Frontline Plc (FRO) 2006 Q3 法說會逐字稿

Good morning or good afternoon to you all. My name is Bjorn Sjaastad and I started as Chief Executive Officer of Frontline Management AS on October 9 this year. And it's a pleasure to welcome you to this webcast where Frontline's third-quarter account is being presented followed by a question-and-answer session. Present are also my colleagues Stephen Eglin, in charge of chartering, and Graham Baker, Chief Accounting Officer, to assist in answering questions when required. Our Chief Financial Officer, Inger Klemp, is not present as she is presenting Frontline on a conference in New York today.

The press release and presentation have been made available on our website and I will go through the presentation referring to the relevant page numbers. And also having paid due notice of the disclaimer on page 2, I ask you to turn to page 3, the agenda. The item that we want to cover is an introduction to Frontline, the third-quarter 2006 highlights, financial review, industry overview and company outlook, and finally questions.

And if you then turn to Page 4, and before starting going through the accounts, we tried to highlight Frontline's corporate structure and you will see here that Frontline Ltd. is a Bermudan company as a holding company and to last year two management companies and me and my colleagues, we are employed by Frontline Management AS in Oslo. The three blocks to the right, Frontline Shipping Ltd., Frontline Shipping II Ltd. and ITC, that ship owning companies; but we also own ships directly in Frontline Ltd. Bermuda where we own VLCCs and Suezmaxes as well as the FPSO. We have our newbuildings there we also own the 11% shareholding in ship finance.

The Frontline Shipping Ltd. I and II was established with a setup with Ship Finance where we also have attached cash deposits to secure that financing. And the ITC vessels to the right, that's ships that we have on bareboat out. So we have not commented too much on these because these are long-term bareboat. And under each section, each ship is owned by a special purpose and company.

If we then turn to page 5, we have also listed Frontline's fleet in a more detailed way. And if you go through that, first of all we see that on the VLCCs we have 26 double-hulls, one double side and eight single-hulls and then we have four newbuilding orders. On the Suezmaxes we have nine double-hulls, two double sides and eight single-hulls; and we have also eight OBO carriers of the Suezmaxe size, but they are trading and dry. And we also have four Suezmaxes newbuildings. Then we have the 9 ships for ITC which is a bareboat, six VLs and three Suezmaxes. We have one heavy lift project and one FPSO project. And then altogether we also have 16 vessels under commercial management.

So all told, we are operating 89 ships for the time being plus the new buildings that we follow up during construction. We have also listed a timecharter coverage in 2007 and what I want to bring your attention to is that we have a timecharter on 88% of the single-hull VLCCs at a rate which is around $35,000 a day and the profits bit for most of the ships that we have on timecharter.

We also timecharter for the OBO carriers as to 65% of the 2007 as being covered -- and the rate there is about $39,000 a day today. That market has had a different development than the [timeco] market lately so that we renew at substantially higher rates than what we've had so far. So altogether we have then about 40, 42 ships in the spot market for the time being and about 20 ships on timecharter for the vessels that we have a direct financial interest in.

If we then go to page number 6 and start to look at the highlights of the 3Q figures, you will see that the net income for the quarter was $99 million compared to $69 million for the second quarter this year and $214 million for the first quarter. So year-to-date net income of US$382 million. This gives an earnings per share for the third quarter of $1.32 against $0.92 for the second and $2.86 for the first. And year-to-date the earnings per share figure is $5.1.

We also have announced today a dividend -- a cash dividend per share of $2.5 for the third quarter compared to $1.5 for the two preceding quarters this year, and that gives a year-to-date dividend of $5.5. If we look at the highlights for the income side, which is the most sensitive part for Frontline, the VLCCs achieved close to $60,000 a day for the third quarter compared to about $50,000 for the second quarter and $73,000 for the first quarter, and the third quarter is in line with the average for the year-to-date figures at about $60,000 a day.

For the Suezmaxes, they increased from $30,000 a day in the second quarter to $40,000 in the third and the average for 2006 so far year-to-date is $40,000, but we had $50,000 in the first quarter of 2006. And for the OBO carriers, they were much more stable due to the nature of the charter party and employment involved and we made $30,800 for the OBOs for the third quarter compared to $30,100 for the second quarter and $31,700 for the first quarter in 2006. It is to say then that all the OBO carriers are presently and have been for the last period operating in the dry market. I'll come back to the figures a little bit later on.

If you then turn to page number 7, we show the major transactions that we've done in Q3 and Q4 of 2006. First of all, we sold the Front Beijing which was delivered in June for about $141.5 million, that we sold with delivery in the fourth quarter and that gave a profit of about close to US$60 million. We also made new contracts in China for six Suezmaxes to be delivered in 2008-2009 and subsequently we sold two of these contracts to Ship Finance in parallel. We also took delivery of the new VLCC Front Shanghai in October this year at a price approximately US$81 million, which is substantially below the market value for such vessels as demonstrated by the sale of the Front Beijing.

We have also exercised and resold two VLCC options also in China for a profit of US$6.2 million. The income or the gain will be deferred until we receive the milestone payments. And then finally, on the fleet side the Front Tobago was sold for a gross proceed of $45 million. This is a single VL built in 1993. She will be delivered in Q4. On the financial side we had reported previously that we have sold our 10% holding in Genmar at a profit of close to US$10 million.

If we then turn to page 8, we show the details of the profit and loss account on the left column for the third quarter and to the right for the year-to-date, but I will start on the third-quarter figures. Where total operating revenue came in at about US$405 million and we had voyage-related costs of about US$101 million and this is an increase compared to previous periods mainly due to higher bunker costs for that quarter. We had about the same level of activity, the same volume of business.

Ship operating costs came in at $54 million, substantially above the same corresponding figure for the corresponding period in 2005. And this is primarily caused by more drydockings and more extensive and more expensive drydockings, but also general pressure on operating cost for running ships.

Net interest income was about the same as the previous quarter of $40 million or $50 million in expenses and $10 million in income, but on the other financial items we have a mark to market loss on interest hedge agreements of about US$16 million which all relates to Ship Finance and is really taken out in the minority interest. This gives an income before taxes and minority interest of $139.5 million and after minority interest of about $40 million you arrive at close to US$99 million in net income or $1.32 per share. And then, all of these accounts, they are consolidated with the Ship Finance accounts according to the U.S. GAAP regulations because of the shareholding of -- of a major shareholding in the two companies plus the fact that Frontline owns 11% of the Company.

And if we take the mainlines of the year-to-date figures, here the total operating revenue was US$1.2 million and operating income was about US$600 million. Income before taxes and minority interest 489. And after minority interest of 107 we arrive at the net income for the nine-month period ending September 30, 2006 of US$381 million equal to $5.10 per share.

If we then turn to page number 9, we show a little bit more on the development on the income side where we have a graph showing income on a timecharter basis for our VLCCs and our Suezmaxes -- what we've done per quarter back from 1999. And from the fourth quarter onwards it's just the Imarex forward curve as of November 27 for the next few more quarters. And here you can see that it's been very volatile, but we have made an improvement compared to the second quarter, as mentioned before.

As I said, the VLCC average rate that we achieved in the quarter was close to $60,000 a day, but if we then look only at the spot ships we had, here we report $65,600. These are a negative influence -- the spot rates by an incident that we had at grounding which really impacts the total average fleet of about $3000 a day, which will be recovered during insurance -- from an insurance repayment. So that really means that the spot rate achieved was about $68,500 a day. The Suezmaxes about $40,000 a day and the OBO carriers about $30,000 a day. And here you can see substantially above what we achieved for the third quarter last year.

If you then turn to page number 10, we comment a little bit more about ship operating expenses and off-hire. And think it is fair to say that even though there has been a pressure on general OpEx, the major reason for the increase has been because of the drydockings as explained. The average operating cost per ship in the third quarter was $9300 a day compared to $9800 in the second quarter 2006. But if you look at the year-to-date 2005, that figure was only $7300 a day. And we have here to mention the accounting policies that we are using where we are expensing the drydockings in the same quarter as they are being incurred, and that really gives a little bit of volatility on the OpEx costs here.

And also the off-hire days we are getting directly in on them in the quarter. And for the third quarter we have drydocked seven ships and spent 311 days off-hire, comparing to 10 ships for the full year of 2005 and 347 off-hire days there. In addition to the number of ships, we have to mention that we have drydocked quite a few of the 91 built vessels and they are much more expensive when we come to the 15 year annual -- the 15 year special survey. That's a more extensive drydocking than the earlier one.

In addition to that, there's been a tremendous pressure on repair yards, steel prices are up and the yard capacity is very stretched. Meaning that they are in a buyer position that we have to pay more for the work that they are doing there. It also tends to add number of days. In the last quarter we will have four vessels in drydock this year, that's what we're planning. And you will also see that for next year the number of drydockings will be reduced somewhat.

If you then turn to the next page, 11, we have shown the cash breakeven rates for the various ship classes that we have. The VLCCs are close to $30,000 a day; Suezmaxes are $22,600; and the OBOs for $22,400. These are gross and do not include any employment of the ships; these are purely costs and OpEx drydockings and financial charges or lease costs.

If you look at page 12, we have included the balance sheet which is of course then also consolidated with Ship Finance, which I will go through and then you will see that from the cash position short-term assets, a substantial amount of the cash is restricted cash to support the lease arrangements that we have both with Ship Finance and also in ITC. The total asset base is about US$4.477 billion and the stockholder's equity, the book value of that is US$729 million.

If you then look at the next slide, number 13, we want to give some more comments on the two different projects that we have. First of all, the FPSO. And we established a company called Sea Production Ltd. Bermuda, which is the owner/vendor of the Front Puffin which is a vessel that is at the Keppel yard being converted to an FPSO for a total investment of US$150 million. We expect delivery of this ship or this unit in July next year and the FPSO is fixed on a two-year firm contract with AED, which is an Australian small oil company operating or developing a specific oilfield. There are also options to this charter.

And Keppel, which is responsible for the construction or the conversion, has now come in with a 30% participation on the ownership side. The strategy for us is primarily to refine values of existing fleet and we are presently considering different alternatives, what to do in the future. But it's likely, as we had advised before, that we want to farm this out from Frontline, but we are considering alternatives options.

On page 14, we have described the other projects that we are working on which is the conversion of Front Sunda which is a single-hull Suezmaxes built in 1992 which is presently at Cosco in China to be converted to a heavy lift expected to be delivered in April next year. She is presently not fixed and our strategy behind here is also to refine values of our single-hull tonnage. We have also options with the yard for more conversions which we intend to use.

We are also here considering alternative ways to develop this business further, either to farm it out to go together with other players in the market, to sell or to maintain this on our own. We think that presently the market looks good, that newly been reported fixtures for smaller size ships in the $70,000 a day range. And we think that over the next three to four years this market will be good, supported by the huge offshore activities going on.

If you then turn to page 15, we have just shown the historical development in earnings per share and dividend per share. And I think this chart speaks for itself; it's a very high dividend that's been paid out over the years both in nominal values as well as in percentage of the earnings per share.

And then on page 16, we also shows some key figures over the last five to six years showing both earnings per day that we have achieved for the various ship classes and also showing the total operating revenue and net income as well as dividends and the dividend ratio. You will see here that so far in 2006 it seems that 2006 will also be a pretty good year as the year-to-date figure is US$381 million. Last year we made $609 million in net income and more than $1 billion in 2004. And for all the years we have had a high dividend payout ratio which we then continue with for this quarter.

In 2003 the reason why we had a higher dividend ratio than net income was due to the Ship Finance deal and also for the third-quarter figures this year, that was because we have sold the Beijing and we will get cash for that in the fourth quarter this year.

On page 17, we turn to the market where we also show Clarksons index for timecharter earnings for VLCCs on the top figures and then Suezmaxes below. And what is special for this in the third quarter is that it's been different from the previous years; it followed 2004 in a way, but the third quarter was better than many had expected. So the seasonal changes didn't occur in the same way as the year before.

And what we can see is that inventory levels are high, there haven't been much disruptions in the market. There have been no hurricanes, the oil price has been falling leading to maybe more people waiting to move cargo -- now I'm talking about the fourth quarter. Year-on-year it seems that oil demand is pretty stable.

So the third quarter this year has been better whilst the fourth quarter seems to be worse than what we had expected -- even though we see that there is an upswing on the Suez market ships for the last few years. The reason for the fall in the fourth quarter might also be due to the advised OPEC cuts and the psychological effect of that.

If you then go to the next page, number 18, we just show that the inventory level is pretty high this year compared to the previous years, but it's leveling off now as it increased in the first part of the year.

On page 19 we look at the fleet and overview for VLCCs where we have shown with two different colors the single-hull VLCCs and then the double-hull VLCCs and the year of build and the number of ships. And then the gray ones we see the expected deliveries in the coming years and the line shows the percentage of deliveries compared to the existing fleet. And in 2007 there is expected to come fully two more ships into the market which is about the same number of ships that we saw the last five or six years apart from this year where the deliveries have been fewer.

And the percentage of new deliveries for 2006 or '07 is then expected to be in excess of 6%. This goes up to close to 12% for 2009 which is the year where you will have most ships or the highest number of ships delivered. The column to the right shows existing fleets and existing orderbook where we have a 35% orderbook compared to the existing fleet. What is special to notice here is that the number of single-hull VLCCs is about the same number as the orderbook. So that's a critical issue; that is how the single-hull fleet will develop as we approach 2010.

If you then turn to page 20, we have a similar graph on the Suezmaxes and you will see that the picture is about the same in terms of number of ships to be delivered in 2007, about the same number as the previous years, and the new deliveries will be about 7% of the existing fleet next year. That will go up in 2009 to close to 13% and fall again in 2010. Still there will be yard capacity, I think, available for some 2010 deliveries if people should decide to order -- definitely in 2011 there are many open positions.

And also here we see that the number of ships on order equals 106 and there are 71 existing single-hull VLCCs -- sorry, Suezmaxes, in the market. So the big question there is also how that is being handled in the marketplace as we approach 2010.

Page 21 -- here we have just shown that demand for oil is expected, according to the IEA, to grow steadily at around 2% over the coming period. And according to Fearnley, tonne-miles is expected to grow by about 3% -- 3.1% from 2006 to 2007.

On page 22 we see that the oil price seems -- or the sentiment seems to have turned. Oil price has fallen, even though it's stabilized now around $60 right now, and basically the oil price I would say for the tanker business has two affects, one short-term effect -- when the price falls people tend to wait to buy oil and therefore short-term it might have a negative impact on the transportation requirements, but long-term a lower oil price would stimulate the demand as we see it and be good for the tanker industry.

Still, on page 23 we see that the world growth is very strong and is expected to be pretty strong in the coming period too. It is a situation whereby we have good growth, healthy growth, both in the U.S. and Europe, but not the least in Asia. And even though it's stabilized over the last few years, it's expected to be on the very high side, close to 5% for next year.

And finally, if we turn to Page 24, we summarize and come with a few outlooks. The way we see it there is a steady oil and tonne-mile demand for our services. There are question marks as to the OPEC cuts, if they will come and what effect they will have. We have noticed that the orderbook is quite large, but 2008-2009 will be the years where we have the most deliveries for VLCCs and Suezmaxes, respectively. We also know that the pace in 2010 of single-hull tonnage will be very critical.

For Frontline, we have a newbuilding program with very attractive prices for the time being. We have more timecharter coverage than we have had in the past and we are focusing to optimize between spot and timecharter. We have seen rising OpEx even though we think that OpEx costs, including drydockings, will be lower next year than this year. Still there is a pressure on the undertone for this cost category.

And finally, what we do is that we focus on operational efficiency and opportunistic transactions. We have also enclosed the FFA curve from Imarex just showing how they perceive the development in the freight market for tankers over the next year or so. So with these words we are ready for questions.

(OPERATOR INSTRUCTIONS). [Fjorg Simmons].

Just a quick question -- you mentioned I think in the press release about the discount you're seeing for single-hulls verses doubles. I wondered if you would elaborate on that and just the discounts that you saw on the spot market during the third quarter?

The discount in the third quarter was about 8000 -- $10,000 a day. In a way that was a smaller discount than what we've seen in the past. That was about the level that it was in the third quarter. But still we see long-term there is a larger discrepancy between the singles and the doubles.

Yes, and I guess to partly mitigate that, you've been fairly active in chartering out VLCCs, particularly the singles. And I guess we're not really seeing that or to date haven't seen that in the Suezmaxes which are still primarily on spot. I was just wondering if you could give us bit of color on whether that's maybe a lack of opportunity say with customers to charter of those vessels or if you were just looking to be opportunistic in the future?

I think it's a combination of it all. It's the opportunities that we see come in and we'd like to grab those when we have them. Of course we have -- the conversion is a part of refining the values of the single-hull Suezmaxes.

Okay. And the last one for me, I just wondered -- the drydocks, if you would break down that between VLCCs and Suezmaxes? And I apologize if that's given somewhere, I just didn't pick it up.

I couldn't say at the top of the head what's the difference here. But I would say that the prime cost factor for this quarter is the OBO carriers which is then because -- if you look at the 91 vintages that have been the prime -- for this year the prime reason for the increased prices -- for the increased costs.

That will do for me just now. Thanks.

Omar Nokta, Dahlman Rose.

Good afternoon. In your earnings release you talk about the FSA market and that you're seeing about 50,000 a day for a three-year VLCC contract. Has that market gotten more liquid for you to hedge a more meaningful position than you would have in the past?

No, I wouldn't say so. That's the problem with that market, that it's not very liquid and it can't take -- the volumes are not very big either.

Okay. Some of your peers have come out and reported some of their positions that they've built. Would you be doing the same in the future if you were to build any meaningful positions?

You mean FSA positions?

Yes.

We have no positions so far.

No positions? But would you report them if you did?

Yes, if we have major positions, definitely we would.

Okay. And just on the OpEx side with regards to drydocks, now that we're going into the next couple quarters are going to be a little bit lights, can we expect that operating expenses should fall maybe into the mid $8000 range or at least below the $9000 level?

I think it's fair to expect that, yes.

Okay. And just really quickly, the Front Shanghai was rumored to have been sold at the Front Beijing. Can you comment on that or would you be -- is that something you would consider taking advantage of having about a $60 million gain?

It was never sold and it was only rumors. But we did sell the Beijing because we felt that opportunistically it was a good thing to take in a profit of $60 million. And it could be that we would sell the Shanghai in the future if we saw that the prices were high enough.

Okay, thanks a lot.

(indiscernible), JPMorgan.

Congratulations, Bjorn, on your new role at Frontline.

Thank you.

A question about the dividend, the third-quarter policy. Clearly it was well above the earnings and you explained that through the sales of Genmar and also Tobago and the Beijing. Just going forward, I want to clarify that the excess dividend or the EPS in the third quarter was attributed to all three of those sales. And basically what I'm trying to get to is that starting with the fourth quarter and going forward the dividend should only match EPS assuming no other transactions. So there are no excess gains on asset sales that can be used to pay a larger dividend going forward?

That's true. We are basing our sales on the -- we're looking at the cash position when we do the dividend payouts. And so far the basis will be the earnings per share, that will always be the basis. And of course if you sell and you have a sales profit and liquidity that will also impact.

Okay. So assuming no other changes in the fleet we can look at a 100% payout ratio in the fourth quarter and in 2007?

I think that all things being equal, yes.

Okay, thank you. And then also, when you were explaining your fleet, the orderbook and the single-hulls, I just want to get a sense for what your thoughts were on the 2010 phase-out date. It seems to me that a lot of the far Eastern countries have already said that they will accept single-hull ships past the 2010 phase-out date which really wouldn't be much of a change from the current market environment since most of the single-hulls are going there.

In your opinion, unless the ships become economically unfeasible to operate, do you really think that 2010 -- or 2009 in advance of the phase-out date we'll see a lot of the single-hulls removed from the trading fleet?

There's a saying in shipping that "old ladies don't die, they only fade away", and maybe that's the case for here too. You know, I have difficulty believing that all of a sudden everything drops dead in the street, but clearly quite a few will have to. There won't be, I think, a market for them all. And of course you will see a greater differential on the earnings side for these ships combined with of course the age and the drydocking in OpEx that you would expect here.

So I think that greatly the efficiency of that fleet will deteriorate tremendously for the period. And I think also that the major oil companies are very much against it. So I think that there will be considerable effect in 2010 of the singles, but I don't think they will, you know, drop dead, as I said, all at one time.

Right. Okay, and then finally, three months ago -- before you started in Frontline -- there was a lot of optimism that because the third quarter was so strong the fourth quarter was set up to be exceptionally strong, even potentially as good as the fourth quarter of 2004. As we look into the first quarter -- and I know it's the winter and I know it's supposed to be seasonally stronger -- but with OPEC poised to possibly cut production a second time and the orderbook ramping up, as you pointed out in your presentation, other than the FSA markets which are just as good as the current spot market sometimes, what gives you optimism that the winter at least in the first quarter of '07 can post some type of seasonal recovery versus the fourth quarter?

I think first of all that the reason why fourth quarter is not so good as we see it now is maybe because the third quarter was good, but it had to do with position taking. Also I think that we have to follow the inventory levels and the fact that with the oil price falling as quickly as it did then it has an impact on -- that people are rather waiting a little bit. So I think that -- and combined with the fact that we have had no hurricanes, no disturbances into the market.

So I think that in a way that everything has been -- gone very smooth in the tanker business adding supply right for the time being. And of course, if anything happens there, then suddenly that has a great impact and we see that the volatility is very high here. You are on a margin so that if things happen -- I mean, rates are moving pretty quickly.

Okay. Thanks a lot, Bjorn, and it's good to see you again.

(indiscernible), Citigroup.

First of all, on your relationship with Ship Finance and the contracts there, we see what we did with Front Tobago -- is it in your mind that we're going to see more asset sales from Ship Finance that you can actually [cancel] the contracts there and capitalize on the strong [secondhand] market? I'm trying to see how firm are the contracts that you have today with Ship Finance and whether you're thinking that you can profit by the strong secondhand market by selling some assets from Ship Finance?

You know that the contracts are such I think we want to sell we have to make an agreement with Ship Finance on an (indiscernible) basis. So it has to be in the interest of both parties if we should sell.

Are you interested in this type of transaction at this point?

Well, it depends upon -- we also have ships that we own on our own. We own VLCCs and we own Suezmaxes and we could also sell ships that we own directly. So I think that it all depends on the price level and what type of shipment we're talking about. And yes, as we did with the Tobago and we did with the Beijing, we could be interested in selling if we see that that is the right thing to do.

On the asset sales, the other thing is that obviously your stock is trading above the net asset value and a ship in Frontline is more valuable than a ship out of Frontline. What's the reason of pursuing secondhand transactions?

That's why we would never sell the whole fleet. We are basically long in tonnage in a tanker company. So this is more, as I said, in the final part in the outlook that these are opportunistic transactions. And of course the single-hulls are somewhat different where the Tobago was a single-hull.

Okay. On another subject on the FPSO, can you give us some indication of the rate or maybe the return that you're logging this two-year contract?

The only thing I can say is that for the two-year contract the returns are expected to be very good. And of course it will be even better if you have extensions further on. I can't give you exact figures on that right now, I'm sorry.

Okay, that's all I have. Thank you.

Roger Nightingale, Bloomberg News.

I was just wondering under what circumstances Frontline would consider scrapping tankers?

Then the rates would have to be very low for a sustained period of time and, of course, combined with the scrap price being very, very high. If anyone, it's always a calculation as to what the market gives and what the alternative used scrap price is. But we're not looking at that now. We don't expect that to happen for our fleet.

Do you think that the scrapping prices will come down much as we approach 2010 and 2015?

It all depends upon the number of ships, because the scrap prices -- that's impacted by the steel prices on the one hand and, of course, the scrapping or shipping on the number of ships being scrapped on the other. And definitely steel prices should fall and if quite a few should go to the scrap yard, that will have a pressure on the scrap prices.

Okay, thank you.

There are no more questions.

Okay. Thank you for attending the conference. Goodbye.