Frontline Plc (FRO) 2006 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to Frontline conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS). I would now like to hand over to the Chairperson, Oscar Spieler. Please begin your meeting, sir and I will be standing by.

Good morning, everybody. This is Oscar Spieler, the CEO of Frontline. Welcome to the presentation of the first quarter results for 2006. The following persons from Frontline are here together with me, our new CFO from 1st of June, Inger Klemp and our Chartering Director, Stephen Eglin and our retiring CFO, Tom Jebsen.

Going over to Slide Number 2, we will start on the main events for Q1 and Q2. We have done a number of transactions between Frontline and SFL and with external owners. In January, we sold the [Navixpresswall] to Minghua. At the same time, we sold Front Tobago to Ship Finance to replace the Navixpresswall time charter with Frontline. In addition to the new building contract at [Nax] in China, we also ordered two [wheeltheseaup] Jiangnan shipyard in February and we also declared the two remaining options at the same yard in April.

We paid out $1.50 U.S. in dividend in March. Going over to Slide Number 3. At the same time, we distributed another 5% of SFL shares to the shareholders of Frontline. We have today declared a dividend of $1.50 U.S. The record date for the dividend is June 12, 2006 and the X dividend date is June 8. And the dividend will be paid out on or about June the 26.

As everybody should know, Tom Jebsen has resigned and we're happy that Inger Klemp has accepted our offer to take over as CFO after Tom when he is retiring on 1st of June. At the same time, Ship Finance has employed Lars Solbakken as CEO of Ship Finance. Ship Finance will at the same -- will build up a small and effective management structure. We have also employed a new technical director, which will be starting later in the summer and we are planning to strengthen our technical team further.

Our newly established Front SFL team have only after a few months managed to secure a very profitable SFL contract for the Puffin Field in Australia. In connection with the contract, we have purchased Aframax Gerrita for $35 million U.S.

Going over to Slide Number 4, we have also sold a single vessel, Golden Stream, giving Frontline a profit of $11 million U.S. One of our subsidiaries took delivery of the single hull Suezmax from Chevron. In connection with the redelivery, Chevron paid a termination fee of $5 million U.S.

Ship Finance have acquired high yield bonds through a [returning] swap line for around $48.6 million in Q1. Ship Finance have also purchased 400,000 shares and this will affect Frontline's percentage shareholding in Ship Finance. Then we're going over to the next slide and I will then give the word to Inger Klemp.

Hello. My name is Inger Klemp. I will move to Slide Number 5. There are two accounting issues I will mention. The first issue is that we continue to consolidate Ship Finance into Frontline in accordance with FIN 46 and expect this to be the case as long as Frontline and John Fredericksen owns 45% or more of Ship Finance. If the combined holding falls below this threshold, it will be considered whether we should consolidate or not in the future.

With respect to the guarantee Frontline has given Golden Ocean, after the correctness of the 50% profit [bit] for the vessel channel lines from [Bosenmar], we have expended 11 million in previous quarters on this item. Further, 0.9 million is expensed this quarter and in addition we have a current liability of $2.6 million booked in the accounts. The claim we have against Bosenmar is not booked in our account and is therefore an upside.

Moving to slide 6. To start, I will mention that when comparing the P&L numbers with Q1 in 2005, you will have to take into account that there are two more vessels this quarter.

The P&L shows total operating revenues in the quarter of $487 million. I would refer to the breakdown of this on the next slide. There is a gain on sale of Golden Stream in the amount of $11 million, as mentioned earlier, and a gain as a result of the lease of $1.4 million of the $1.9 million loss on impairment that was accrued in the fourth quarter 2005 on the Navix Astral, which was delivered in January 2006.

In the first quarter 2005, we had a gain on sale of vessels in the amount of $28.5 million related to Front Fighter. Expenses I will run through on a later slide but I will mention that depreciation is higher this quarter than in 2005 due to two more vessels.

Operating income or EBIT was 275.5 million and EBITDA was 327.8 million in the quarter. The Company recorded interest expense in the quarter of $52.6 million, of which 15.4 million relates to at-sea.

The total for other financial items including FX loss contributed are positive 14.7 million in the quarter. This is primarily related to dividend on the [Gainmar] shares with 7.7 million and a continued increase in the forward curve for LIBOR rates in the quarter has resulted in valuation gains of $5.2 million. This is situated on the interest rate swaps with a notional principal of 535.7 million, all of which relates to Ship Finance.

In addition, Ship Finance has entered into a number of swaps, which subsequently were terminated during the quarter at a total gain of $3.6 million.

As most of you are aware, we posed a minority expense of 88.2% on [less] income in Ship Finance. Since GAAP only allows Ship Finance to take two incumbents 20% profit split when it is a certain that it is the minimum higher for a financial year has already achieved. Most of the profit split is booked in the late quarters. Net income ended therefore at 219 million in the quarter or $2.93 per share. As Oscar mentioned earlier, we are distributing a dividend of $1.50 per share. Then moving to Slide 7.

VLCC's spot earned more than $84,000 per day in the quarter while the average of spot and fixed earned was $73,000 per day. The Suezmax fleet earned 49,700 per day and the OBO's, where all the vessels were on time shockers made $31.700 per day. The RTC vessels are end charted in tonnage is not included in these rates. In addition, we have revenues from container vessels and the termination fee from Chevron related to Front Voyager. Then moving to Slide 8.

We have experienced a substantial increase in ship operating expenses lately and we expect this to continue. This is explained by three main factors. Marine crew wages have increased as the Marine sector is being stretched due to the strong growth in a number of vessels in all segments. Increased dry docking costs due to older vessels and increased yard costs. Lube oil costs have also increased as crude oil prices and refinery margins have increased. As you can see, we have average OpEx of $7,996 per day in Q1 2006 compared to $7190 for the full year 2005. The numbers exclude the container vessels, the RTC vessels and Front Puffin. Estimates for full year 2006 is approximately $7,600 per day. Moving to Slide 9.

The balance sheet is pretty straightforward but I will comment on a few items. New building and vessel purchase options have increased with new building installments in the quarter. Vessels and equipment have decreased as a consequence of the sale of Golden Stream. And finally, the minority interest line has increased due to the distribution of another 5% of the outselling shares in Ship Finance to Frontline shareholders in Q1 2006. Then moving to Slide 10.

The end exposure was reduced by $40 million during the quarter in connection with the sale of Navix Astral. And exposure is now down to $34 million. Interest rate exposure is limited for [sometime] consolidated with Ship Finance it is approximately 28.5% of debt and capital leases that it's floating. But for core Frontline it is actually much lower. Moving to Slide 11.

We think it is proper to focus on the columns to the right when considering Frontline's current break-even rates. Those columns show break-even when Ship Finance deconsolidated. The figures in the first column from the right take into account the vessels we currently have on time charters and leaves us with the rate needed to break-even after that. As you can see, these levels are competitive by industry standards. Moving to Slide 12.

We are basically here with a sense that as in the past quarters and the only new item which has aspired to a box being the FPSO and HEAVY LIFT business development. As of today, the only investment here is Front Puffin.

And with this, I leave the word to Oscar Spieler again.

Hello, again. I'm going to go into the tanker market and supply and demand presentation. Going over to Slide Number 13.

IEA revised the global oil demand growth for 2006 down from 1.37 million barrels per day to 1.25. World oil supply rose in April by 485 kilo barrels per day to 85.09 million barrels per day, which is an all-time high supply. It is estimated that China in Q2 will have an annual growth in oil demand of 6.7% year-on-year while it was 2.5% in Q1. The net crude imports were in the same period up 24.6% year-on-year and this is of course very positive for the tanking market.

The recent supply problems in Atlantic Basin have caused longerhaul tonne mile demand. Ship broker Fearnleys estimates that the crude tonne mile will increase by 4.4 year on year in 2006.

U.S. oil inventories are well above the five-year average and due to the heavy maintenance after the hurricanes, the season rise in oil the inventories are ended earlier than normal. Refinery maintenance in the U.S. peaked during March '06.

The IMF sees developing countries growing 6.9 this year versus 3% for the advanced economies. Geopolitical factors are in the driving seat for oil price given the high capacity utilization. Going over to Slide Number 14.

As everybody who knows, everybody who follows the tanking market knows the market is extremely volatile and will continue to be so. For the first quarter, we did expect a drop in the market due to heavy maintenance on the refinery side. However, the Clarksons and our spot earnings shows actually that the earnings for Q1 in 2006 was higher than the earnings for Q1 2005. In the last six years, the difference between the highest market is around $210 U.S. per day on VLCCs and 145 on Suezmaxes. In a market like this, timing is everything. Going over to Slide Number 15.

Fundamentals and supplies. So far this year, there has been delivered five VLCCs and seven Suezmaxes and in the remaining of the year, there are only 12 more VLCCs to be delivered, which is less than we have seen in the last few years.

There has been a massive ordering of VLCCs lately due to the new common rules, which represent an optimistic view of the 2010 phase-out of the single hull. These deliveries will be partly offset by growing the demand for tonnage from offshore projects, just like FPSO, FSO and heavy lift, which Frontline is also looking into. Actually some broker estimate it could be as much as up to 30 vessels per year for these type of conversions. However, we feel that this is a bit to optimistic with regard to the tanking market.

Furthermore, we have lately seen that oil majors such as BP discriminating single hull tonnage and BP for instance will only transport for [system] oils and therefore also refuses to inspect them on the same basis. In a good market, the difference between single and double hull vessels are marginal. However, the difference becomes bigger in a bad market. We believe that the new shipbuilding capacity will come up in China and [Vidian 2013] you will have increased the shipbuilding capacity dramatically. Going over to Slide Number 16.

The overall macro figures remain strong and IMF has a GDP growth estimate of 4.9% in 2006 and 4.7 in 2007. IEA have downgraded their growth in oil demand for 2006 to 1.25 million barrels per day, which implies 1.5% growth versus 2005. However, it remains strong in our mind and the figure represents a recovery from 2005, which had a growth of only 1.3, with China, the Middle East and the developing countries driving the rebound.

We believe that the demand figures look overall positive with Q4 estimate as the most interesting. Q4 is estimated at a growth of 2.8%, which compared to the slightly negative figure minus 0.1% in Q4 2005 makes us quite optimistic for the last quarter's rates.

There are at least two clear trends that look promising for oil demand throughout 2006 and 2007. The rising middle class in developing countries is boosting car sales. German export orders for cars hit a record high in January and a similar trend is appearing in Japanese car exports as well. The strongest country for car sales is China. World trade is growing strongly which boosts diesel consumption for both trips and train and bunker consumption for ships.

Adding to this on a more speculative note, reports early this week made U.S. weather forecast experts indicate that the season, which begins next week and ends in November will yield 13 to 16 named storms in all, six of them categorized as major. An average season has 11 named storms, six of them hurricanes, two of them major. Going over to Slide Number 17.

International coming economy. The U.S. economy, which has been a locomotive in world growth seems to finally be easing a little. A note on the positive side, healthy GDP growth both in '06 and '07, the long interest rates keep stable, the corporate sector is healthy. On the negative side, we can mention [cuing] topping off [of out] effect on the American housing and car sales, higher oil prices and its influence on demand and the U.S. dollars depreciating and of course the trade balance.

Europe appears to be healthy and the economy is forecasted to grow 2% in 2006 and 1.8% in 2007 according to IMF. Germany seems very positive and close to all industries moving in the right direction. European consumption is stable and strong at historical high levels.

China is clearly still a main source of world growth and IMF projects, GDP to grow 9.5% in 2006 and 9% in 2007. The oil demand was up 2.5% in Q1 based on year on year, while the net crude imports, as mentioned earlier, was as high as 25% in Q1 2006.

The three remaining quarters all have very positive demand estimates. Q2 6.7, Q3 5.3, and Q4 6.5, giving China a full-year growth estimate of 5.3%, the highest of all areas along with the Middle East. China drives the demand in Asia followed by India, South Korea and Japan. China recently raised prices on gasoline and these all are less than expected. According to IEA, China's car sales increased 54% in Q1 to 1.25 million cars. China has further reported to have completed the construction of a substantial portion of its plans to [exceed its] oil storage. We do not know whether those have been starting to be filled.

Another interesting thing is that Angola have passed Saudi Arabia as China's top supplier for the first time in Q1. Angola with these quantities tie up 15 to 28 VLCCs, depending on trade on Angola to China liftings, compared to [A.G.] China liftings, which will tie up only 9 million VLCCs. Going over to Slide Number 18.

As you can see from the growth from Bassoe fleet capacity increase is in balance with the estimates for demand for tonne miles and is forecasted to be in excess for 2007. And in 2006, the supply demand is quite high -- tight, I mean and fairly balanced. And this is more or less supporting what we said earlier. Going over to Slide Number 19, a summary of the industry outlook.

Demand for oil forecasted by IEA will be up 1.5% in 2006 from 2005 -- to 2005. And we believe in that firm growth also in 2007. The world economy from a monetary perspective appears healthy as a result of historically low inflation and demonstrated ability to withstand temporary commodity price spikes.

Greater demand of oil in China and massive amount of orders on newbuildings reported and rumoured latest is some 150 VLCCs, which will affect the tanker market in the end of the decade with a big question mark, what will happen in 2010 and the phaseout of single hulls? Geopolitical tension in Nigeria, Venezuela, Iraq and Iran and other parts of the Middle East have escalated due to recent events. We expect in line with Bassoe that supply will only moderately exceed demand for tonnage this year. If a sum up is to be given, we believe rates will be comparable or modestly down from 2005, a higher degree of volatility as witnessed so far, should be expected for the remainder of 2006. We also believe in a strong market in historical terms for 2007. Going over to Slide Number 20 and the FPSOs.

We have established a small FPSO team and we have already secured one contract on the Puffin Field in Australia, as mentioned earlier. We receive a lot of interest from the market and we're working on several projects for the moment and also working on developing a generic FPSO. As we see it, the demand for FPSO is growing and the measuring on the number of oil companies which have approached us, the market is growing fast. Bassøe are estimating that as many as 30 VLCCs such as Suezmaxes and Aframaxes could be converted every year. If this comes true, that will of course also be extremely positive for the tanking market. We're focusing on building up this activity within Frontline with this prospect of spinning off this activity at a later stage. Going over to Slide Number 21.

The higher activity in the drilling sector will result in more frequent rig moves, which will require more capacity in the heavy lift market. We have decided that with the start of conversion of the first Suezmax in October, we will evaluate the situation and consider to convert up to a total of six Suezmaxes. We are converting these Suezmaxes by cutting out the existing midships section and fitting a new heavy lift midships section as a replacement. We are planning to use the old midships section as an FPSO and we will actually manage to get two vessels out of one.

Then I will leave it to the operator and we will go over to the Q&A session.

(OPERATOR INSTRUCTIONS). Jon Chappell.

Hey guys, it's Jon Chappell from JPMorgan. Oscar, I had a question on the costs for the heavy lift vessels and the FPSO conversions. Have you budgeted what the cash costs might be for the Gerrita and then the 2 plus 2 plus 2 for the heavy lifts for 2006 and 2007?

On the Gerrita, that contract will be based on the actual contract price and so far we have budgeted around 110 and $120 million, including the purchase of Gerrita on the --Gerrita.

With regard to the heavy lift, we don't go out with numbers for the moment because there's a lot of other players evaluating whether they're going to go into that market or not. So we will keep that confidential for the moment.

And then just a follow-up on that, the dividend the last two quarters and especially the first quarter of '06 is well below the earnings, which kind of goes against the 100% payout policy. Is there an official shift in the 100% payout structure or do you need that cash to fund these conversions that we're talking about?

There is no shift in our policy but you have to consider that we have been paying out profits to Ship Finance in the first quarter -- almost $90 million. And we also have of course some investment that we will have to fund. So there is no shift in our policy.

And then finally there was just a brief mention in the press release about six time charter contracts with Shell; it said flexible arrangements. Are those fixed rate contracts? Are they the kind of contracts with freight [man] in the sense that they guarantee employment but the rates will be variable based on spot market conditions?

These contracts are variable based on the spot market.

Okay. And what's the length of those contracts?

It is five years.

[Roy Streetster Stewart].

I just wonder, you made reference in the press release to potentially bringing in partners to some of the new builds. And I was just wondering if you could confirm that you are selling two of those new builds contracts for perhaps 106, 107 million that's been rumored in industry press?

As you know, there are rumors in this press all the time and we are looking at selling this -- buying more vessels all the time, you know? But I don't have any comments to that specific rumor.

And just you know you talk about reducing exposure. I think this is the first time perhaps I've heard or seen in a presentation maybe a weakening market in '07. And you also talk to striving to find the right mix between spot and term. I was just wondering, is that a shift and maybe what perhaps you feel is the right mix between spot and term charter rates over the next year or two?

Not really. We will benefit quite a lot of having a strong relation with Shell and other aspects. And as we always have done, we are considering whether we are going to be spot on time charter on a continuous basis and based on how we forecast the market and so on. So that's a continuous process.

Okay, and last on for me. I mean the spot rates, your chartering department delivered in the first quarter were strong and fairly impressive. I was just wondering if you felt that's going to be harder to sustain with the growing differentiation we hear about between single and double hulls as the market perhaps slackens off a little?

I will give the word to our chartering director, Mr. Stephen Eglin.

Hi. This is Stephen Eglin. Right at the moment, we have a very limited exposure in the spot market for single hull VLCCs. The Suezmax ratio is about 50/50 at the moment, but we are working on several time charters for the single hull fleet.

Okay. That's it for me. Thanks.

Doug Mavrinac.

I just had a few quick questions. One, on those four VLCCs orders, would you characterize those as being more of opportunistic orders given the prices that you received on those or would you say that that's more of a -- kind of a strategic decision and maybe a statement that you anticipate that new building prices are only likely to increase over the next few years?

Good question. I wish I could answer your question and as I said you know, we haven't seen a drop in the Korean prices so far. But of course depending on how the market develops. But if you see it ease on the spot market, this will also in the long run reflect the new building prices and the second hand prices. It's a bit opportunistic in one way, these orders. On the other hand, we are also quite occupied -- we actually have tried to renew our fleet. And with the prices which we actually received on those contracts, we felt that was the right way to go. But, yes, that's it.

Great. And then as relates to your FPSO business, I think you made reference to ultimately intend to spin that business off. What sort of scale do you believe you need to require or achieve before it becomes a large enough entity to spin off as a separate entity?

I think it's important that we try to build up some volume in front then before we spin it off. But when we are three vessels, three projects, I think we can really start to look on spinning it off.

Okay, great. And then one final one and I apologize if you answered this earlier in the call. But can you give us an update on your plans for your remaining 11% holding in Ship Finance?

For the moment, we really don't have a big plan on it. At one stage in the future, we will most probably spin it off. But for the moment, with the present share price, we really don't -- we will not spin it off as planned earlier.

Jessica Fisher.

Hi, this is Justine Fisher. I just have one quick question about the VLLC rates done during the quarter by Frontline and by Ship Finance. Is there a reason why Frontline's earned -- average time charter equivalent rates were much higher than Ship Finance's?

Tom Jebsen here. The answer is that Frontline has six modern double hull VLCCs on its own which are not part of the Ship Finance structure. So that gives the skewdness in those two figures.

Philippe Lanier.

Just a question on strategy going forward in the next 12 months. I'm not quite sure how you guys view the Eastern part of the world. You have a better sensitivity than I do. But from the Western hemisphere and U.S. trade, from what we understand, a large part of the support in the healthy [or] trade you've seen is the near-term shape of the futures curve and really incentivizing their financier to continue to buy oil overseas despite having record high inventory levels. Do you guys look at the world in those terms and if you start seeing a flattening in that curve, are you in a position to start locking in some of the future rates?

On the FFA side, we are really -- we have a small -- we are not big, big players in the FFA market. We are more like control -- trying to be a resistance towards the other players in that market. And so far we have not comment for any hedges in that respect.

And in relation to say the level of inventories in the Western hemisphere, is that a concern to you or how do you view the market along those terms?

Really, the inventories and investment [in that] hemisphere is not really a concern for us at all. The reason why it's so high for the moment, it could be that the U.S., due to the geopolitical situation are increasing their inventories; I'm not sure. But as far as with regard to the spot market and the -- we don't see a big correlation between inventories and the spot market.

John Kartsonas.

Hi, guys, a couple of questions. On the GMR interest, can you give us an update on what you own right now and more importantly what is your intention going forward?

We own 11% as of today.

And your intention going forward, is that like a long-term investment? What are your plans with this interest?

The investment, we look at this as quite opportunistic and it's a bad word -- Tom is laughing here. So if we had other plans, we wouldn't really tell the market either so, okay?

Okay. On the FPSO contact that you signed, maybe can you give us some numbers, either on the rates or on the returns that you have there?

The rates are based on the investment and it is around 12% on a total capital return based on three years appreciation.

That's unlevered return? Return investment or --?

Return on investment, yes. Total cap.

Finally on the CapEx for this year, can you please break down your CapEx per quarter for this year? You said 110, 120 million? Am I right or --?

Inger, do you have it? No, discussed that earlier on. We have $110 million on the Puffin project, approximately, then we have a few installments on newbuildings. In addition, we also have the heavy lift vessels, which requires ongoing capital. But I will not going to detail on how much it will require on the heavy lifts.

And you have the two VLCCs, right on Q2 and Q3 being delivered, no?

That's right. We also have the maxes, which are delivered in beginning of July, the 1st one.

So for the whole year, including all of these now, what is the number?

Tom is very eager to answer questions because this is his last conference call for all time, so he'll get the phone now.

On the VLC's, there is $36 million in the second quarter and 63 in the third and 55 in the fourth. But there will be two deliveries during that period, which obviously opens up from let's say $70 million in financing on each of them if we decide to just do the financing and keep the vessels in Frontline. The splitdown on the heavy lists and the FPSO's, I'm sorry we can't help you with. But it will basically be more or less all in the fourth quarter and first quarter next year on those two projects, if I remember correctly.

Celia [Romanez].

Good afternoon. This is Celia Romanez on [Encapting]. I'm returning to the FPSO projects. I was wondering how many vessels you have targeted in total for conversion?

If we managed to occupy all the single hull vessels in FPSO, we are happy and that is really our target but it's a bit optimistic. But we are looking into converting as many single hulls as possible and if we find also a good return on investment by converting double hull vessels, then we're also looking into that. But we don't have a target as such.

Okay, at one point you targeted some 12 Suezmax vessels, which is all part of and already in your fleet. I was wondering how many conversions you would see a year?

The 12 vessels as we mentioned earlier was the total conversion in the market; it was not the Frontline vessels. But I can foresee that we will manage to get one more project before year end. And if we manage to do two, three per year, that will be fine.

Okay, also when talking about project financing of these conversions, I was wondering about how -- what kind of debt structure you could manage to build on that?

I will give that answer, the telephone to Inger.

Sorry could you repeat the question?

The question was for the project financing of conversions of FPSO's ex Gerrita, I was wondering how large -- how much indebtedness you could have on those projects?

Well, we haven't actually tried to get any kind of offers on that. So, it's difficult to tell. But yes, if I could just take a guess I would say 60%, 70% something?

(OPERATOR INSTRUCTIONS). We're seeing no further questions, sir. I will hand the conference back to you.

Okay, thank you very much, everybody, for participating in the conference. I wish you a good weekend and I also want to thank Tom Jebsen very much for many years in Frontline and he's really been a very valuable employee in Frontline and I wish him good luck for the future. Bye-bye.

Ladies and gentlemen, thanks for your participation. This concludes today's conference. You may now disconnect your lines. Thank you.