Frontline Plc (FRO) 2006 Q2 法說會逐字稿

Ladies and gentlemen, welcome to Frontline Limited's second-quarter 2006 presentation. My name is Inger Klemp. I am CFO in Frontline management. Due to that Oscar Spieler, the CEO in Frontline management, is currently sick, I have with me today Mr. Stephen Eglin, Chartering Director in Frontline management.

I will first run through main events in the second quarter and so far in the third quarter. Then I will run through the numbers before I will leave the word to Stephen to run through the latest developments in the market.

Moving to slide 2, we (indiscernible) from first of April Frontline Limited subsidiary [compared to tankers limited] took delivery of the Virgo Voyager, renamed Front Voyager, from Chevron. The vessel is currently trading in the spot market.

Front Sunda suffered an explosion, causing a fatality, while [it was in ballast] condition in the South China Sea, June 19, 2006. Despite an extensive search and a risky operation, a crew member was not recovered and is still missing. We are considering converting the vessel to a heavylift vessel.

A cash dividend of US$1.50 per share for the first quarter of 2006 was paid out in June 2006. Frontline has also increased their exposure to the VLCC market through chartering in two double-hull VLCCs from Knightsbridge Tankers for a four- and five-year period. These charters will commence in 2007 with delivery and direct continuation of the present charters.

As previously announced in June 2005, Ship Finance sold Front Hunter to an unrelated third party for a net gain of $25.3 million, which was deferred. The charter and the management agreements with Frontline relating to this vessel were terminated at that time, and Ship Finance pays Frontline a 3.8 million termination in addition to Frontline having the right to sell to Ship Finance a newbuilding VLCC and chartered back at reduced charter rates.

In June 2006, the parties agreed to cancel this agreement, and to split the profit in accordance with the profit split agreement -- that is 80% to Frontline and 20% to Ship Finance, but adjusted for the residual value belonging to Ship Finance. The cancellation of this agreement resulted in a net payment of $16.3 million to Frontline in addition to the earlier termination payments of 3.8 million.

Ship Finance booked a net gain of $9 million relating to the sale of Front Hunter and cancellation of the option agreement in the second quarter. This influences the Frontline consolidated accounts with an increased recorded minority interest in the approximate amount of $8 million.

We took delivery of the VLCC Front Beijing from Nantong Cosco Khi Ship Engineering at (indiscernible) on the 3rd of July, and she was subsequently fixed successfully on her first voyage to BP.

Moving to slide to 3, Frontline has, as reported in the Company's first-quarter report, ordered four VLCCs newbuildings at Jiangnan shipyard in China for delivery from 2009 and onward. Two of these originally newbuilding contracts have in the second quarter been sold to third parties for a total gain of $9.8 million. Frontline has subsequently to the sale entered into further two newbuilding contracts, including an option for an additional two newbuildings.

Frontline has entered into a contract with Jiangshu Rongsheng Heavy Industries Group Company Limited in China for the delivery of [six 156,000 delivery tons] Suezmax newbuildings. The vessel will be delivered in the period August 2008 to August 2009. Frontline also secured auction for further two -- plus two Suezmax newbuildings. Two other vessels will be offered to Ship Finance.

Frontline will after this have a newbuilding program consisting of five VLCC newbuildings and two options with delivery in the period 2006 to 2010, and six Suezmax newbuildings and two plus two options with delivery in the period August 2008 to August 2010.

In August 2006, Frontline announced that it had sold its entire holding of 3,860,000 shares in General Maritime Corporation for price of $40 per share. Frontline will record a gain of approximately $9.7 million in the third quarter [after the start of this day]. Frontline has during the holding period also recorded dividend income on the same investment of approximately $13.3 million.

Finally, on August 22nd, 2006 the Board declared another dividend of $1.50 per share. The record date for the dividend is August 31st, 2006. The ex dividend date is August 25, 2006. And the dividend will be paid on or about September 18, 2006.

Moving to slide four, there are three accounting issues I will mention this quarter. 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 Fredriksen owns 45% or more of Ship Finance. If the combined holding falls below this threshold, it will be monitored and considered whether we should consolidate or not.

With respect to the guarantee that Frontline has given to Golden Ocean after the correctness of the 50% profit split from Bocimar for the vessel Channel Alliance, we have expended $11.1 million in previous quarters on this item, and $800,000 is expensed this quarter. The claim we have against Bocimar is not booked in our accounts, and is therefore an upside.

On the June 30, 2006, Ship Finance, which is consolidated by Frontline, purchased the jackup rig Seadrill 3 for $210 million, and subsequently leased the rig back to Seadrill Limited. In accordance with U.S. GAAP, this investment in Seadrill 3 is being accounted for under the equity method. As a result, an investment in associated companies of $45.9 million has been recorded, and results of the rig-owning entity will be recorded under share of results from associated companies.

Moving to slide four -- to start with, I will mention that when comparing the P&L numbers with second quarter in 2005, you will have to take into account that there are three more vessels this quarter, being the Front Puffin (indiscernible). In addition, Front Voyager is trading in the spot market as opposed to earlier [on bearable] to Chevron.

The profit and losses shows total operating revenues in the quarter of $344.9 million, and for the six months period ending June 30, 2006, $826.7 million. I will revert to the breakdown of this on the next slide.

We [recently] recorded a gain from the sale of assets in the amount of $9.8 million, as mentioned earlier, related to the sale of the two Jiangnan building contracts. In first quarter 2005, we had a gain on sale of assets in the amount of $17 million connected to Lillo, Spirit, and Emperor.

Expenses I will run through on a later slide. However, I will mention that the charter hire expenses are higher in 2006 due to more vessels chartered in.

Operating income, or EBIT, was 144.9 million. And EBITDA was 195.2 million in the quarter. In the same quarter in 2005, operating income was 184.8 million, and EBITDA was 235 million. Operating income, or EBIT, was 415.4 million. And EBITDA was 517.9 million in the six-month period.

The Company recorded interest expense in the quarter of $53.4 million, of which 15.2 million relates to ITC.

The total for other financial items, including the FX loss, are positive 3.3 million in the quarter. Comparable numbers second quarter in 2005 was 7.6 million. In 2006, this is primarily related to dividend on the [GenMar] shares with $5.6 million and a continued increase in the forward curve for LIBOR rates in the quarter has resulted in valuation gains of $2.9 million on the interest rate swaps, with a notional principal of $742 million, all of which relates to Ship Finance, and in addition to this, a lot of freight forward agreements in the amount of $5.2 million.

As most of you are aware, we post [as] minority expense of 88.2% on net income in Ship Finance since GAAP only allows Ship Finance to take to income the 20% profit split when it [ascertained] that the minimum hire for the financial year has already been achieved. Most of the profit split is booked in the late quarters, and only $5.5 million is recorded this quarter. In addition, 38.2 million in profit share has accumulated during the first half of 2006.

Net income ended therefore at $68.6 million in the quarter or $0.92 per share. We are distributing a dividend of $1.50 per share.

Moving to slide 6, VLCC spot earned more than $55,600 per day in the quarter, while the average on spot and fixed earned was $50,600 per day. The Suezmax fleet earned 30,600 per day, and the OBOs for all the vessels are on (indiscernible) made $30,100 per day.

The ITC vessels and the target in tonnage is not included in these rates. In addition, we have revenues from container vessels and the Front Puffin. The VLCC spot rate and the average on the spot and fixed earned was in line with Q2 2005, while Suezmax and OBOs was slightly below second quarter 2005.

Moving to slide seven, we said in connection with the first-quarter numbers that we had experienced a substantial increase in ship operating expenses lately, and that we expected this to continue. In the second quarter, the numbers proved this to be the case. This is explained by three main factors. One, marine crew wages have increased as the marine sector is being stretched due to strong growth in a number of vessels in all segments. Two, increased drydocking costs due to all the vessels and increased yard costs. And three, [lube oil] costs have also increased as crude oil prices and refinery margins have increased.

We have drydocked six vessels in the second quarter of 2006 while only two vessels in the first quarter of 2006. These vessels are the Front Breaker, Front Leader, Front Lady, Front Duchess, Front Maple, and Front Granite. In the second quarter of 2005, we drydocked only two vessels.

As you can see, we had average OpEx of $9,800 per day in the second quarter of 2006 compared to $7,200 for the full year of 2005. The numbers exclude the container vessels, the ITC vessels, and the Front Puffin. In this connection, one should note that we have five vessels on [bare] boat in 2005, and in addition, we have three more vessels in 2006 than we had in 2005. The estimate for full-year 2006 is approximately $8,000 per day.

Moving to slide eight, the balance sheet is pretty straightforward, but I will comment on a few items. Newbuilding and vessel purchase options have increased with newbuilding installments in the quarter -- [here of] the last installment on the Front Beijing, which was paid into a joint account end of June before the delivery on July 3rd.

Short-term debt and the current portion of long-term debt is higher due to that we chose to finance the delivery of Front Beijing on short term. On June 20th, 2006, Ship Finance which was consolidated by Frontline, purchased the jackup rig Seadrill 3 for 210 million and subsequently leased the rig back to Seadrill Limited. In accordance with U.S. GAAP, this investment in Seadrill 3 is being accounted for under the equity method. And as a result, an investment in the associated companies of 45.9 million has been recorded, and the result of this rig-owning entity will be recorded under share results from associated companies.

Finally, the minority interest line has increased due to the distribution of another 5% of the outstanding shares in Ship Finance to Frontline shareholders in the first quarter 2006.

Moving to slide 9, the yen exposure shows a stable development, and is only $34.6 million in the quarter. This is related to yen foreign currency contracts. Interest rate exposure is limited. For Frontline Consolidated with Ship Finance, it is approximately 29.6% of debt and capital lease that is floating. But for core Frontline, it's actually much lower.

Moving to slide 10, we think it is proper to focus on the columns to the right when considering Frontline's current cash breakeven rate. Those columns show breakeven, with Ship Finance deconsolidated. The figures in the first column from the right take into account the vessels we currently have on time charters out, and leaves us with the rates needed to break even after that. As you can see, these levels are competitive by industry standards.

Moving to slide 11. There are no changes in the setup since last quarter. The setup is the same as in the past quarters.

And with this, I leave the word to Stephen Eglin.

Good afternoon. Turning to slide 12, the market has surprised most experts with a strong second quarter this year and so far in the third quarter. The volatility of later years is still very much present in the market which makes it difficult to predict, as anyone who follows the tanker market will know. As seen several times prior, it is the foreseen circumstances driving the market resulting in these large swings, and evidences how finely balanced the tanker market really is.

Both VLCCs and Suezmaxes witnessed a very positive development in Q2. Frontline's VLCCs trade in an average of about $56,000 with a [spread this] for double hull about 58,100, and single hulls 43,100. While Suezmaxes made an average of $30,700 a day, where the split is approximately 44,300 for double hull and 18,000 for single.

The bullish sentiment in the market, which translated into higher rates for owners, came as a result of the lack of tonnage following the peak in demand as refineries approached the end of the maintenance programs in Asia. The number of open VLCCs the next 30 days in the Arabian Gulf, for example, had a decreasing trend throughout the quarter, and fell from the highest count of 73 down to 33 units. The average for the second quarter is calculated to 48, which is approximately 10% lower than that of first quarter.

The supply problems in the Atlantic Basin, North Sea, U.S. Gulf of Mexico, and Nigeria has caused longer-haul shipments, increasing the ton-mile ratio. (indiscernible) estimate that crude oil ton-miles will increase by 4.4% year-on-year in 2006.

Crude future prices, as retained in contango, which has encouraged storage option as well as longer shipments. The number of vessels reported to be on storage throughout the second quarter varies from broker to broker, ranging anywhere from 5 to 25, where we find the average to be the most likely. Much of this uncertainty stems from whether or not standard storage options on long AG West voyages such as those from Saudi Arabian [vailer] were declared or not. However, what we do know is that there were some very long discharges in the U.S. Gulf, which in itself can be defined as a type of storage.

Iranian NITC currently has two vessels on storage, but at one point in the second quarter, was up to around eight or 10 VLCCs. The chartering in of tonnage for short period three to four months that NITC did in the second quarter must also be seen in relation to their docking schedule.

Drydocking did take tonnage out of the market, and shortage of dock space is a common feature of the yards. NITC, as mentioned before as an example, had eight ships in docking in the second quarter, whereas the Frontline group had six in total. This covers all segment -- VLCCs, Suezmax, and OBOs. It is reasonable to assume that other owners would have had similar docking programs. It has been the trend for several years, but the end of Q2 and start of Q3 are below market, and with last autumn and winter being as strong as they were, several owners are likely to have pushed their docking schedule forward into the summer months. Disturbances in the oil market is headline news on a daily basis, and the latest is the BP production cutback at Prudhoe Bay, making higher-than-normal shipments of crude oil go to the U.S. West Coast, all in double-hull tankers. With all this in mind and most of these points still valid, the third quarter has opened up strong, even compared to the record year of 2004.

Slide 13 -- so far this year, there has been delivered 10 VLCCs and 17 Suezmaxes, and in the remainder of the year, there are only seven additional Suezmaxes and seven VLCCs to be delivered, as per today's known schedule.

However, if the market proves to be as strong as per current signs, it is possible that some early 2007 ships may actually get delivered at the end of this year. This is less than what we have seen in the last few years. VLCC growth so far in 2006 January to July is calculated 2.2% basis deadweight tons, whilst the growth for Suezmaxes January to July is calculated to 5.4% basis deadweight tons. For comparison, the Suezmax fleet grew by 9.5% in 2005, whilst the VLCC fleet grew by 7.5%.

Orders for newbuildings have been stabilized after the massive ordering prior to the new common structure rules which apply to all oil tankers with lengths equal to or greater than 150 meters and that are contracted for construction after April 1 this year. The buildup of the orderbook represents an optimistic view of the 2010 phase-out of single hulls.

Shipowners [or] investors at $120 million for delivery in 2009 must be seen as very optimistic regarding what the future holds. And it would appear that these owners are reinvesting their capital gains from the last few years' rally into what they know best -- shipping -- and not diversifying to any great extent.

Currently there seems to be a [portent] delivery [rush] from what we saw late Q1 and early Q2. The newbuildings are, however, expected to make real impact as we go forward, and 2008 and 2009 will be the major delivering years for new VLCCs, while 2007 will be the determining one for Suezmaxes. These deliveries will be partly offset by growing demand for tonnage from offshore projects, such as FPSL and heavylift, which Frontline is also looking into.

Furthermore, we have seen over the last few years several oil majors [earlier] Chevron, Texaco and Total, and latest now, BP, discriminate single hull tonnage. And BP will now only transport persistent oils -- crude, fuel, [vac and] gasoil and so on -- in full double-hull ships, and therefore also avoids inspecting single-hull ships on the same basis. This makes an impact on the trading fleet as it reduces the productivity significantly.

Oil traders with crude or fuel oil covers may well as a result of this require double-hull tonnage in order to have full flexibility with regards to unsold cargo deliveries. Furthermore, the single-hull ships are no longer able to trade to their full capacity compared to the double-hull vessels. This has an impact on the gap in single-hull versus double-hull earnings in an already existing two-tier market.

Slide 14 -- the overall macro figures remain strong, and the IMF has a GDP growth estimate of 4.9% in 2006 and 4.7% in 2007. The IEA has downgraded there growth estimates and oil demand for 2006 to 1.19 million barrels per day, which implies 1.4% versus 2005. Even though this is a significant revision down from previous estimates, it still represents strong growth, having in mind that 2005 grew by 1.3% from the record year 2004. 2007 is estimated with a growth of 1.8%.

We believe that the demand figures overall look positive with the Q4 estimates as the most interesting. Q4 is estimated with a growth of 2.6% year-on-year.

Chinese net imports were up 17.3% in first half of 2006 versus first half of 2005. Angola has recently passed Saudi Arabia as China's top supplier for the first time. Angola will with these quantities tie up between 15 and 25 VLCCs, depending on their trade patterns on Angola/China listings, compared to Saudi/China listings, which would tie up approximately nine VLCCs.

Furthermore, we have seen a growth in shipments from Venezuela to China, both on crude and fuel oil, with latest news this week of Venezuela signing another oil contract with China, increasing the export to China from 180,000 barrels per day to 300,000 barrels per day.

We also hear reported that West Africa's Far East exports may climb to 2 million barrels a day during the fourth quarter of this year. There also seems to be an increased number of shipments of fuel oil into Singapore, both from Northwest Europe, the U.S. Gulf and Atlantic Coast, and from the Caribbean. This is mostly driven by the spread in fuel prices [Atlantic] market versus Singapore prices. And there has also been increased storage facilities in the Singapore/Indonesian area.

Next slide -- the oil market is quite volatile these days, and [data brend] reached a record high of $78.69 per barrel on the 8th of August. Shocks of various kinds trigger the market from day to day, and the latest is the partly shutdown at Prudhoe Bay. It may not become as severe as first estimated, as BP announced last week that pumping from the western half of Prudhoe Bay will continue and not be disrupted.

Geopolitical events are still an issue in the oil market, either being the BP partly shutdown, kidnapping and/or sabotage to [partners] in Nigeria, or the recent Israel/Lebanon conflict. OPEC has also stated firmly that they will continue their commitment to stability in the oil market. However, it is questioned if OPEC in fact have any spare capacity which they can utilize if a new shock would come. And hence, a question mark arises if these commitments have any value.

It is important to yet again point out the effect high oil prices, and therefore, high bunkers prices have on the tanker market. A $10 per metric ton increase on a VLCC will reduce the time charter earnings by about $1,000 a day. Bunker price at Fujairah in the first half of 2006 was an average 43% higher than that of first half 2005.

In the second quarter many refineries had heavy maintenance schedules. Most of these refineries were back to normal operation and increased their throughput levels. As the graph indicates, the Japanese refinery utilization rates surged by 7.5% to 84.3% from 76.8% in June. In the Atlantic Basin, while the maintenance schedule was already completed, unplanned outages have led to lower refinery throughputs in the U.S. and Europe. In the USA, the refinery utilization rate declined to 91.3% from 92.8% in June.

Next slide -- in general, one can argue that the peak in growth has been reached, but there is still a good momentum with positive growth figures all around. For the U.S., we know that the consensus forecast for GDP is set to reach 3.5% in 2006 and 2.8% in 2007. This implies that they are past their growth peak, and the Federal Reserve decided at its latest meeting to keep the rate steady at 5.25%. What could give a set back though is the fact that house and auto sales, including manufacturing, seem to be topped out, and hence our [leading] the previous mention of moderation. The main risk for United States as we see it would be future spikes in the oil prices. It seems they are more vulnerable towards this now than in the past.

Europe appears healthy, and the economy is forecasted to grow 2.2% in 2006 and 1.8% in 2007. It is reported from official statistics that China's GDP growth reached 11.3% in Q2. This implies that the Chinese economy grew by approximately 10.9% in the first half of this year. And the government has stated that they desire a slowdown in the second half to take the full year growth rate to 10%.

China's oil demand was a whooping 10.1% in Q2 2006 year-on-year, while the net crude imports were up [to] 10.6% in Q2 2006. Chinese net crude import is hence down from the levels seen in first quarter, where year-on-year growth was reported as 24.6%. Chinese oil demand is still very positive for the two remaining quarters, giving China a full-year growth estimate of 6.5%, the highest of all areas. Chinese further reported to have completed the construction of a substantial portion of this planned strategic oil storage.

Last slide -- as we look forward for the remainder of 2006, we do expect the weather to have an impact on the spot market. As we move into the winter season, there is likely to become delays and disruptions due to severe weather. This normally has a positive effect on the spot market.

Predictions for this year's hurricane season in the U.S. is somewhere between five and seven. It is also interesting to follow the future market, where at the height, FFAs for Q4 '06 were traded at world scale 175 for TD3 AG-Japan VLCCs, and world scale 122.5 for TD5 West Africa-USAC. This equates to roughly $125,000 a day for VLCCs and $65,000 a day for Suezmaxes.

Thank you for your attention. Operator, will you please start the Q&A session?

(OPERATOR INSTRUCTIONS). Mr. [Morena], Jefferies.

I just have a few questions for a you guys. First, what do you attribute the huge discount you're single-hull Suezmax vessels are relative to your double-hull vessels during the quarter? And do you expect that discount to be maintained, given your outlook for the next few months?

One of the major reasons for the difference in income on the Suezmax is that the double-hull Suezmaxes are trading predominantly in the Atlantic Basin, where the singles are trading almost only in the Far East, and as such, can only be compared to the VLCC single-hull market in the East. As the market raises, I would expect this gap to become smaller.

Okay, great. And can you provide a little more color on some of the Shell timecharter contracts that you recently entered six of your VLCCs on? You mention that they were flexible arrangements. Does that means that there is a market-rate-based component to them?

That's correct. There is a market-based rate, and that's all I can say.

Okay, fantastic. And then finally, taking more of a longer-term outlook for the market, obviously you guys have a very bullish outlook based on your number of ships on order, both VLCCs and Suezmaxes. But looking at just the number of Suezmax either on order or in negotiations for additional orders, what is it about the long-term outlook for the Suezmax market that you believe is so attractive?

Well, first of all the orderbook for a Suezmax sized vessels is much lower than that of Aframaxes and VLCCs. I think at the moment, the orderbook for VLCCs is 28% of the current fleet; Aframaxes is 27%, and Suezmaxes is only 20%.

Mr. Chappell, JPMorgan.

Regarding your single-hull ships -- following up on that, you have had a lot of talk in past conference calls about conversions to heavylift and FPSOs. But according to the press release, right now, there is only one -- the Front Puffin -- that's been agreed to go into the heavylift conversion. Are the single-hulls just earning so much in the current market right now that you find it tough to remove them from the trading? Or do you find it tough to get the shipyard capacity to undergo conversions?

First of all, the Front Puffin is destined to become an FPSO, not a heavylift. We have decided to convert one single-hull Suezmax to heavylift. At the moment, we are planning further the conversions, but we have decided to take one at a time.

Okay. Do you plan on keep trading these vessels at [until the indigo] conversion -- is that correct? Despite the fact that they are earning discounts to your double-hull fleet, you have no intentions to dispose of those vessels, given, I guess the current return on invested capital on those ships?

I think we -- at the moment, the ships are actually trading rather well, and although they were not great in the second quarter, we hope and think this will improve.

You gave pretty good detail on the drydockings in the second quarter and mentioned there was an acceleration. What is the plan for the second half of the year as far as drydockings are concerned?

Well, the presentation gives an outline of what we expect to be the bookings for the third quarter and the fourth quarter. I believe we have seven vessels in the third quarter and (technical difficulty) vessels for the fourth quarter.

Okay. And Inger, can you give the impact of the cost from the drydocks on the second quarter? Just roughly per ship -- because you expensed them, how much does each drydocking impact your operating expenses?

I'm sorry; I can't give you an accurate figure of how much only related to the drydockings. But as we said in the [presentation] (technical difficulty) we expect the average for the total year to be around $8,000 a day.

Okay. And then one last thing -- you had mentioned containers a couple times in the presentation. Is that just the container ships that SFL has, or does Frontline on its own have exposure to container ships?

No, it's is only the SFL container vessels.

Mr. [Leonard], Bank of America.

A couple of questions -- just following up very briefly on the Suezmax single-hull performance in the quarter, was part of that underperformance due to vessels trading empty into drydocks? Or should we expect similar realizations in the future -- if you understand the question?

I'm not sure I understand the question (indiscernible) drydocks?

In terms of the average rate that you received on the spot single-hull Suezmaxes, was that related to what they were actually earning, or is it somewhat slightly lower than what you would receive in the future because some of those vessels were trading empty going towards drydocking -- simply weren't being utilized?

The drydock assumption is correct. Some of the (multiple speakers) were positioning for drydock and were taken out of the market for a long period of time.

Right. Then a second question -- Inger, if you could, do you mind breaking down for us for the next two quarters what your CapEx requirements are, and give us some sort of highlight as to what is consolidated with Ship Finance and what is Frontline specific?

(technical difficulty) Frontline specifics, you have the second vessels from (indiscernible) yard coming up in September. That's (technical difficulty) $55 million.

Pardon me -- 55?

55, yes. And then we will have of course some investments in connection with Front Puffin and heavylift projects. That's also in relation to Frontline. And with respect to Ship Finance, I think that is in a way a bit difficult to tell, because obviously, they are working on new projects all the time. So it's difficult now to say what the next half a year will bring. I think with respect also, of course, to the newbuilding program for Frontline, of course, there will be some installments coming up during the next half year. But I'm sorry; I cannot give you all of the exact numbers now, so --

Okay. I will back into it as best I can. And then just one last question, on the vessel that you guys were targeting for the heavylift, is that -- as you related in your press release, will that be the Front Sunda? Is that a secondary vessel, and you're perhaps going to use the Front Sunda as a second heavylift?

No, the Front Sunda will be the first heavylift.

It will be the first one?

Yes.

Ms. Fisher, Goldman Sachs.

The first question that I had was just to clarify exactly what happened with the Front Hunter agreement. And I understand the way the initial vessel sale and agreement worked, but as you said in the presentation and as it says in the press release, in June 2006, you decided to scrap the agreement that had been signed for the new VLCC in 2005, and then that 16.3 million payment that was made from Ship Finance to Frontline -- that was made because Frontline was now taking 80% of that profit gain on the vessel sale. Am I understanding that correctly?

No. In June 2005, the vessel Front Hunter was sold. And at that time, we'd agreed with Ship Finance (indiscernible) and Ship Finance agreed that [Ship Finance] would have an option to (technical difficulty) away the Front Hunter with a future VLCC newbuilding to be delivered one year ahead. And that was the first VLCC newbuilding that came from Nantong yard here in the beginning of July.

At the same time, we received a termination payment that at the time of $3.8 million. That was actually the difference between forward rates and the fixed rates in the Front Hunter agreement -- 80% of that. Also, [following away] the profit split arrangement 20/80% (indiscernible) party.

So then in June now, one year later, we decided that we wouldn't like to exercise that option, and we agreed with Ship Finance that they should then be able to take the gain income which they had deferred in the period. Due to that, Front Hunter would be swapped with the VLCCs that came up one year later. And as part of that, we agreed that we should then have 80% more or less of the profit and Ship Finance would have 20% of the profit, just adjusted for the residual value for Ship Finance.

So basically, when we look at the 25.3 million that was deferred, if you take the 3.8 million that was initially paid for the agreement termination plus the 16.3 million that was paid in June, that is 80% of the 25.3 million initial deferral? And so you're saying that because Frontline basically decided not to recharter out a VLCC to replace the Front Hunter, you said okay, since we're not going to replace that vessel, we will now just split it according to the way the profits would have been split anyway, and that's why we get 80% and Ship Finance gets 20% -- is that right?

Yes, apart from the adjustment of the residual values.

Okay. And so is this the way things will work going forward, that when Ship Finance disposes of vessels -- and I guess they could do it in a number of ways, but if they do dispose of vessels, Frontline will take 80% of the gain from that sale? I guess with the exception of the container ships, because -- well, those don't have to do with Frontline anyway; never mind.

Of course, we can't tell what the future will bring here. I mean, each possible sale will have to be agreed, I guess.

Okay. And then the second question that I had was just to clarify the cost of the bunker fuel -- you said that for every $10 increase in the price per gallon of bunker fuel, that that was an effective reduction in a timecharter rate of 1,000. Is that right?

$10 a metric ton.

Okay. And so I understand that depending on whether the vessel is on timecharter or spot, that makes a difference as to who pays the actual bunker costs. So when you gave that slide that showed the increase in operating expenses per day from -- I think it was 7,000 and something to 9,800 -- does that include the cost of the bunker fuel? Or how should we be -- because if we were, just for example, forecasting the impact that bunker fuels would have on results, we would be double-counting if we assumed that it would increase the cost to close to 10,000 a day and reduce the rate. So does that 9,800 include the bunker fuel increase?

OPEC has nothing to do with the bunker consumption.

It's only the lube oil.

Stephen Eglin. It's the lube oil, it's the (multiple speakers) insurance and so on.

Mr. Kartsonas, Citigroup.

Two questions. I guess first on the FPSOs -- and obviously, you're looking at this market closer, can you give us an idea of what are the structural requirements for these vessels to be converted to an FPSO, meaning that any tanker can be converted to FPSO, what exactly are you looking in your fleet as potential candidates?

In theory, any tanker could probably be converted to an FPSO. But it depends on what the environment the FPSO is supposed to work under, and also what work will be required to convert the vessel. Obviously, it will be nearly impossible to convert an existing -- at least a single-skin vessel to work in a harsh environment like the North Sea. Therefore, we are concentrating -- focusing on other areas.

At the moment, our main goal is to focus on the Front Puffin and convert her and deliver her on schedule. But of course, at the same time, we are looking at other projects, and with any of our single-skinned vessels, both Suezmaxes and VLCCs.

So it is mainly an issue of double-hull versus single-hull rather than any specific construction fact on the vessel?

No -- not only it, but also the area that we are focusing on it is only single-skin. And there you have various requirements from the specific field that you are operating on with regards to the size and to [cubic] and some specific age requirements. And also, we have a series of sister ships on the Suezmaxes that are 100% mild steel, which is favorable for a conversion project, although not --

Those are the Spanish ones?

No, they are built in Yugoslavia.

And how do the economics on a double-hull conversion look like? If you were to acquire a pretty young VLCC today, would it work?

Only if the end user is willing to pay, of course.

Okay, but how is the market there?

Values of double-hull vessels is very high, as seen in any S&P transaction these days.

Okay. And I guess on a different subject, you talk about how Angola is becoming more and more important in the West African market. If you were to take a guess on how many of these VLCCs that trade from West Africa east are [back holds], what would you say the percentage would be?

Probably most, but it depends on the market very much. The AG versus the Atlantic market do not always follow each other. And at times, you will get ships ballasting from the Far East directly to West Africa.

Justine Fisher, Goldman Sachs.

I just had one other question about the conversions. If Frontline does come decide to convert some of the single-hulls that are currently operating within Ship Finance, will Frontline or Ship Finance bear the cost for that?

That depends on how we decide to finance the conversion.

Yes, how we agree on it, so --

Okay, thank you very much.

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Thank you.