Frontline Plc (FRO) 2005 Q4 法說會逐字稿

Thank you operator. Ladies and gentlemen, welcome to Frontline's fourth quarter 2005 presentation. My name is Tom Jebsen. I'm 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 the word to Oscar to run through the latest developments in the market and some of the things we are working on internally.

Moving to slide 2, starting with the main events in the fourth quarter and so far in Q1, we paid out a dividend of $1.50 per share for the third quarter in December. And then today, we have -- or our Board has declared another dividend of $1.50 per share. The record date for the dividend is March 6. The ex dividend date is March 2 and the dividend will be paid on or about March 20.

The Board has also decided to distribute approximately 5% of outstanding shares in Ship Finance. That is 5 percentage points out of the 16% the Frontline holds. In effect, this means that every Frontline shareholder will receive one share in Ship Finance for every 20 shares held in Frontline. The record date, the ex dividend date and the distribution date are the same as for the monetary dividend just mentioned earlier.

Moving on to slide 3, in December, we acquired the remaining 60% in the vessel Front Tobago from our joint venture partners. This has been accounted for as an investment only. In other words, no gain from selling to ourselves, if you understand. In January we sold the vessel Navix Astral to the charter MOL. MOL had a call option on the charter. Technically it was really Ship Finance that sold it, but we had a contract for -- to charter that vessel.

So while the sale occurred in 2006, since we knew that -- that is, Ship Finance knew that they would realize a smaller loss, one had to according to U.S. GAAP to book to the loss in Q4 2005. And the amount being $1.8 million. And since Ship Finance has consolidated into Frontline, obviously that comes into our P&L also.

Since Ship Finance, as the owner of Navix Astral, had an obligation to provide a vessel to Frontline sale or no sale, Ship Finance had to secure a replacement vessel and the parties have agreed to let Ship Finance buy Front Tobago and let the vessel so-called step into the shoes of the Navix Astral charter. This week, we have entered into new building contract for two VLCCs to be delivered in 2009 with options for another two vessels. Oscar will get back to that a little bit later.

We have during the fourth quarter started to establish the FPSO business unit. And in addition to that, we have now also initiated a project to convert two of our older Suezmaxes into heavy lift vessels. Again, Oscar will inform you more about this later, but while many people consider a single-hulled Suezmax to have less than five years less left for trading, I tell you that these vessels when converted will have a twenty-year trading life.

Ship Finance bought back shares during the period in the amount of $27 million and -- or 1.4 million shares, and we have also acquired bonds for another 1 million during the quarter. So outstanding bonds after this is $157 million par value. The profit split Frontline is to pay Ship Finance for 2005 ended up at $88 million.

Moving on to slide 4, we continue to consolidate Ship Finance into Frontline and expect this to be the case until we have fully divested the holding. In the presentation, you'll find restated accounts for previous quarters. There no major items in the profit and loss, just the sale of Cos Hero during the summer, which was restated to discontinued operations since the vessel was the only drydock vessel that we had. This had an impact on Q1 and Q2 accounts [and] the same for the guarantee Frontline has given to [Gold Notion] us to the correctness of a 50% profit split on the vessel [Channel Alliance].

We have so far extended -- expensed $11 million on this latter item. The claim we have -- we, that is Frontline has against [Bossmar] is not booked in our accounts and is therefore an upside. This also led to a restatement in Q1 and Q2. Front Tobago we covered earlier. And the final item relates to the balance sheet having to be restated as [per] the second quarter as a result of an adjustment to the accounting for the purchase of two vessels which Ship Finance acquired from related parties associated with the main shareholder, [Hammond Holding], back in June 2005.

Following consultation and advice received from the U.S. Securities and Exchange Commission, the Company has now recorded this transaction at fair value instead of historical cost, and effectively this has led to an equity contribution of approximately $85 million being accounted for. So effectively we have increased our equity by $85 million.

Moving on to slide 5, the profit and loss shows a total operating revenue for the quarter of $430 million. I will revert to the breakdown on a TCE basis on the next slide. There is a small loss on the sale of Navix Astral, as explained earlier. Also, expenses on the shipping side I will run through on a later slide, but G&A is higher this quarter due to heavy activity, ending the new year and $21 million. We estimate G&A at the same level also for 2006.

Operating income or EBIT ended at the $237 million and EBITDA at $287 million in the quarter. Other financial items include FX -- including FX gains of positive 11 million in the quarter. This is related primarily to marked-to-market of interest rate swaps and gains on Japanese yen forward contracts.

As most of you are aware, we post as a minority expense 84% of net income in Ship Finance. Since GAAP only allows Ship Finance to take to income the 21% profit split when it is ascertained, that is the minimum higher (indiscernible) for the financial year has already been achieved. Most of the profit split is booked in the last two quarters. This effect partially explains the $70 million minority in the fourth quarter. With this, we end up with net income therefore being $134 million in the quarter or $1.79 per share. The figures for the full year are EBIT at $873 million, EBITDA at $1.060 billion, net income at $607 million and in earnings per share at $8.11.

Moving on to slide 6, VLCC spot earned almost $69,000 per day in the quarter while average of spot and fixed [earned] was $65,800 per day. The Suezmax fleet earned $44,100 per day and the OBO's where all vessels are on-time charter made $32,900 per day. Interestingly enough, the single hull VLCCs outperformed doubles in the quarter while for the Suezmaxes, it was the other way around -- doubles outperforming singles by $12,000 per day.

Moving on to slide 7, we have experienced a substantial increase in ship operating expenses lately. I explained this also in the last quarterly webcast. It's basically explained by four factors. 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.

And three, marine crew wages have increased as the Marine sector is being stretched due to the strong growth in the number of vessels in all segments. Finally, four, in connection with us selling one vessel and taking delivery of three other ones, we have spent substantial amounts on these vessels. And since we use the accounting principle expense as incurred, this has had an impact of $200 per day per vessel over the whole fleet. As you can see, we had average OpEx of $7,190 per day in 2005 and a higher rate due to the more time drydocking than in 2004.

Moving to slide 8, the balance sheet is pretty straightforward. The only items to mention is that cash is down 90 million compared to September 30, which is partly explained by some cash moving into restricted cash in connection with us establishing security for the financing of the shares we acquired in General Maritime. This also leads to a large increase in other current assets.

In addition to the GMR shares being posted here, we also have a large increase in voyage in progress on this line due to the rise in the market. On the liability side, short-term debt increase is due to the GMR shares financing, is basically the reason for the lift. And finally, the equity line also the vessel line on the asset side have been increased by $85 million as mentioned earlier. You don't really see these rises since previous quarters have been restated.

Moving to slide 9, yen exposure has been reduced by $25 million during the quarter. We have reduced this exposure further in Q1 in connection with the sale of Navix Astral. The level will be down to $35 million next time we meet. Interest rate exposure is limited. For Frontline consolidated with Ship Finance it is approximately 25% of debt that is floating. But for core Frontline it is actually even lower, since core Frontline has fixed charters with Ship Finance on all of the 50 vessels involvement between those two parties.

Moving to slide 10, I think it is proper to focus on the columns to the right considering Frontline's current breakeven rates. Both columns show breakeven with Ship Finance deconsolidated. The figures in the first column to the right take into account the vessels we currently have [on-time] charters out and leaves believes us with the rates needed to breakeven after that. As you can see, these levels are competitive by industry standard. Our FFA book is currently close to zero.

Moving to slide 11, what is Frontline now? We're basically here with same set up as in the past quarters. And I guess the only items aspiring to box being the FPSO and the heavy lift business development. And with this I leave the word to Oscar Spieler.

Good morning to everybody. I will first go through the fundamentals for Q4 and then move over to the outlook and at last I would give you some information about our FPSO and projects on heavy lift projects. Q4 developed stronger than we anticipated in spite of the fact that as (indiscernible) were delivered during the quarter. The tanker fleet in general was influenced by congestion and therefore less effective than anticipated.

Due to the daylight restriction and bad weather, the delays in the Turkish Strait were substantial with up to 17 vessels waiting with a delay of up to 23 days at the most. We also saw a number of tankers on the merge due to the damages in connection with the hurricanes. The vessels have been waiting up to 110 days -- our vessels had been actually waiting actually up to 110 days and are still laying there. And a number of companies have charter vessels in (indiscernible) according to our information.

We have also seen a lot of congestion in Basra due to infrastructure problems and we have seen up to 20 vessels waiting there for a number of weeks. In addition, there are also 12 modern VLCC on storage in Iran with some heavy [rain incurred].

Moving over to slide number 13, it was only a marginal increase from Q4 '04 to Q4 into '05 according to IEA. One of the reasons might be that the mild weather -- might be the mild weather. It does not look like the oil price has had any dramatic effect on the oil consumption. However, it could be one of the reasons of the slightly disappointing growth in oil consumption in 2005.

The hurricanes and the damages to production platforms caused additional [turmoils] in Q4. Approximately 300 barrels per day of production capacity in the U.S. Gulf is still out and is expected to be out throughout the first [half-year or] 2005. Another factor which can cause longer transportation businesses is the strong (indiscernible) for the forward oil prices and the large crude stocks. The [trader used] the vessels as [stores] and therefore prefer long distances.

Moving over to slide number 14, the import to China was higher in Q4. And this is mainly due to the very cold [alter] winter in China. The price regulation and gas line is still in force. However, the government has paid the Chinese oil companies for the losses. [This most] probably have been positive with regard to refining and consumption in China in the last few months. What is really positive for the tank industry is the fact that the import in Q4 and -- Q4 '05 and Q1 this year never have been higher.

Moving over to slide number 15, number of the spot fixes out of the [AG] in Q4 was lower than in '04 -- Q4 '04. And this trend also continues into Q1. Normally this would result in a lower market. However due to congestions on straits and ports, the effects have been minor.

Moving over to slide number 16, [REA] further predicts that the average demand for 2006 in total will be 85.40 million barrels per day or a 2.1% growth from 2005, hence showing a firm belief in the continued demand growth. Several new small oil fields coming on-stream in West Africa -- long haul to China and India.

The VLCC fleet saw an expansion in 2005 about 6%, a very high figure with our overall tanker tonnage growth of some 7%. However, for 2006, the growth will be significantly less with only some [70 to 80] VLCC deliveries. We also believe that there will be a number of vessels taken out for conversions. Actually, we believe that there will be around 4 VLCCs, 4 Suezmaxes and 4 (indiscernible) every year going forward. (indiscernible) pipeline will be delayed and could be viewed as both positive and negative. However, we believe it will be positive because when the pipeline comes on-line because this adds additional turmoils for sea transportation.

We have political tension in Iran, Nigeria, Venezuela which could have an effect on the tanker industry, but first of all on the oil price, which could have a negative effect on the oil demand if it goes very much above today's level.

Most people predict a healthy market in 2006 as well. Imports to China will be up because oil consumption most likely will rise stronger than the meager 3% increase in 2005. And to Europe because the continuing decline in the North Sea production has covered -- must be covered by imported crude.

We are ahead of a heavy maintenance season in the refineries in this U.S. which will take out more capacity for a longer period than usual. So far, we have not seen any dramatic effect on the oil price. However, as I said earlier, if it increases further we believe that we will see a dampening effect on the consumption.

Moving over to slide number 17, the graph above shows REA estimated new capacity coming on in 2005 and 2006. Out of the 2.6 million barrels, 1.5 million barrels is from the Middle East, requiring long distance transportation either to U.S. of the Far East and the rest will also require seaborne transportation (indiscernible) out from Nigeria or Libya or Algeria. From a tanker point of view, it is interesting to see REA's estimate for Q4 '06 which is very high, and with a limited number of VLCC's coming out this year we're really optimistic for the last months of 2006.

Moving over to slide number 18, the economical growth forecast for 2006 is optimistic. There's usually a fairly good correlation between GDP growth and oil demand. Last year we saw a lower ratio, which we believe is due to higher oil priced and the hurricane effect. However, this year REA and IMF believe it's back to normal.

Moving over to slide number 19, we presented this graph some years ago showing the development of the tank fleet versus require demand for sea transportation based on the fact that the growth in oil demand will be 2% per year from 2007, and that a 1% growth in oil demand will require 1.7% growth in (indiscernible) which we feel is conservative. We have estimated a fleet growth of 5% for VLCCs, 6.5 for Suezmaxes and 8% for (indiscernible) off the 2007. There's only estimated marginal scrapping.

Based on this assumption, you can see that there is only a marginal change in the fleet balance. This graph shows the following. Based on our estimates, there is a fair balance between supply and demand up to 2010. Secondly, the industry needs the single hull up to 2010. If not, it will be under -- too few vessels for transportation.

And thirdly, in order to be able to replace the single hull VLCCs based on the fact that the orderbooks are more or less full up to 2008, there has to be built an enormous number of vessels in 2009 and 2010 in order to be able to replace the single hulls. In other words, in 2009, you have to build 100 VLCCs and the same number in 2010, which we feel is unrealistic.

Going over to page number 20, last year oil import to China was disappointing, caused by regulated prices, transition to coal, oil price, etc. There are some Chinese officials who claim that the growth in oil demand was actually zero. The Chinese economy is full speed ahead today and the last week's prediction is that the oil import looks to be even higher than shown in this graph in 2006.

To summarize, the outlook, based on the I-A estimates for 2006, based on the fleet growth and based on the good results we have seen from Q1, we are very optimistic for the result -- for the rates for 2006 and we believe that there can be close or maybe even better than the result in 2005.

Moving over to slide number 20 -- 21. Our FPSO team is up running and we have employed three persons. We have established partnership with [Vescoable] for the process and topside management and OSM on the marine side. We do not plan to build up a big staff, but outsource most of the functions. We also started the development of a generating FPSO, which is according to plan will be completed by Q3 '07. In addition we also are in negotiation on several different FPSO projects.

Moving over to slide number 22, we believe that there will be a focus for heavy lift vessels for transport of jackups, [same as] immersibles and [mobiles] in connection with the boom in the oil market and the boom in the rig jackup markets. We have started a conversion of two Suezmax vessels to heavy lift. They will be completed by end of this year and they will be converted in China.

These vessels will be then upgraded to [create] additional (indiscernible) years and hence these vessels will actually reach a life of 35 years before they will be scrapped. Later this year, we will decide whether we will go forward converting another four Suezmaxes, which can be actually ready already in the middle of 2007.

And then we leave the -- thank you.

Yes, operator, we're ready for the Q&A session.

(OPERATOR INSTRUCTIONS). Mr. Chappell, JP Morgan.

Tom and Oscar, a couple of questions about the conversions, the heavy lift vessels and the FPSOs. First of all, the two Suezmaxes for the heavy lift, are those Ship Finance Suezmaxes or are those Frontline owned?

They are -- the first two ones are currently Ship Finance owned. That's right. So effectively currently, Frontline has an agreement so they can use them up to 2014. Obviously we need to agree on how to handle that between the parties. You -- obviously one of the alternatives for Ship Finance is that they can finance both the new investments and -- yes, and also extend the contracts. Obviously that's up to negotiations, but as I indicated, we're talking about a life that stretches way beyond 2014 -- 20 years from today -- that's 2026.

And the other four Suezmaxes Oscar spoke about at the very end, will those be Ship Finance ships as well?

I guess two of them are actually currently with Frontline only and the other four are with Ship Finance.

Okay. And as we look at modeling those ships this year, it sounds like the first two have already been removed from trading, so we'd have to look at that as having two less ships in the operating environment in 2006. First of all, is that correct? And then second of all, when we look at modeling these past 2006, are there typically contracts that are signed for the heavy lift vessels? Is there a spot market for that type of ship?

Your first question, the vessels have not been taken out of trade yet. They will not be taken out before October 2007 -- 2006 because the way we do this will minimize time [off hours], so the conversion time will only take 60 days. On the market on those four heavy lift, the market is very strong today, but when all these new rigs coming out from Singapore and the jackups and [semis], we believe that the market will tighten further. The market is -- first of all it's a spot market. Some of the contracts are awarded a long time 3, 4, 5 years ahead. Some of them are done on very, very short notice.

Okay. This is a market that I'm unfamiliar with. Can you give us a sense of what the current spot market rate would be for a heavy lift vessel of the Suezmax size?

It varies between -- I would say today's market US$40 to US$100,000 per day.

40 to 100. Okay.

It is impossible -- it depends on the how desperate the customer are and with the present day rates of rigs of -- for close to US$500,000 the cost of the transportation is insignificant in this respect.

Okay. And one last thing probably for Tom, the first quarter is essentially over now from a booking perspective. Can you give us an update of what you booked the VLCCs and Suezmax fleets at at that this point?

No, I think what we -- this is Oscar. I think we have decided not to guide you on the earnings so far. We said that we are happy with the earnings have seen so far in the press release and I think we will leave it with that.

Justine Fisher, Goldman Sachs.

Good morning. I just have one follow-up question as far as the heavy lifting vessels with Ship Finance, will they -- will you have to rewrite the contracts on those vestals to be different, as far as the rates are concerned, in the profit shares from the current contracts? Or would the base level be the same?

The base level should be the same and the profit-sharing should be the same. And as I said to Jon, what probably -- what Frontline will have to consider together with Ship Finance is whether Ship Finance could finance the midsection and all the extra equipment being put into these vessels to upgrade them to heavy lifts and put back into, say, a second part of a contract.

How much does that cost per ship?

I don't think Oscar wants to tell that.

Okay. The second question I have is actually regarding ITC. I think that I remember on your last conference call you mentioned that you were going to take redelivery of a couple of those vessels. It was a very -- it was just in passing, but I just wanted to know what the status was of those vessels. I know they're on long-term charters BP and Chevron. Any color as to whether those charters will be extended or has Frontline taken back any of those ships to operate by itself?

The -- in the structure called California Petroleum, there's one single hulled Suezmax and three double hulls. And Chevron is to redeliver according to contract on April 1st, and what -- we are currently preparing to take over that vessel. And we are actually in discussions with rating agencies, Standard & Poor's and Moody's, to secure a contract -- a replacement charter as it's called between California Petroleum and Frontline. And obviously, the only way we can qualify is that we will put up some money for charter hire in front and thereby enhance, let's say, the Frontline name if you understand. So -- and then that vessel is going to continue in the Cal Petro system. That is our plan right now.

Okay, but in Windsor petroleum and the others, the schedule is still as it was when those structures were initially set up that the first -- I think the first option to -- for the oil companies to redeliver the ships is in 2010, right? Or 2012?

On the doubles, yes, that is right. I think that's right, yes. So really this is the only thing we can do on that structure. And then it's going to be sorted dormant again for many years, if you understand.

[Mr. Stuart], [Simons].

I had a question on the new builds, just regarding the $104 million. It seems to be a little bit below where the market is quoted in [Clarkson's] and the like. I just wondered how much is that to do with a discount for the Chinese yard and how much you managed to negotiate a better price and what kind of additional [supervisions] you feel you need for a Chinese yard.

We have not said anything about the price. That is speculation from the press. You are right that there are a discount for Chinese new buildings compared to Japanese and Korean, so in that respect they are right. And then of course, I think you should know Frontline that we are hard negotiators, so your last question was -- supervision. That is a marginal thing actually. It's nothing to really -- it's marginal.

Okay, and then just in terms of percentage broadly, what would you suggest would be a normal discount from Chinese to Japanese or Korean yard?

It is difficult to say. I think it varies quite a lot between the different yards and so on. There are some yards which are -- more or less have the same prices as Japanese and Korean yards, and they are all (indiscernible) are lower. So I don't have any number on that actually.

Okay, but it's fair to say that this yard is relatively new to the VL market?

Yes, it's a relatively new to the VL market. That's right.

And one last thing. When did options for the additional vessels expire?

April of this year.

(indiscernible), Citigroup.

A couple of questions on the chartering side. First of all, I believe you have four of the bareboat charges, Shell renewing this quarter. Any plans on what you want to do with them?

We're taking them back. So they will be applied and put into the spot market.

They're going to the spot? And how about the LBOs -- the ones that expire this year?

Yes --

We are looking at different options there as well. But we will most probably go -- try to trade them back in [west] -- it's not decided. With this volatile market, it changes every day. So I think we have to have a very -- we have to take that decision day by day and of course there's also an alternative to make those in (indiscernible) into pure Suezmaxes by taking off the hatch covers on deck.

I see. Also, the other container ship, I believe first of all the container revenues are in Frontline right now? Correct?

I'm sorry, I didn't hear the question.

The container ship revenues, they're consolidated too as well, right?

Yes.

What was the second vessel [fixed to]? Do have the [rate]?

That vessel is actually going off charter in the near -- within the next month really, so what we're currently working on is to put a [doubt] on anywhere between a one and three-year charter.

I see. And finally, on the adjustments for the forest and the energy on the shareholder's equity, can you him explain a little bit more how -- who contributed this equity? How exactly was this adjustment done?

We -- at the time when this transaction took place last summer, there were a few other transactions in the VL market around -- at price around $135 million per vessel. Originally, when we were negotiating the contract with Pertamina, we won the contract at approximately $92.5 million per vessel. So the difference on two vessels is $85 million. Frontline, or excuse me, Ship Finance paid for those vessels $92.5 million apiece. And that was our view that it was correct to book those vessels and -- at cost.

In -- but since the market price was quite different, we had a long argument with our auditor and actually Ship Finance auditor sides with us basically, and Frontline's auditors sided against us. So -- and we brought this into the SEC [to 404] for discussion and they basically ended up siding with Frontline's auditor. And that led to us -- booking the vessel at, let's say, fair value or assumed market price at the time. So that's basically the story behind it. Does that help you?

Yes.

And it is a pretty interesting case because as the SEC said, they'd never had that kind of a case before. And it will be sort of a -- it is going to be a case case, if you understand, for accounting people in the future.

(indiscernible), [Dalman Rose].

Yes, my question pertains back to the Chinese new builds. Are you anticipating like a heftier down payment than the usual 10% we see from Japanese and Korean contracts?

What sort of -- what is the total contract you are thinking of? (multiple speakers) On a 100% basis then?

Yes.

We pay them approximately -- we pay out approximately 20% now in the beginning and the rest is starting with the (indiscernible) and so on.

So 20% up front? Thank you very much.

(OPERATOR INSTRUCTIONS). There's no more questions.

Okay. Well that's fine. Thank you very much for listening in to our conference call and we look forward to talking to you again or presenting ourselves again in three months' time. And if you have any questions in the meantime, please feel free to call us in Oslo. Bye-bye.