been influenced by the oil price. We are just passing a period with low demand and are now going into driving season and air condition season.

Going over to slide number 16. Approximately two-thirds of the world's seaborne transportation is transported on VLCCs and Suezmaxes and out of 90% of all seaborne transportation, out of the Arabian Gulf is done on the same segments. Non-OPEC has not managed to increase their production and most of the new oil is coming out of Arabian Gulf and West Africa. Hence, we believe that first of all it is the VLCC which will be the big winners in the market, also taking into account the orderbook.

Going over to slide number 17. If you look at our world inventories, according to i.e., the world inventories have only grown by a $137 million the last 27 months. What is also interesting to observe is the fact that the inventories was reduced by $0.5 (ph) million per day in Q1 which means lower demand for sea transportation.

Moving over to slide number 18. There are strong correlations between OPEC production and the VLCC rates. We have seen a variation of this correlation the last quarters and we believe that this is due to long less demand for oil due to heavy maintenance of the refineries which I will refer to later. Inventories have been reduced by $0.5 million per day. And new billing coming into the market without scrapping resulting in a net fleet growth.

The fact that these three factors occurred at the same time have given the charter an upper hand for the moment. However, this we believe -- we believe that these dollars will be changed as the refineries are finished with their maintenance, the demand for oil will increase as we go into the air condition and driving season. Another factor which may boost the market is the fact that China will start to increase their inventories early in the next year.

Going over to slide number 19. The period we just have passed is historically low. We're looking at the rates from 1993 to 2003 and week 18 is the lowest.

Going over to slide number 20. There have been heavy maintenance on the refineries and this has given an effect on demand for oil. According to REA, this has had an effect on the demand for crude by $2.4 million barrels per day.

Going over to slide number 21. The markets so far this year are more or less following the same trend and level as last year. There have been rumors that the markets have been below $20,000 U.S. for VLCC lately and I asked our charter people to put up a list of what we have done during the last two weeks. So far what we have done was 9 VLCC at an average of $32,000 U.S. on a round trip basis including waiting. And we have also have done five Suezmaxes at $46,000 U.S.

Again I would stress that without any disruption or events in the market, that the markets have been more or less the same as last year, which we actually take as a healthy sign of a fairly balanced market.

In order to summarize, we go over to slide number 22. The last quarter with a reduction in the inventories combined with heavy maintenance on the refineries and net growth in the fleet all at the same time, have resulted in a weaker market than expected, but we believe that this is only a seasonal trend. While we now enter into driving season and air-conditioned season with increased demand and getting closer to the heating season, the balance would change and we believe we will see a strong market for the rest of the year.

The growth in the U.S. economy, Japan economy and China economy is healthy and close to the expectations and if this continues, the oil demand will have to increase sooner or later. In order to see the same level like last year, we need to see an event like the hurricane (indiscernible) or (indiscernible) changing his export or a strike or similar events.

In regard to purchasing our vessels. The upside in purchasing or new building or (indiscernible) is limited as far as we can see. However, we follow the market closely and will buy or sell when we feel that the time is right.

We are also watching our competitors for possible corporate deals and lately we have been buying and selling Genmar with the attitude of the management of Genmar, we thought it was right to go out again. We are also actively looking at Time Charter for both in and out.

And I think that was all for the presentation and we go over to the questions.

(OPERATOR INSTRUCTIONS) Mr. Testor (ph), One Investment (ph).

A couple questions please. On the 300 million of free cash you have now, could you please explain how you treat the Genmar stake? Do you consider that as cash of the liquid assets and is with the current position in Genmar?

Secondly on the distribution, I think your payout ratio to you should have been 100%. We are now again a bit below. I'm wondering if you could give a sense as to what dividend policy is going forward?

And that's the last question was -- in the statement you make a few comments about industry fragmentation. I was wondering if you had any concerns that the psychology of industry fragmentation may give you the upper hand for the charters for a bit longer or prevent such strong seasonal patterns as you might have seen in the past on the upside? Thank you.

I will take the first two and Oscar can take the third one. First one was on how Genmar is treated. The shares whether actually owned or on the futures contracts were under other current assets. The liabilities were handled, if it was a futures contract, was handled as a current liability.

When it comes to a dividend policy, I did make the point of talking about non-recurring items and some of them are actually non-cash also. For example, interest swaps and foreign exchange gains. So my point was really to argue for that we were closer to 100% payout than you what you probably could get just at looking at the posted earnings per share.

Going forward, we basically have the same policy that we should be paying out in this part of the cycle we believe that unless we have big investments to make, we want to pay out close to 100% of free cash flow to our shareholders. Obviously even though we definitely believe that this is a normal seasonal weakness we are going through, we are of course just like everybody else, a little bit more cautious at this time of the year than when we get into the good fall. So that has also been a consideration when scaling back slightly on the dividend.

Okay, just on the main free cash now, that is therefore hard cash including your current position on Genmar, whatever that might be? Meaning (multiple speakers) not with Genmar stock but its including whether any cash from having sold Genmar. So that is not with Genmar shares as part of cash but it takes into account here your current position in Genmar? Being an asset, not a cash figure?

That is right. So if we sold whatever we have left of Genmar shares today, then we would get that much more cash tomorrow.

Yes, okay. Thank you.

We will go to the fragmentation of the industry; we have seen that there are a lot of new players coming into the new market from the Far East which is fairly inexperienced in time to market. And that very often we can see that they don't have the full view on the competitors. They don't have the full view on oil supply and demand situation and very often they manage to take down the market unnecessarily.

And what do you think in terms of the (indiscernible) the extent to which they as a seasonal (indiscernible) improves. Do they increase the volatility on their way up or do you think they'd give the charter as a chance of simply playing one off against the other?

I think the last one is the most correct. The way out is of course trying to make them -- to cooperate better with them actually -- or not cooperate but to try to educate them on how this market actually functions.

Okay and does this give you any concern for the seasonal upside of that part of the year or no?

As long as we have the balance of supply and demand as we have today, we don't see a big problem. But of course if the market becomes weak, that might be a problem.

Okay, thank you.

Mr. Harvey Stober, Dahlman Rose.

A couple questions. One, can you tell us what sort of impact you're seeing in terms of the opening of the Baku pipeline?

What was the question? About the Baku pipeline? The impact. Basically it is -- we think it is a positive. Of course it would have been great if it had gone down to Basra, the pipeline instead, but the reality is the following. This is new production capacity that is going to be exported out of Azerbaijan and let's say the Caspian region which did not exist in the crude market in the past and which will all be seaborne. It is going to be for the most part seaborne on Suezmaxes. To a lesser extent, I assume both on VLCCs and (indiscernible). But it is one million barrels per day that is going to be 100% seaborne, so that is a positive.

If you look at the crude situation in the eastern Mediterranean and Black Sea combined basically as we see it the Mediterranean region, that is Spain, Italy, France, etc., are already fully supplied from the oil producers in the same region. So effectively that means that the crude coming out of Baku or other Russian crude will have to be exported for further distances, which means there are probably going to be more shipments to the United States and there may also be more shipments through the Suez Canal out to the Far East.

So affectedly, we actually think that the one million barrels coming out of Baku is going to be a very good positive for the shipping industry.

Thank you very much.

Mr. Lanier, Securities.

Just a question on what is really going on in the Arabian Gulf market right now. If you have had as you mentioned in your call, an increase in production at around 500,000 barrels out of that region specifically over the past three months, one would expect that VLCC rates would have at least picked up a little bit. Do you think you can explain a little better what type of cargos you have actually seen? Has there been a pick up in exports from that region or is it really just an issue of too many ships in the region that has brought the market down?

When we look at our statistic, we look at all those on spot (ph) fixtures out on the Arabian Gulf and actually have not managed to see an increase in number of spot fixtures during the last few months. And as I said to you, there has been a draw on the inventories in the world inventories and that means 0.5 million barrels per day which more or less balances out the increases in demand. So again, these factors which I mentioned in refinery maintenance, the number of new vessels coming into the market and also the draw on the inventories have given this effect.

I guess the question comes down to we have personally been noticing the same things and had a theory that inventories in the first quarter at least in the OACD and in the U.S. have actually increased. So that our theory was with the inventory drawdown that you're suggesting is more into Asia and in the Middle East region and they are actually replacing those inventories right now and not shipping them. I was wondering if you had any corroboration to that theory?

No. That is basically what we have been thinking and almost found hard to believe but now it has been going on for so many months that that is probably the right thing to do. The Saudis in particular are probably refilling their inventory facilities based on what must have been a huge drawdown, especially in the fourth quarter last year.

Right, other than that, just congratulations on the quarter and thank you very much.

Mr. Krtsonas, Smith Barney.

I have two questions. First of all, I want to focus a little bit on corporate governance and more specifically on the recent transactions with the Suezmaxes moving from FRO to SFL. Any thoughts of establishing independent boards between the two companies? Or some kind of a committee that can oversee these transactions and make sure that none of the two companies get most of the benefit?

I guess the answer to that is that first of all -- I guess the worry from the investment market really has been more on the Ship Finance side of the table than on the Frontline side, though the current majority owner holds approximately the same amount of shares in both companies. We do have an independent Board Director in Ship Finance and we are working on increasing that. And also since the time limits for different Sarbanes-Oxley issues are coming closer and closer, we also need to establish an independent audit committee etc. So all of that will be taken care of.

Okay, and another question more on your OpEx and breakeven costs. Your breakeven costs went down. Your OpEx was up and your interest expense was up. What is the relationship between these two figures? Shouldn't your breakeven costs go higher with OpEx and interest going higher? Quarter-over-quarter, I am looking for.

Again the interest expense went up because we expended 11.7 million in the quarter related to fees that were paid in connection with last year's refinancing. At the time that was a Ship Finance financing. And of course the problem here is that that 11.7 million is consolidated into Frontline's accounts but in reality it is not part of lets say core Frontline any longer. So actually Frontline's -- let's say costs of interest has actually been stable. It is Ship Finance that has taken this onetime beating if I can use that word.

But you are right when it comes to our way of calculating breakeven rates, is that we use the budget and operating expense. So in the case of the hit that we take in the first quarter on some of those drydockings, that will not be let's say it transpired into an adjustment of a cash breakeven rate. You're absolutely right in that.

Okay and finally can you give a sense of what you have booked so far this quarter in terms of pay rates in VLCC and Suezmaxes?

Yes, actually last quarter we also -- we didn't guide anything so far on this quarter and we're taking the same position now that we will not guide anything. You analysts are becoming forecasting this now.

Okay, thank you very much.

Mr. T.E. Ronaldi (ph), from (indiscernible).

Trying to sort of foot something you mentioned about rates not being too far down from this year. If I look at page 21 of that graph, it looks like VLCC's were about 50. The redline that represent this year looks to be in the low 40s but then you mentioned that your most recent fixtures have been in the low 30s. What am I missing?

What I was referring to is more to our earnings. There has been a lot of press coverage now that the rates are below $20,000 U.S. And if you look at the graph here, this is going up to week 20 and we are today in week 22 or something like that.

Okay. Well what is that number for week 22?

I don't have that.

Is the 32 representative of it?

This is during the weekly report -- I guess from (indiscernible) -- so effectively I would assume it is going to be somewhere around 25, 30. But I'm not sure what it will (multiple speakers)

All right and then maybe one more. I guess you had mentioned in the context of General Maritime sort of your action -- kind of a result of their reaction or receptivity to negotiations. What exactly just to be clear, what exactly has transpired between the two? Because my understanding was that an invitation to a meeting on relatively short notice in an informal setting was turned down but that no more formal request to meet was made. Is that accurate?

I guess they hired in Goldman Sachs and spent a lot of money in building up a defense. And if you look at the latest AGM handouts, you'll see that they secured the management with nice parachutes and that is basically what has been going on. They were only interested in an upright pay cash for the shares so that they could go, and we didn't think that was proper.

Okay, that is all I have. Thanks.

Mr. Fyhr, Jefferies.

Thank you. Most of my questions have been answered but just one question. You mentioned spinning off the remaining shares of Ship Finance and maybe this is a question for the Ship Finance conference call but just if you are still holding significant shares in the company? It seems like there is a discrepancy in the earnings estimates and going back to the fourth quarter even though the cash flow was above expectations, earnings came in below street numbers and I think same for the upcoming quarters. It seems like quite a discrepancy in estimates. Are you aware of this and if you are, are you planning to do something about it?

We will provide a few slides which I hope will make it clearer and if it does not, I hope you are going to tell me so I can try again next time.

Yes, but I guess since I think the street needs to understand the way you treat your operating capital leases and I think it's only fair and especially if you're going to spin off your shares that everybody is on the same page.

Yes, but again as you said, isn't it more proper that we take that during the Ship Finance presentation because there we do have some slides on it.

Okay, very good. Thank you.

Mr. Chappell, JP Morgan.

Good afternoon. Tom, I just wanted to clarify one thing. The interest expense line item going forward now will probably be closer to the fourth quarter level if we exclude that 11.7 million kind of onetime charge.

Yes, excuse me. But they will increase because in the first quarter we geared up the loan amount or the amount we had borrowed by close to $160 million. And then also later next month, we will be drawing down a new $350 million facility partly for the purpose of buying the two Pertamina vessels. And also we're looking into financing a container vessel that we paid for in cash. So over time you will see net interest expense increase actually. So you have to make some calculations on that.

And you mentioned the SSL consolidation now. You had mentioned in the past a couple different options for spinning that off and you said you think it's the best option right now to do a secondary offering. But is there a possibility that you could do maybe half in the way that you had done in the past and maybe half in the secondary offering if that is what the market appetite is for? Or do you pretty much want to stick with the 16% secondary offering now?

I think we would've been happy doing that but I think any investment bank underwriting on that stuff probably would think that was improper. You ask them why but I assume they'd think that handing out a large number of shares to Frontline shareholders who at least in the market are perceived to be sellers of the shares -- and that has really been one of the problems with our shareholder structure -- that many people perceive that every time Frontline puts out some shares in the market, there is going to be selling pressure on the shares.

So effectively based on that reasoning, we think that the best thing is probably to get some -- a bunch of people to underwrite the full 15% and then we are done.

Right. And then the deconsolidation will turn?

That is the idea.

Finally, can you just give us an update on the single hull ships that Frontline currently owns and then your target for fleet renewal with those ships? Is it conceivable that you just let them expire or that they get scrapped in 2010 without adding double hull tonnage to replace those ships?

We are considering also the time to buy new vessels. But at the present, you know, the new building prices and the secondhand prices we have seen recently, we are not really seeing that that has gained our other shareholders. We feel that the price has been too hard for the moment and it has not been the right time. But we are -- we are watching the market all the time and whether we do buy vessel by vessel, but most probably, it will do more corporate transactions. So we are trying to analyze the different companies to see if it is possible to do some good (inaudible) around.

Okay, thanks, Tom and Oscar.

Mr. Testor, One Investment.

Firstly, just on your Ship Finance holding, given that you would obviously like to partner with Ship Finance in any further sector consolidation, would it make sense to therefore hold onto your stake in Ship Finance as part of -- as somehow allowing you to use that or as currency or otherwise your influence in any further consolidation? Why would you not hold onto it? Like your thoughts.

I guess our view is that there is no point in holding onto an asset which we are not utilizing actively. That would really just -- (indiscernible) a tacit (ph) investment until something could happen. And I think if you look at the track record that this company and basically that John Frederiksen's system has towards the stock market, it is fair to say that whenever we or other parts of the Frederiksen system have needed money they basically have always been able to find investors who think it is interesting projects that we are working on. And so we don't really see any point in sitting on $220 million of assets that are not helping Frontline as such in its daily operations.

Okay, and a then second question was just on if you could give any sense to what you are hearing or seeing as far as a Chinese reserve building or likelihood of an amount and timing of any sort of attempt to build a strategic reserve in China. And maybe while you are at it, in India.

What we see is that there is a lot of projects, tank farms being built in China and Singapore in order to increase the inventories in the Far East. The problem is to get the (indiscernible) when they actually start to fill those inventories up and -- but we believe that there will come some of these time frames will come on line during the autumn actually. And then we will start it from the top. I think that today they have 14 days coverage in China and the plan is to get it up to 15 (inaudible).

Can you give any fair sense as to what you're seeing in terms of tank farms coming on in terms of the scale? Say some you think might come on in autumn. Do you have any sense for what sort of scale of impact that would have on margin or demand? Or and looking into next year maybe provide some sort of more tangible feel for what you see as an influence from the buildup of the tank farm capacity?

I believe we calculated it. It was around 200,000 million barrels -- 0.2 million barrels per day. It is not significant but it is just a marginal increase in the --.

You know for example in the United States they have been increasing by I guess slightly more than 100,000 barrels per day on average over the last three years which really isn't more than 35 to 45 million barrels per year. And if you look at the Chinese market, their current consumption is around 7 million barrels, which means with a 50 day forward cover, you're talking about 350 million barrels of -- let's say, proper inventory levels. And as Oscar said, they currently have only about 30% of that.

So effectively, they should build up by 250 million barrels. But again, I think it is a positive effect but it is oftentimes it’s grossly exaggerated because we are talking about the world consuming 84 million barrels per day now, probably increasing to 86, 87 over the next year or so and then 100,000 here, 100,000 there is really minor in this context.

Sure but if you're going to go from 14 days to 50 days cover and you're going to do it over, say, it's not going to be done over ten years I presume. And so on the basis of what you might find -- I just wonder what you're seeing as to why you think this is going to be a tangible impact on a '05, '06. It sounds like you don't think it will be.

I think it is going to take probably close to five years than to let's say 18 months, if you understand.

I understand.

Another thing, the market is balanced and on the increase in the demand will affect it as long as we have as balanced market as we have today.

Okay, fine. Thank you.

Mr. Rosenlund Kirkhorn, ABG Sundal Collier.

I have question regarding the sale of Front Fighter. Could you please run through that once again? I don't think I quite understand. Do you get some sort of compensation here from the fact the Ship Finance is selling vessels that are sold out to you?

John Krtsonas also had a question similar to that. Let's try to explain how we've been reasoning from a Ship Finance side and for that matter a Frontline side on this. Ship Finance is basically providing capital in exchange -- providing capital now to buy a vessel in exchange for certain cash flow in the future. And if Frontline's view has basically been that if they decided they don't like asset A in this case from Fighter, but would like to buy more into assets B&C, which were the two VLCCs, then they should be able to do that and basically it replaced the $68 million of funds that have been provided by Ship Finance for Front Fighter with 196 million for the Front Century and Champion. And then get a credit for the 68 million subject to Frontline paying cash flow on the remaining 120 some million dollars which the new investment requires.

I hope you follow me on that one. So basically, the whole point here with both that one and this transfer of this two times three Suezmaxes is that as long as Ship Finance gets a proper and agreed return on the capital it has provided and it is given proper security for that cash flow in the form of title to vessels, etc., then they should be happy.

I understand your reasoning. So what you are saying is that the day rate over $31,000 per day for Front Century and Champion is compensation looking from Frontline's point of view? That that rate is below the long-term rate for if someone else virtually charters that vessel for the same kind of period? Am I understanding you right?

No, you're partly right because if you look at the Golden Victory which was done a month later and which is not being -- does not have any offset -- then you're talking about $33,000. So effectively that difference is the difference between the original sales price of Front Fighter into Ship Finance which probably was around $40 million and sales price at 68.

Okay, I think I understand your reasoning on that, okay. I just have a second question as well. When you're talking about replacement rates or breakeven rates and using that at $45,000 per day, are you really using a cost of capital of 11%?

That is on the equity. So the cost of capital is a combination. If I remember correctly we used 25% equity at 10, 11%, and then bond yields for another 25% that currently Ship Finance trading around 9% yield and then bank debt in the range of just below 5% using a five-year swap. And you bring that cocktail together and you get I think 7.5, 8% weighted average cost of capital.

But if you have $220 million new billing price and use 7% cost of capital, that implies a much lower day rate assuming OpEx of $6500 today, doesn't it?

I think we've got OpEx over the next 25 years.

So that is the only reason?

It is an approximate figure.

Okay, great. Thank you.

No further questions.

Okay. Ladies and gentlemen, thank you for listening into us and we look forward to seeing you again in three months time. Have a good day.