Frontline Plc (FRO) 2005 Q3 法說會逐字稿

Ladies and gentlemen, welcome to Frontline Limited's third quarter 2005 presentation. My name is Tom Jebsen, I am CFO in Frontline Management and with me here today I have Mr. Oscar Spieler, CEO of Frontline Management. I will first run through the numbers before I leave a word to Oscar to run through the latest developments in the markets.

Moving on to Slide Two. And of course you should all have this up if you have access to our Web site, www.frontline.bm.

Slide Two shows you the main events in the third quarter and so far in the fourth quarter. A dividend of $2 per share for Q2 was paid out in September.

Further, we sold and delivered Front Hunter during the quarter for $71 million. Frontline has agreed to cancel the charter agreement and will in exchange receive compensation of $3.8 million -- hello?

I'm sorry. I heard somebody on the phone here.

Frontline have agreed to cancel the charter agreement and will in exchange receive compensation of 3.8 million for terminating the charter. This termination payment represented 80% of the difference between the forward rate for the next year at the time and the charter rate between Ship Finance and Frontline.

In addition, Frontline have a right to sell Ship Finance and charter back its new building VLCC which is due for delivery in July, 2006.

The new charter rate will consist of two components, the first will be the same rate that was in the Front Hunter charter, and second part will be based on the incremental investment which will be made by Ship Finance at the time. Through such a solution Frontline will benefit through being able to utilize the sales gain to back the new financing and thereby achieve a favorable overall rate for the new vessel.

We agreed a sale on the last remaining dry bulk vessel earlier this year, Cos Hero and it was delivered to a new owner in August yielding the Company in excess of $20 million.

When Frontline spun-off Golden Ocean last year we gave a new company two farewell gifts. One was options to buy two new builds to be delivered in 2005 and the other was a guarantee for certain profit split which Golden Ocean has on one of its vessels charted out to Bossamar.

I will revert to the last mention on the next slide but on August 18 this year, Golden Ocean exercised its option to acquire the second of the two new building Panamax bulk carriers having already done the first one in earlier quarters. The vessel was delivered to Golden Ocean late August, 2005, and thereby any on or off balance sheet liability with regard to two new buildings has come to an end.

We have, as mentioned in the last conference call, initiated the process of developing a FPSO business. The Company's uniform single hull fleet is believed to be well-suited for conversion.

Also yesterday the Board declared a dividend of $1.50 per share for the quarter. The record date for the dividend is 29th of November, ex-dividend date is 25th, and the dividend will be paid on or about December 13.

In addition to the bullet on the slide we have fixed two more vessels and time charters during the charter. I will come back to that.

And Ship Finance in which we still control 15.8% took delivery of its second and final 1700 TEU container ship. We also received a drop dead fee in connection with our failed attempt to acquire a majority of the capital in the Bergshav Group.

Moving to Slide Three.

As we write in our report we have choose not to proceed with the spinoff or secondary offering of the remaining 15.8% holding in Ship Finance for the time being. Due to this Ship Finance will continue to be consolidated into Frontline.

Our holding has increased a little due to Ship Finance having bought back 300,000 shares over the last two quarters.

In addition to that as you'll in Ship Finance results just to be released, they have acquired another in excess of 700,000 shares during the last few weeks. Ship Finance has further bought back another 30 million par value of its bonds leaving 457 million outstanding.

Again, we refer to more information on Ship Finance in its separate release and Webcast later today.

We have already discussed the handling of the Front Hunter sale on the previous slide. The account show a gain of 32 million.

With the sale of Cos Hero we have sold our last [clean played] dry bulk vessel or interest. The gain and net income for Cos Hero in 2005, plus the final share sales of Golden Ocean earlier this year, are booked on a discontinued operations in the line above net income. As you can see they're just in excess of $10 million for the first nine months.

On the previous slide I mentioned that Frontline had guaranteed towards Golden Ocean a charters performance of a profit split. The profit split is disputed and while we strongly believe we will win the arbitration, we have, according to U.S. GAAP to take the risk of loss to expense.

This has increased other financial expense by $8.5 million in the first nine months. 7.9 million of this figure relates to Q1 and Q2 and we have therefore restated those two quarters accordingly and the restated profit and losses are enclosed in the appendix to this presentation.

Moving on to Slide Four.

The profit and loss shows the total operate revenue in the quarter of $292 million. I will revert to a breakdown of this on the next slide.

Gain on sale of Front Hunter was $32 million. Expenses I will run through on a later slide, but G&A is higher this quarter due to bonuses for 2004 being paid in the quarter. We still believe G&A will be just in excess of 18 million for the year which is by any measure the lowest in the industry.

Operating income, or EBIT, was 142 million and EBITDA was 194 million in the quarter. Those two figures include the 32 million in gain by sale of Front Hunter.

Other financial items is booked as a positive for the quarter at 17 million. This is related primarily to mark-to-market of interest rate swaps 8.5 million and the Bergshav drop dead fee of 6.5 million.

As most of your aware we post as minority expense 85% of net income in Ship Finance. Since GAAP only allows Ship Finance to take to income the 20% profit split when it is ascertained, that is the minimum higher for a financial year has already been achieved, most of the profit split is booked in the late quarters.

This effect partially explains the 55 million minority in the quarter. Discontinued operations was 5 million leaving a net income at just below 74 million in the quarter or $0.99 per share.

Moving on to Slide Five.

VLCC spot earned $38,900 per day in the quarter while average of spot and fixed earned was $37,100 per day. Suezmax fleet earned 26,200 per day and the OBOs, where all vessels are on time charter currently, made $34,700 per day.

The forward curve for BOCs as per Imarex shows $120,000 for the remainder of 2005 and $47,500 per day for 2006.

Moving to Slide Six.

We have experienced a substantial increase in ship operating expenses lately. This is explained by five factors.

First when values declared for insurance purposes increase as they have over the last year then premiums naturally increase, too. Second, lube oil costs have also increased as crude oil prices and refinery margins have increased.

Thirdly, marine crew wages have increased as the marine sector is being stretched due to the strong growth in the number of vessels in all marine segments. And, fourth, in connection with us selling one vessel and taking delivery of three we have spent substantial amounts on these vessels equal to $200 per day per vessel over the whole fleet.

And, five, we have also tried to be clever booking dry dockings in the summer months, and as you'll see in the graph on the slide, no vessels are to be dry docked in the fourth quarter and only three in the first quarter, and as to the latter that will be at the very end of that quarter. This latter point means that a heavier burden is taken in the earlier quarters during the year.

And then finally, I guess we also should mention that the fleet does age since we have been holding back on new buildings over the last few years.

Moving on to Slide Seven.

The balance sheet, this [inaudible] is basically nothing to comment on the balance sheet except for the following book equity through the year. This is due to the substantial cash dividends combined with non-cash dividends related to Ship Finance spinoff of shares.

Moving on to Slide Eight.

Yen exposure was unchanged in the quarter, but since quarter end, we have reduced our exposure by $25 million at 116 yen to the dollar. As to interest exposure, for Frontline Consolidated floating debt is limited to just below 800 million after a total of $3.15 billion in bank and capital lease debt outstanding.

So as we see it we are basic pretty well hedged for any surprising increases in interest rates.

Moving on to Slide Nine.

We think it is proper to focus on the columns to the right when considering Frontline's current breakeven rates. Both columns show breakeven with Ship Finance deconsolidated.

The figures in the first column from the right take into account the 18 vessels currently unchartered and leaves us with the rates needed to do breakeven on the remaining spot tonnage. As you can see both rates are very competitive.

14 out of the 18 vessels mentioned, or 23% of the fleet, are on charters with more than 12 months remaining. We have in the last two months chartered out two vessels, the first is the Suezmax Front Glory, a double hull, for two years at $36,750 per day, and further we have chartered out the single hull, yield to seas, Front Sabang for three years at rates which are at levels comparable to the previous five yield to seas we have chartered out. Our FFA book is currently close to zero.

Moving on to Slide Ten.

We are basically here with the same setup as in the past quarters. I guess the only item aspiring to a box being the FPSO business development.

As to the shareholder structure we have in the last months indicated that at least 12 million shares are short in Frontline. We have to say it this way since unlike what is the case in New York the Oslo Stock Exchange has no requirement for reporting short positions.

As to Q4 we have indicated that we have booked 62% of the Suezmax days at $38,400 per day, and 80% of VLCCs at $53,700 per day. Given this and taking into consideration the large profits to Ship Finance in Q4 the Board has stated that it expects to see profits for the full-year in excess of $570 million.

With this I leave a word to Oscar Spieler.

Good morning, everybody.

Going to Slide number 11.

We are for the moment surfing in a very good market as expected and as you should have recognized, we have been last bull the last quarters. I will not go through the supply side since they are more or less unchanged since last time for 2006 and 2007. There are no available [inaudible] before end of 2008 and there are hardly any scrapping.

With the high oil prices we believe that we will see more conversion of single vessels to FPSOs which would be positive for the spot market. REA has adjusted the amount for 2005 and 2006 down. And the reason are the prices start to have an effect on the consumption, the consumers start to feel the pain of the high oil prices combined with increased interest rates.

Secondly, the mild weather will also give a reduced oil consumption. Oil have been replaced by alternative energy sources like coal.

And lastly the SUV sales are diving but they are still driving. We feel that there is no reason to be overly bearish and say [inaudible] almost look at the bright side of life.

Moving to Slide number 12.

The manufacture is pointed in the right direction for seaborne all transportation. The hurricanes have resulted in more sea transportation. I'll revert to this on the next slide.

We see that the [inaudible] in China on the U.S. are picking up. It's worth noticing that IEA expects an increase in USA and China of 1.5 and 6.5% respectively which means that each person will consume around 435 barrels per person extra per year in U.S. while only .13 per person extra per year in China.

The bottleneck in the production in the refineries are about to be sold. More production will come from West Africa, A.G., and FSU.

Most of the new oil will have to be transported by sea. The air traffic have increased by 8.3%.

We have a controlled fleet growth with less vessels coming out from new building yards next year compared to 2005. 2005 versus 2006 is 32 versus 18 for VLCC and 26 versus 23 for Suezmaxes.

According to IEA higher increase in demand next year will be higher according to IEA higher increase in amount next year. In 2005 it was 1.5% while in 2006 it was estimated to be 2%. All the above fractures are positive for Frontline and other tanker operators.

Moving to Slide number 13.

Rita and Katrina have had much bigger effect than last year's hurricanes. According to IEA latest report, 700,000 barrels per day production is still missing.

The hurricane took out both refinery and production capacity leading to increased transportation of products and crude. We have also seen increased storage as a result of the hurricanes taking up transportation capacity.

Moving to Slide number 14.

In connection with the hurricane season and the high gasoline prices the consumption dropped quite dramatically early in the autumn. However, now it looks like things are back to normal and consumption is about last year.

Moving to Slide number 15.

During last quarter we pointed out there was a mismatch between the number of lifting out of AG and the reported production. However this time the production is still the same and the number of lifting has been increasing.

We can only ask the question why. We believe that this is a sign that there are extra storage capacity in the AG.

Moving to Slide number 16.

The table shows the relation between oil demand and GDP. We believe that China's economy is very energy driven and in order to see any major growth in GDP over time will you need increased energy consumption.

This is reflected in the numbers from IEA and IMF where we see that this relation become more normalized in 2006.

Moving to Slide number 17.

With a very profitable refinery margin the last year's, there are who have realized the profitability of upgrading their refineries to take out more products and be to refine heavy crude. As you can see the operating is huge, 2.7 million barrels in 2006, 2.1million barrels in 2007, the upgrading is carried out all around the world.

A lot of the new oil coming up next year is sweet oil where we have better refinery capacity. We believe that these issues will solve some of the bottlenecks we have seen on the refinery side with the result of reduced refinery margins.

Moving over to Slide number 18.

Far East is more than China. The graph shows the GDP growth and oil consumption growth in the different countries.

By using the same relation between oil demand growth and GDP growth in China these countries will increase their consumption as much as 240 million barrels per day compared to China's 460 million barrels per day in 2006. There are also all the countries around the world like South America, Middle East, India, which also see huge growth in GDP and oil consumption.

Moving over to the last Slide, number 19.

In 2006 the fleet growth is less than in 2005 for VLCCs and Suezmaxes. Number of deliveries are reduced by 4 VLCCs and 3 Suezmaxes in 2006 compared to 2005.

At the same time the oil demand growth is increased from 1.5% to 2%, both factors are giving a positive sentiment to the industry. With the new production coming on line in 2006 and an increased refinery capacity we expect lower crude oil prices and product prices which would give an additional boost to the demand side.

The threat of lack of oil is not real according to our estimates. The conventional oil reserves are around 1.2 billion barrels.

While the unconventional reserves like tarsan and heavy Venezuelan [enoco] oil have reserves of up to 3.6 billion barrels according to Lehman Brothers. We expect that the volatility will remain and that we will continue to be very profitable in the years to come.

And then we'll leave go over to questions.

Operator, could you take care of this? Hello, Operator?

Mr. Lanier, Banc of America, please.

How are you guys doing today? Oh, pretty good, pretty good. Exciting times.

Very exciting times indeed. Two questions.

First of all, I've never really gotten a chance to speak with you regarding your plans on capitalizing on your single hulled assets. Do you think you could go into a little more detail as to when we start seeing activity, what kind of capital investments that would require and kind of the financial gains one might expect?

This is Oscar here. On the FPSO side we have so far employed two senior people from the industry who have worked for the industry for the last ten years and we will be fully operational from around 1st of January.

And we will go into, we will start up to develop again [inaudible] FPSO number for straightaway. And hopefully the one we will do on speculation and the plan is to have that fully operational by middle of 2007. We will then at the same time also [quote] on tenders coming out and as you know there are a lot of projects coming out in 2006 and 2007 and 2008.

With regard to the capital expenses we are talking about apart from the vessel around $60 million in investment for a standard FPSO without any gas injection or water injection.

Sounds very interesting. It's an evolving story.

And then the second question is, I just wanted to talk a bit about next year. The way we look at things here, I agree with you guys on the IEA numbers and on the oil demand growth next year, and where we see it is really like you said on your slides, a lot of that production is really being satisfied by non-OPEC, a lot coming out of the Caspian region and West Africa, Angola. With your exposure you're really both I guess have a positive and a negative hedge on that with less oil being demanded from the AG and then more oil being demanded on the Suezmax side.

I was hoping to get a little bit more clarity from you guys who are more experienced as to how the ships trade as to how are people going to position VLCCs either in West Africa and/or in the Mediterranean and what's that going to do on the historical spread between VLCC and Suezmax rates?

Philippe, I'll comment on the first part of your question then Oscar can take more on the trading environment, et cetera.

Really the first part who's going to produce that crude is a $10 million question in tanker industry. And I think that's what we've been claiming over the last four or five years and so far it's correct that IEA has tended to over estimate the non-OPEC increase in supply and as it has been, they haven't been able to increase at all over the last four or five years, and therefore they basically missed out on the gearing effect by OPEC basically really having to be a swing producer in the positive sense for tanker owners and that's really the same thing going into next year.

If you look at the IEA then you're basically talking about calling OPEC for both 2004, 2005 and 2006 they estimate that plus minus 28 million barrels per day. For example, one of your competitors which we've been following very closely and has had a fantastic track record, basically project no growth in, or hardly any growth on non-OPEC supply and as Oscar also mentioned, with a number of the Middle East new fields coming onstream with lighter crudes, Middle Eastern crude is going to be more competitive. And Barkley's basically talking about calling OPEC next year of 31.3 million barrels. So that's 3 million barrels of difference.

A huge difference.

It is. And obviously that's, I would say it's sort of two extremes because it's really the difference between heaven and hell, I guess, I don't know, maybe $100,000 per day on average, or 25,000.

Absolutely.

But all I can say is for anybody listening in is that as investors or analysts you just have to make up your own minds on who is going to produce these, let's say, incremental barrels next year and to what extent will countries like, for example, North Sea area and United States, Alaska, continue to show declines in their production levels which we've seen throughout most of this decade.

I guess then to, just the second part of my question, and I completely agree with you the numbers on the IEA always do, are a little too optimistic on non-OPEC. Just in a theoretical sense then, I guess the second part of the question is, how competitive can VLCCs be in the Mediterranean basin?

The VLCCs that do some freight in the Mediterranean but it's limited. Of course with a new partner coming out in [Shaham], that will [inaudible] could be a typical VLCC trade.

With [inaudible] I'll just explain about the VLCC trade and the Suezmax trade. The difference between VLCCs single hulls and double hulls are around 6,000 U.S. dollar in Q3.

What is important with the VLCCs of course that there are new possibilities in the last few years with regard to cross trading so you can have a much more efficient trade with the vessels, taking vessels to the U.S. and then back to West Africa and then back to China or Far East and then back again.

On the Suezmax, the difference between the single hull and double hull where as much as 9,000 U.S. dollar per day in Q3, and the reason is it the single hull or is it the East West market, I believe it's a combination. So what we have done now in Q4 we have repositioned quite a few of our single hull vessels to the West. So I don't know whether that answered your question or not.

It definitely gives me some clarity. Thank you very much for your time.

Next question, Mr. Chappell, in the company JP Morgan, please.

Thank you. Good afternoon.

Oscar, I had a couple of follow-up questions on the FPSO market. Can you talk a little bit about how the FPSO market looks right now as far as contracts go, lengths of contracts and the type of rates versus what you're seeing in single hull VLCC active oil trading and how you think that market's going to develop over the next two years when you think a lot of your single hull ships will be completing their conversions, if you think the market will be more long-term contract covered in the direction of rates and FPSOs?

I think there are around 18 projects which we know about for the next two years and, of course, we will offer in on the projects which we feel are suitable for us. We will not go into the harsh environment like the North Sea we will stay down in Africa, Brazil and other areas.

But we are also quite, I mean this FPSO strategy has been there for actually a long time but we have said that we will stay in the tanker market as long as it is profitable depending how it develops we will still keep quite a lot of our single hulls in the market but the idea is that definitely that by going into the FPSO market we would manage to extend the life of these vessels by our own ten years giving a very high profit on investment.

It is a very competitive market there but with the high oil prices and we feel that there will be a lack of suitable FPSO candidates so we feel that we are well-positioned in order to succeed in this market.

What are the typical contract lengths for FPSOs?

There are different types of contracts there. There are contracts which depreciate your whole investment throughout the [inaudible] and there are other contracts which are more short-term so you have a residual value of the vessels after the first contract and then in order to make profit you have to re-employ the vessels in another project.

And you mentioned the first one you'd probably would be on a speculative basis. Would you think that once you get a little bit more comfort in this market you might wait until there's contract coverage on the back of the conversions before you undertook that capital expense?

I believe that the need for vessels will be that huge and we have started a contract we will be very, very soon after we have off the contract and started to order equipment we will be contacted by different oil majors and oil companies on the [inaudible] fairly easy.

One question for Tom.

The minority interest line was a little bit surprising to me and I understand it's the way you account for the Ship Finance profit share. I just wanted to make sure, the third quarter number, was that just the minority interest of Ship Finance with their earnings in the third quarter and the third quarter allocation of profit share? Was there a big make up component from the first and second quarters that weren't accrued? As I try to get a sense for what the fourth quarter minority interest will be, will that be much larger than the third quarter because there's some prior year accruals that might fall in the last quarter of the year?

The profit split in Ship Finance net income was $26 million. And there's still an accrued but not taken to income amount of $22 million after the first three quarters. So with the current rate environment that we see obviously we think that the profit split for the final quarter will end up in the 50 to $55 million range leaving total profit for 2005 at 85 to $90 million.

Okay.

Was that clear?

Yes. But so the minority interest then for the fourth quarter given the current environment in the fourth quarter and the 22 million of remaining accruals should be still significantly higher than the third quarter?

And that's one of the reasons why we end up in our guidance for the fourth quarter indicating net profit for the full-year in Frontline of $570 million plus which basically leaves the $100 million for the fourth quarter after minorities.

That does helps a lot, Tom, thank you.

Next, Mr. Kartsonas in the company Citigroup.

Good morning. A couple of questions.

First of all following on the market, obviously as you said rates can be 25, or 100,000 next year. If you look at the futures Imarex is indicating probably close to $39,000 VLCCs, $29,000 Suezmaxes, how would you think about that? Why do you think the market is there especially compared to the time charter market which is much stronger?

I'm sorry, John, what was your question? How we felt about it or?

Your thoughts about, like, I mean you have time charters fixing at north of 60,000 for VLCCs, the calendar year '06 in the Imarex is much lower. Why you think there is such a big spread between these two?

Okay. I'll leave a word to Oscar in a minute but I guess that's one of the problems with Imarex still but, you know, you get unbelievable spreads between what people perceive in the paper market and what they are doing physically and that kind of spreads you don't see in a more mature markets like for example the crude market and, of course, that gives people who have traders on the desk quite some opportunities I would assume.

But the figures you mentioned, we actual I thought the figures for Imarex was 47.5 but still there's a long way up to the 60 plus that you mentioned in the fiscal market which I think is correct.

But Oscar will say something to you.

And of course if you look at the paper market it's around 224 November and 154 December and a bit less in January. But of course if you take a physical vessel in unchartered this vessel out on a long voyage to U.S. you would manage to cover that [inaudible] around 120 [inaudible] to U.S. dollar per day for 70 days. So it's too different markets in one way and different players.

Okay. But on the FPSO now, obviously have a large number of single hulls here and obviously you can grow this market. However, the Cap Ex as you said it's trade is significant. How are you planning to fund going forward this conversions, is it going to be, I mean you have a pretty leveraged balance sheet here.

I think if you take a look at the players in the FPSO market most of them actually are small players and they have definitely balance sheet constraints. One of the great things for us in Frontline in addition to the fact that we already trade these vessels and basically can trade them up to the day they're going to be converted, we also have the balance sheet strength and we also have FPSO experience both through the people we now have employed but also through a number of our employees have been involved in this in the past and not the least also our associate company SeaDrill also has two FPSOs which are being operated now.

So I think we're well suited to do this but moving on to the market it's very probable that there will have to be a consolidation in that business because if you look at the way, let's say financial viability of most of these players, they are small, they have one to four, five projects running and that leaves them with a tremendous exposure towards residual value risk or other problems on the fields, for example, which means that they haven't taken out the, let's say, the spread of risk that you get through a portfolio approach if you understand. So we will also be working on that probably in some time when we got this thing up and running internally first.

Do you think that the competition between the majors and independents probably is going to be an issue in the majors have much stronger balance sheets to engage in this kind of business? Is that an issue for an independent owner from a competitive standpoint?

You are thinking of oil majors?

The oil majors.

I don't think they want to get into this business quite frankly. But at the same time what we want to offer them is more of a generic concept and as one of the other gentlemen earlier on in this Q&A session asked, we will, I think that basically we have a 35 to $60 per barrel oil price you really have opened for lots of smaller fields to be developed, and that also means a different kind of risk because so far most of the FPSO projects have really been, let's say, 10 up to 20-year projects, or let's say ten years with options attached to them but with the current pricing of crude you could easily end up exploring much smaller fields that maybe only have let's say three to five years of production on them before you have to move on to the next one. And again to participate in that I just think you need a stronger balance sheet than what most of these players probably have.

Lastly, I mean the last two presentations you decided to do disclose short interest in Norway which combined with a U.S. short interest is pretty high and it seems inside [you still] own a large percent of the stock, can you disclose how much of this is lended out by the insiders of the company, is it something you [inaudible]?

That's actually on our Web site. We post the shareholder structure every month. Of course that is for what it's worth because most people hide behind custodians.

But John Fredriksen basically controls 35% of the shares and as you can see on the latest posted listings, his shareholding appears to be much smaller and as we have put out on the note at the bottom of those tables the difference is basically that he's lending out shares for short lending if you understand.

And how much is it right now? Do you have a number?

We are pretty sure that short positions in Frontline are at least 12 million shares out of the 74, 75 million shares issued. But the problem is that since [inaudible] Stock Exchange does not require this kind of reporting, we don't know whether the main shareholder is putting some of hid shares out for lending in New York or if that's a separate bunch of shares if you understand in which case it would be even larger than 12 million.

Okay. Thank you very much.

Next question, Mr. Silver, [inaudible].

Thank you very much. Can you talk about the seasonal patterns? There has been some talk of reverting to go more normal seasonal patterns with first quarter fixtures continuing the strength of what we're seeing in fourth quarter perhaps being even stronger and how you see the first half of '06 shaping up?

Yes, fourth quarter generally what we'll see in the fourth quarter was that we believe that the market will actually [inaudible] earlier than it has actually so with regard to Q1 generally it's a strong market, what sort of, how long it will last is difficult to say but generally we are positive for Q1. But it's very seasonal as you know. It's pretty predictable if you look at it from year-to-year.

I think it's fair to say that if you look over last three, four, five years it's become more [inaudible] for people on the other side of the table to at least look at if not rely on long-term weather forecast and basically that means if you get to up to Christmas and weather forecast for example in the United States are that it's going to be mild weather on the East Coast then it's very like that procurement officers, say in let's say refineries in the U.S., will try to scale down and make it that their inventories are going to be sufficient.

And so really the problem is that everybody's going to be looking at these weather forecasts and if you get into late December and the forecast is basically cold in the northern hemisphere until end of February then it's going to be a fantastic first quarter, that's for sure.

Terrific, thank you very much.

Next, Miss [inaudible] Goldman Sachs, please.

Hello? Hi, sorry.

My first question is regarding the spinoff of Ship Finance. It seems a though you're putting it off now because of the market conditions. Could you give us any idea of what the timing may be for eventually spinning it off? Would you do it in 2006 if you felt that the equity market conditions were different?

That really is for the Board to decide. Their communication was basically conveyed to you in the quarterly report and that was very short.

They just want to hold back on it for the time being but I think they and we have been working on several projects for quite sometime and we were just hoping to have some more good news to let out of the bag and hopefully the general trading environment for shipping shares might improve at which time we probably will do this. From a shareholder point of view it makes sense to do a secondary offering and create a more proper shareholder structure in Ship Finance as we see it.

Okay. And then the other question that I have on one of the charts where you list what Frontline is composed of, under Ship Finance it lists I think it's 274 million of cash. Have you had to put more cash in that escrow account as Ship Finances fleet has increased because more cash is required to sort of back up the charter agreements?

That's the idea. On the latest VLCCs we have a limit of $7 million per vessel while when we put up the structure back in '93 it was $5.6 million per vessel.

Thank you.

Any more questions, Operator?

Yes.

Hello? It sounds like we've come to the end.

It's not in the end. No, Mr. Lanier, Banc of America, please.

Hello, hello?

It's Philippe. I had one follow-on question. Sorry that I forgot to ask it.

On Ship Finance, I was relieved to see that I'm finally getting the minority interest and your profit sharing so thank you for helping me through that. But there's just one final element which I'm still a little curious on and that is, as I've understood it you guys are essentially really only making the cash payment first quarter of next year. Is that correct?

That's correct.

The question I have is tracking that on the side of Frontline. Does that affect your ability to pay out a dividend in the fourth quarter? Or has it already been accrued?

Around the 10th of March we should get the, let's say it's be 85, 90 million that I mentioned earlier, and the short answer to that one is that definitely is not a financing problem. If I needed to do pay a dividend in the middle of February and for some reason didn't have money, which I can't see why I should have that sort of problem with, then I would always be able to factor that kind of money in to get the payment done.

But currently Ship Finance has $75 million of cash so I don't see why that should be an issue at all.

No, no, I'm not worried about the cash. It's just in the terms of our forecasting you make, let's say you're making the 100 million in net income in the fourth quarter that you were suggesting. Does the large part of the money you've made there go to paying the accrued profit share you've had for the year or has that money already been accrued and prepared to paid out in the first quarter I guess is the question?

The additional dividend that Frontline announces in the fourth quarter is it going to be effected by the amount that it has to pay for Ship Finance the first quarter of next year?

Oh, okay. I'm sorry, Philippe. The answer to that is that we have not held back lots of cash for that, the payment to Ship Finance so effectively if the market should turn south over the next few weeks then that could limit or will limit dividend for the fourth quarter which will be paid out in February, that's right. But obviously with the current freight market we don't believe that's going to be the case so we are very optimistic about paying out a nice dividend also for the fourth quarter which will be paid out in February of next year. Fantastic. Thank you very much.

Next, Mr. [Rosalind], ABG Sundal Collier.

Thank you. If you look at your Q3 earnings and try to translate that into a cash earnings figure, could you just give some sort of indication what have kind of cash earnings that would represent? I'm been trying to do some calculations.

I'm not sure I understood your question. Could you repeat that?

The cash earnings in Q3, just assuming that [inaudible] consolidated, what kind of figure will we get to on Frontline, then?

That one I just can't take top of my head [inaudible].

That's okay. But the follow-up question is, if you look at EPS in the third quarter of $0.99 and for a second quarter in a row you're paying out dividends higher than earnings and in Q2, on Q2 [inaudible] that was a sustainable situation. Is there any reason why you're using so much of your Q4 earnings for dividends on the Q3 results?

I guess the only reason is that we have buckets of cash right now and we don't see any reason we should be holding on to that when we get to February. But obviously from what you're asking and also given the previous question that we have to pay out the profit sharing it's quite obvious that the pay out ratio for the fourth quarter would definitely be way below 100%, unlike what it was this quarter.

Okay. Great. Thank you.

Next Mr. [Youngbloch] in the company Artemis, please.

Good morning. I had a question on the VLCC rates and how they compared to some of your well-regarded competitors.

Last second quarter your VLCC rates were also extremely impressive and you said it was kind of one-time thing it was mostly going to California and stuff like that if I remember correctly. And now again you've beat some of your best managed competitors and I start to wonder, and the age profile of your vessels are somewhat lower and single hulls and stuff like that. I'm just curious what you're doing differently and whether or not this is really a trend which continues as opposed to just getting lucky as you seemed to indicate last time?

[Inaudible] cross trading and we also have quite a few vessels on long voyages sitting on the [inaudible] on the [inaudible] for a long, long time but our, but generally, you know, we put a lot of focus on timing and we have a very, very active view on whether it's worth to wait for a [inaudible] wait [inaudible] and I think it's better to ask our competitor what they do instead of asking us. We will not [inaudible].

Let me ask you this. Is there anything different in the accounting or anything else that would lead us to conclude that you're better or as you understand their presentations is it really an apples-to-apples comparison?

I don't know. The only thing I know that there's a lot of our competitors which have taken new building, they capitalized the first ballast voyage from the yards, the first voyage is very often overstated compared to our numbers. So it really doesn't explain it, it is the opposite that they more or less over represent their numbers since they take the ballast voyage and capitalize it.

I'd just like to add that basically in all fairness to everybody there's no way in shipping that you can sort of hide or improve earnings in more than a quarter or whatever. So and I'm sure that most of these, all of the listed companies basically have come to the conclusion that they've got to be honest on this and do it consistent.

So I wouldn't be looking for any of that kind of explanation. I just think as Oscar said, we've been consistently betting on movements within the quarter when will things go up, when will things come down, et cetera, and there we seem to be a little bit more lucky or good compared to the one's we measure ourselves against.

There could be one explanation and there are, you know, some of our competitors when they take in [inaudible] account, if they take [inaudible] on a time charter, if they lose money on that position whether that is through taken off on the earnings, I don't know.

Another thing which they also might be doing is that if they're going into the FFA market that they deduct the [inaudible] loss the FF A on [inaudible] that's also a thing. But as you said, you know, generally we have outperformed our competitors both in the [inaudible] market and the [inaudible] market for many, many quarters now and years.

Then one last question. Tom, just in response to the last question you said something which I didn't quite understand and you said the pay out rate for the fourth quarter would be less than the third quarter obviously but also less than 100%. I'm sorry, can you just walk me through what you're thinking there?

I actually didn't, I don't think I asked that it would be less than in the third quarter, that's $1.50. I don't have any opinion on that right now.

What I meant was if you look over the last few quarters we basically have been able to pay out around 100% of earnings per share, or in this current case in excess of that. But obviously up to the beginning of March Frontline has to accumulate $90 million which is to be paid to Ship Finance, and that will of course then restrain, and that's 36 million of that has already been accounted for. That is accrued in the accounts but effectively now it will have to be paid.

My point was simply that there's a payment coming up which will mean that we have to pay, let's say, less than 100% of earnings per share in the fourth quarter probably next time. Was that any clearer?

That was clearer, yes. That was clear. Thank you very much.

Okay.

There are no more questions at the moment. Okay, then I would just like to thank everybody for listening in.

If you have more questions you can always give us a call here in Oslo. If we don't speak to you then have a good day and we look forward to seeing you again after Christmas in February sometime. All the best.