Frontline Plc (FRO) 2006 Q4 法說會逐字稿

Thank you for standing by and welcome to the Frontline Q4 2006 earnings presentation. [OPERATOR INSTRUCTIONS] I'd like to advise you that this conference is being recorded today on Tuesday, the 27th of February, 2007. I would now like to hand the conference over to your first speaker today, Mr. Bjorn Sjaastad. Go ahead, sir.

Good afternoon to you all and welcome to the Frontline presentation on the Q4 results of 2006. Joining me today is our CFO, Inger Klemp, and also Stephen Eglin, who is in charge of chartering our vessels.

We will follow the presentation material that has been sent to you and presented on the Web site and for ease of following the presentation, I will just make reference to the various slides that we are going to follow. And as said, at the tail end we'll open for a question-and-answer session, but I will come back to that.

Slide number three, the agenda, and the purpose is really to go through a short introduction, the fourth quarter 2006 highlights, financial review, Sealift, Ltd., and Sea Production, Ltd., industry overview and company outlook and finalize with questions.

We then turn to slide number four where we have presented the Frontline fleet. First, we have listed our VLCC tonnage, where you will see that we have 26 double-hull ships, 1 double-side ship and 8 single-hull VLCCs. Now if we look at the employment situation for those vessels, for the VLCC vessels, 4, or 15% of the double-hull VLCCs, are covered by time charter for 2007 and 88% of the 8 single-hull VLCC vessels have also been covered on time charter at rates that are mentioned here, $34,800 per day for the single hulls, plus profit splits attached to that. We also have 4 new buildings on the VLCCs.

If we then turn to the Suezmax fleet, we have 9 double hulls, 2 double-sides and 6 single-hull vessels and then 8 OBO carriers. When we then look at the employment situation for the Suezmaxes, we have one ship on time charter of the double hulls. The remaining is in spot market. Of the single-hull vessels, there is one ship on time charter for part of the year, but it is to say that 4 of the 6 single-hull ships here have been sold, 3 to Sealift and 1 to a third party. The 1 sold to a third party will be delivered in Q1 this year and the 3 vessels sold to Sealift have been chartered back to Frontline until they enter the yard for conversion -- estimate of that happening in the course of 2007. That really means that we have reduced our exposure on the single-hull Suezmaxes to 2 vessels when we approach the end of the year.

Then we have the ITC vessels where we have 6 double-hull VLCCs and 3 double-hull Suezmaxes. All of these ships are on long-term bareboat charters to large oil companies for a long period of time, really giving only a small contribution to the results of Frontline in this period and it's really-- the future value lies in the auction value at the tail end of the charter for part of that fleet.

Then we also have quite a few ships under commercial management where we've commercialized the ships but have no risk/reward for the level of income -- 8 double-hull VLCCs, 3 double-hull Suezmaxes and 2 single-hull Suezmaxes, which are 2 of the ships sold to Sealift and 1 Aframax double-side.

All together we operate about 83 ships. I also forgot to say that we had 4 new buildings on Suezmaxes.

We have been working on contract coverage over the last periods and as of entering into the Q2 of 2007, 34% of our fleet is covered on time charter. We've also been working to reduce our single-hull exposure, which has been done through the chartering out of the single-hull VLCCs, as just mentioned. They are chartered out-- most of those ships are chartered out for the remainder of the commitment period of Frontline for those vessels and we have also sold single-hull ships to reduce the exposure on single-hull Suezmaxes.

If we then turn to slide number five, we have an overview of the corporate structure of Frontline where the top is the Bermudan company and then we have Frontline management in Bermuda and in Oslo, where we are working. And the blocks below the line, those to the left reflect the shareholdings that we have now in various companies -- 11% in Ship Finance, worth about $210 million; Sealift we have 33% ownership, about $70 million, and Sea Production, 28% ownership. The market value is about $57 million.

Then we have the ships under charter to-- from Ship Finance, Frontline Shipping, Ltd., and also Frontline Shipping II, Ltd. And then we have ITC, as mentioned, and then we also have owned tonnage, either directly owned or through KG with expiry or purchase options for us during the course of the next 3 to 4 years.

If we then turn to slide number six, we give an overview of the new buildings, which is really catering for market position in the future. We have 4 VLCCs ordered at attractive prices for delivery, 2 in 2009 and 2 in 2010. Then we also have 4 Suezmax vessels, also attractively priced today, to be delivered in the second half of 2008 and in the first half of 2009. We also have some options that we are considered to use for the Suezmax fleet.

If we then turn to slide number 7, we show financial highlights and for Q4 we have a net income of $135 million, equal to $1.80 per share. This was achieved through the time charter income level of $48,000 a day for the VLCCs, $31,200 for our Suezmaxes and $34,2000 for our Suezmax OBOs. These are the average earnings, time charter earnings per day, for the various fleet sizes. There are, of course, differences as to single and double tonnage, as well as those on time charter, but that will come back to that later on.

For 2006, as such, our net income was $516 million equal to $6.90 per share and the average time charter rate was $57,800 for VLCCs, $37,800 for Suezmaxes and $31,700 for OBO carriers.

And we also have announced a cash dividend for Q4 of $2.05 and also we have decided to dividend out our remaining shareholders-- shareholding of the Ship Finance, which at the cost-- at the share price of $26 as of February 23rd, that gives the value per Frontline share of $2.79. So the total-- the total dividend, then, according to the share price of Ship Finance is then $4.84.

This follows our extensive dividend policy, where we use dividends as a vehicle to generate higher returns for our shareholder. We strive at having a high payout ratio on a quarterly basis, but, of course, the level of dividend is also impacted by the earnings, the market prospects, committed investments, as well as market opportunities.

If we then turn to slide number eight, we show major transactions in Q4 2006 where the first bullet points refers to sale of tonnage. We have sold the Beijing, as previously reported, for $141.5 million, giving us a profit of $59 million. The Front Tobago was sold for $45 million, giving us a profit of $14.3 million.

We have also, during the quarter, made new balance contracts for the Suezmaxes at Rongsheng that I was just mentioned and 2 of those were resold to Ship Finance International, Ltd. We took delivery of Shanghai at the price of $81 million. That's a sister ship to the Front Beijing and we've also exercised and resold two VLCC options that we had for a profit of $6.2 million.

The reasons, really, for these sales are differently, slightly. When we sold the Beijing, that was purely because the profit was so good that we felt that we wanted to do that. When we sold the Front Tobago, that was a single-hull VLCC and following our wish to reduce our exposure for single-hull tonnage.

If we turn to the slide number nine, we have further transactions that we've done after year end but before presenting these results in Q1 2007 and which we've reported before. We established Sealift, Ltd., and then subsequently sold 6 single-hull Suezmax tankers to that company, of which Frontline has the responsibility to convert 4 to heavy-lift carriers and Frontline retains 33% ownership in that company.

That was done in January and in February we did also a floating of Sea Production, Ltd., where we sold our floating production vessel, Puffin, and our sea production management company for $210 million. In this company, Frontline retains 28%. These transaction will have P&L and cash flow effects that we'll be taking into consideration during the next 6 quarters.

We also made an agreement to sell the single-hull Suezmax transporter for $38 million, which will give Frontline a profit of about $15 million and that ship is, as I said, a single-hull vessel and that will be delivered in March, next month.

If we then look at the profit and loss statement in slide number 10, we have-- we have the figures depicted there. These are consolidated figures with Ship Finance International, Ltd.

And if we look at the fourth quarter results -- I'm just reading the main headlines -- the total operating revenue was $350 million. We had voyage-- we had a gain from sale of assets of close to $74 million -- it was primarily the Beijing and the Tobago that was just mentioned before -- voyage costs of $87 million and ship operating costs of $47 million.

Total operating expenses was $204 million after depreciation, administrative cost and chartering-- charter-hire expenses.

Administrative costs was-- went up quite a lot in Q4 compared to corresponding period previous year, primarily driven by increased cost in Ship Finance, who've got their own administration now, as well as administrative costs in Sea Production, which we started, basically, in 2006.

Ship operating costs also increased, but I will come back to that later on another slide.

We then turn to interest income of $13 million, interest expense of $52 million and some other financial items, giving us an income before tax and minority interest of $185 million and then we have $51 million of minority interest, giving a net income of US$134 million, equal to $1.80 per share.

If we then go to the full year of 2006, total operating revenue was about US$1.6 billion. Gain from sale of assets, $95 million, voyage cost and commissions, $396 million and ship operating expenses about $199 million. Also here you see an increase from the corresponding period last year, which I will come back to. The reason for the increased voyage expenses was primarily driven by higher bunker costs in 2006 that it was for 2005.

We also had some higher charter hire expenses and higher administrative expenses, as just explained. Depreciation about the same level of $203 million, giving a total operating expense of $857 million, an operating income of $820 million.

Interest income equals $47 million and interest expense $208 million, giving an income before tax and minority interest of US$674 million and after minority interest of $158, we end up with a net income of $516 million for the full year in 2006, equal to $6.90 a share.

And, as can be seen, that is only slightly weaker, from a bottom-line point of view, than 2005, where the bottom line was US$606 million or $7.99 per share. And this really means that, I think, that 2006 was the third best year in the history of Frontline. So still-- still a very good year despite the somewhat disappointing, for us, result of the fourth quarter, where we had expected the winter months to have [inaudible].

Just to mention that we-- we are discussing with our auditors the consolidation of the ITC companies within the Frontline's group accounts and if-- but if there is going to be a change there, that will not have an effect on the net income or on the equity. It's only a way of presenting the figures.

If we then turn to the next slide, number 11, we have shown a little bit more on income on the time charter basis. And you will recall that in the fourth quarter of 2006, the VLCC earnings for us was $48,000 a day, down-- substantially down from Q4 2005.

If you look at the VLCCs, we did-- on the spot basis, we did $53,300, but again, if you divide that into single hulls and double hulls, you would see that we achieved $56,500 on our double hull spot VLCC fleet, whilst the single-hull VLCC fleet was as low as, then, $37,600. And that's a clear, should I say, not change, but direction that there is a big difference between earnings on the single-hull and the double-hull tonnage. Here it is about $20,000 a day. Now it is fair to say that we have only 2 single-hull VLCCs and the figures could vary from quarter to quarter, depending upon the actual voyages that they are entertaining.

On the Suezmax vessels, the average was $37,200, but here again, we see that on the spot double-hull Suezmax fleet, we made $40,900 a day, whilst on the single-hull fleet only $22,000 a day. And also here we see the difference in the single-hull and the double-hull tonnage. And that has been more pronounced now in the fourth quarter when the market has weakened compared to Q3 last year. And right now I think that the earnings on the-- of the single and the double are-- the single are only half of the earnings of the double if you think of the voyage or the route Arabian Gulf eastbound.

If you look at the Imarex curve below, then you will see that the Imarex, the market forecast really somewhat flat second and third quarter this year, but there was a forecast substantial increase at the tail end in Q4. Really, they expect to see a winter market, at least for the coming season in 2007.

If you look at the figures that we achieved in 2006 compared to 2005, they're much more similar. So overall, as we also saw, 2005 and 2006 was almost the same. We see that the OBOs were lower in 2006 than 2005, but fortunately the dry cargo market is now so good that we see that we get increased returns on our 8 OBO carriers.

If we then turn to slide number 12, we dwell with the ship operating expenses and off hire and you would see that year-to-date 2006 the total fleet had an average ship operating cost of $9060 a day. This includes drydocking of 19 of our fleet, which is a substantial increase in number of drydockings compared to last year, when we only drydocked 10 ships and where we saw that the average running costs were $7360 per day.

Off-hire days also went up, as a consequence of the-- of the increased drydockings. Our accounting policy is to drydock-- is to expense the drydockings as they are incurred, therefore you see the variation from quarter to quarter.

It is also fair to say that for 2006 of the 19, quite a few of the 15-year-old ships were drydocked, the OBOs, as well as some Suezmaxes and single-hulls, VLCCs and we see a big difference in the drydocking costs for a 15-year-old ship compared to a 5-year-old ship. So whilst we drydock a 5-year-old ship for about $1 million or less, then you end up with easily $2.5 million for drydocking a 15-year-old ship with a corresponding longer off-hire period, which, of course, also penalizes our bottom line.

You see next year that the drydockings-- the forecasted number of drydockings are down to 15, somewhat lower than for 2006.

We then turn to page-- or to slide number 13. We describe our cash breakeven rates for 2007 as dollars per day. That includes OpEx, drydockings and also our administrative costs. So the full breakeven rate for the VLCCs are then $30,200 a day, $22,600 for Suezmaxes and $23,000 for OBO carriers.

If you go to slide 14, you will see an overview of the balance sheet and total assets stands at US$4.4 billion, of which we have the short-term assets in cash and cash equivalents of $204 million. Then we have restricted cash of $623 million related to restricted cash in ITC, as well as in subsidiaries of Frontline to support the Ship Finance long-term charters. We have vessels, net, and vessels under capital leases of about US$3 billion.

On the liability side, the long-term debt and long-term obligations on the capital leases are about US$2.8 billion and the stockholders' equity in Frontline is about US $668 million, minority interest US$541 million.

The balance sheet is very much similar to the year before. The balance sheet is, of course, also consolidated with Ship Finance.

Slide number 15, here we describe what we did in January where we decided to spin off our heavy-lift activities and we did that by establishing Sealift, Ltd., where Frontline-- sorry, I was at slide 16.

Slide 15 deals with Sea Production. This is a similar structure that we decided to spin off our floating production business where we established Sea Production in February in this year, this month, and it was also OTC listed simultaneously in Oslo. Frontline retains 28% ownership in the company and the company bought the floating production unit Front Puffin, as well as a few other assets for floating production purposes.

This was financed through equity, the raising of new equity of $180 million and a bond issue and-- as well as a debt issue.

Frontline-- we will use our shareholdings to try to-- try to participate in the further consolidation in the business or to sell or dividend out that shareholding to our shareholders. So we are not in the business to operate long term floating production assets. Frontline is a pure crude oil tanker company, but our objective here was to facilitate for this new company, Sea Production. This will also generate cash and profit for Frontline, which will be accounted for in 2007.

As I mentioned, Sealift, we spun off Sealift in January by establishing the company, raising $180 million, also there, in equity and bond and bank finance and Frontline sold 6 ships to this-- ships to Sealift, 4 of which with a responsibility to convert to heavy lift tankers, which will-- those ships will be delivered from April through-- this year through May next year and then we sold 2 Suezmax tankers with the conversion option rights with the same shipyard -- total investment of about $476 million. The price per heavy-lift vessel was $100 million apiece, ready and final converted from Frontline, and the Suezmax assets, including the option contracts, about $38 million apiece.

And also the purpose here with our 33% shareholding is to try to promote further consolidation in this business or sell or dividend out the shares to our shareholders.

We are neither here in the position that we would like to-- to take this further. We would like to-- we have established a good organization to take care of the strategic and operational challenges of Sealift into the future.

If we then turn to slide 17, we have shown the dividend and-- per share and the earnings per share since 2000 and also including the dividends that we announced today of $2.05 cash, as well as the burn of the remaining 11% of our shareholding in Ship Finance. It really means that since Q1 2001 we have paid $39.05 in cash dividends per share, as well as the value of the spinoffs we have paid $20.44 per share. So all together, close to $60 per share in dividends over that period.

Slide 18 is an explanation of the total operating revenue, net income and dividends paid in the same years, at the same time as we've shown the time charter income that we had on our VLCCs, Suezmaxes and OBO carriers, respectively. And here you will also see that we have had a steady dividend compared to our net results and also a higher dividend compared to, actually, our total operating revenue. And also here, it's clear that 2006 is about the same level of profitability as 2005.

Slide number 19 describes the Frontline share with a share price as of 23rd February of $36.32, the number of shares outstanding, giving it a market cap of $2.7 billion and an enterprise value of US$4.99 billion. With an EBITDA of 2006 of $866 million. This gives an earnings per share in 2006 of $6.90, and a price/earning ratio of 5.26 and a ratio of enterprise value to EBITDA of 5.76 and a cash yield of 20.79%. That's a cash dividend yield.

On slide 20 we are showing a few more graphs on the markets, just also to prepare for the future outlook. We see that from the Q4 here on the black-- in the black line, for both VLCCs and for Suezmaxes, the earnings for Q4 2006 was far below that of 2005, even though there was a rate hike at the tail end of 2006 for Suezmaxes. But that came in very late and it was short-lived, in a way.

We also see that from so far in Q1 we are-- we have stabilized, at least, for the VLCCs, but still we are below the corresponding level that was in Q1 2006, as well as Q1 for 2005. And with Suezmaxes, that follows about the same picture.

I think the reasons why it's been like that of the external factors from a demand side, it was stable, warm weather, no particular delays, no particular hurricanes, no political-- political-- no special political unrest and we had, also, official OPEC cuts in November and also into February. And all of that had a negative impact on the tanker market.

On the supply side, it was a real-- it was about stable fleet growth for Suezmaxes in 2006 compared to the years before and the same-- and a somewhat lower fleet growth for VLCCs.

If you now turn to slide number 21, we give an overview of the fleet, divided in-- for VLCCS, divided into single hulls, double hulls and the order book. What is evident from this graph is that the order book equals 34% of existing fleet that you will see in the bars to the very right in the graph. It's about the same number of ships on order that you have existing single-hull tonnage.

And if you look at 2007 and '08 and '09, the particular years, you will see that the deliveries in this year and next year will be about on the same level as the years before, apart from last year, which was somewhat lower. The big-- the big volume of new deliveries will come in 2009. And basically that-- I would say that it's the destiny of the single-hull tonnage that is the joker in the game here.

If you look at-- if you look at, for Suezmaxes on slide 22 for the same structure, the pattern is more or less the same, only that there are more ships on order than there are single-hull tonnage and, relatively speaking, there are more ships coming into the market in 2009 than we see-- we expect to come to the market for 2007 and 2008.

But what we think also it's important to bear in mind is the increased inefficiency of the single-hull tonnage. That's something that we see today that you have much more waiting time for and less places that they can go, fewer charters that are willing to take on single-hull tonnage, so you can very well see that that will have a reduced-- a reduction in the supply-- effective reduction in supply due to inefficiency of the single-hull fleet in the coming years.

That really means that we feel that the next-- this year and next year shouldn't be that bad, after all. There is a question mark as to 2009, but then again, it's what happening with the single fleet. It's hard to see a lot of scrapping if the market is still very high.

But what we experience today, as I said, if that fix Arabian Gulf east, the VLCC double-- that will give about $50,000 a day, whilst it would give only about $25,000 a day for a single-hull VLCC. And if you take the voyage for a Suezmax, we would have about $40,000 a day for a double Suezmax and about-- Arabian Gulf east and only $20,000 for a single hull. So the differential between the single and double is going up and going up.

If we then turn to the slide number 23, we just show the oil price and the-- having leveled off substantially in the second half of 2006, but then with the OPEC cuts, we see that it bounced back again somewhat up and the bunker prices are normally following suit the oil price. Clearly, for the tanker market, when-- when oil prices is falling, then people wait a little before they buy the oil and then that would normally have a negative impact on the tanker market.

On slide 24 we also see the crude oil inventory levels in the OECD area and even though we don't have figures for January this year, we see that the stock level in 2006 was very high. It was increasing in the first half of the year and then falling thereafter, apart from an increase again in October-November, and now it's falling again. So the question mark is really how much is it falling now for January, if it is still falling. Still, there has been the warm weather in the Western Hemisphere.

If we look at slide number 25 on world oil demand, the IEA estimates growth to be about 2% per annum in the near future, still strong demand growth in Asia and the Middle East and stable in the remaining regions. There also have been some questions on the U.S. strategic petroleum reserves, whether they are too small. Currently they estimate annual fleet growth of 2.7% per annum. This is lower than 2006. We are checking into this-- the logic of those figures.

Definitely from a demand and a reduced-- reduction in OPEC production normally is not good for the tanker market.

On a positive note, on slide 26 the world economy seems robust as ever, despite a mild deceleration in the U.S. The annual GDP growth is at a fantastic level, I would say, close to 5% on a total. This has really shown that there's good economic conditions, both in the OECD and-- as well as in the less-developed nations in the industrialized countries.

And-- and so this will-- this will, from a demand point of view, have a stable and possibly development in demand for oil and for-- also for transportation of the oil.

And the final slide that we have on outlook on slide number 27, this is just a summary. The macro comments that we have, we think the macroeconomic environment is healthy. The order book for tankers is very high. For 2007 and 2008 it's not that bad and the big question is how the single-hull tonnage will be phased out. That will be gradually, it will be reduced inefficiency and at one time they will be out, basically, forever.

There is still uncertainty on the supply side of oil, whether there will be further OPEC cuts or not. We think maybe unlikely that there will be further OPEC cuts. And then, of course, the political stability in the world will have an impact there.

For Frontline, we are pretty happy with our own position. We have made some spinoffs that will-- that is positive for us, which will give us one-off profits. We have significantly reduced our single hull exposure. Our order book for new ships, we are happy with that, both timing of delivery and price levels. Our breakeven rates are low and acceptable and provides a good fence on the downside and we've also an effective time charter coverage for-- as we see now, around 34% of our fleet. So that really puts us in a-- in a good position to meet the market that-- that we-- that will come.

And just-- we've also shown the FFA curves for TD3 VLCCs Arabian Gulf east, as well TD5 Suezmaxes, West Africa the U.S. And it's a pretty flat curve for the next 2 or 3 quarters, but then it's expected to increase at the tail end of the year.

So this-- the Imarex, they expect-- they expect the winter market to come back in the fourth quarter.

So, then, I think I will open for questions and answers from you. So if you would just introduce yourself and come with your question, we'll try to answer as-- the best that we can. Thank you.

[OPERATOR INSTRUCTIONS] Your first question comes from Jon Chappell from JPMorgan. Please ask your question.

Thank you very much. Good afternoon. Bjorn, in your press release you said that your cash dividend of $2.05 exceeded your EPS due to some transactions in the first quarter. I assume that means the sale of the Front Transporter, as well as the Sealift and the Sea Production transactions. Could you quantify how much cash benefit to Frontline was generated by those 3 transactions? And also can you state whether the entire cash benefit from all 3 of those transactions was in that $2.05 dividend or if there's some leftover cash for future dividends from those transactions?

Yes. There are few leftovers, so it doesn't include all of the-- all of the cash profits from those 3 transactions. I would estimate about $50-$60 million that is taken from the transactions which we have completed in the first quarter, if you compare that to the earnings per share.

And how much would you estimate is left over for future dividends?

Well, I haven't got that figures right now, so I can't really say that, because we have not finalized the evaluation of the profit and cash flow from those transactions. There are some open ends there, because we are going to deliver, for instance, the 4 ships ready converted to-- and there are some uncertainties. We'll have to come back to that -- and that will be generated over the next 6 quarters.

Okay. One last question. You've mentioned your intention to spin off Ship Finance by the end of next month. Do your financial statements become deconsolidated once that spinoff is completed? And, if so, how do we look at the new Frontline financial statements? What parts will see the most significant changes?

I think it is fair to say that we are consolidated the Ship Finance-- the parent company of Ship Finance and definitely when we sell-- I said definitely, I believe that we will deconsolidate from there. The question is really how we handle each lease for all the ships that we have on time charter from them, Ship Finance, but whether we are consolidating the SPCs owning each ship or we are using lease accounting, it's really the same.

But it will be an issue to follow Frontline after the deconsolidated of the parent of Ship Finance and it's primarily the non-Frontline-related assets of Ship Finance and the corresponding P&L effects of those that will be taken out, as well as the minority interests.

So from a P&L perspective, just briefly, the charter hire expense should go up significantly because you actually have to flow that through your income statement, as well as the profit share payments to Ship Finance, but Frontline's depreciation should come down significantly since you won't have ownership of the fleet and the minority interests will disappear. Am I missing anything significant?

I think, first, the minority interest will disappear, yes, and our charter hire will go up with the profit spend that we have to do that. And also, other non-Frontline-related activities would be taken away and that will also impact on all-- on each of the lines that we would have.

But it's a little bit complicated because Ship Finance, they are having-- doing accounting for the various non-Frontline-related businesses in different ways, too. So we will come back to that.

Okay. Do you think that will all be settled by the time you report the first quarter earnings?

Hopefully, yes. That's the objective.

All right. Thanks a lot, Bjorn.

Yes, thanks.

Thank you. Your next question comes from Doug Mavrinac from Jefferies & Co. Please ask your question.

Great. Thank you. Good afternoon. I was just wondering, Bjorn, if you could go through the decision-making process for asset sales such as the Front Transporter, which was a Ship Finance, I guess, owned vessel that Frontline sold? Just if you could go into kind of the interaction in between Frontline and Ship Finance to determine that a sale would take place and then also the method of calculating the proceeds that Frontline is to receive, as well as any sort of compensation payment that Frontline receives from such a sale?

You know that on this-- on the Transporter, both Ship Finance and Frontline have had a wish to reduce the single-hull exposure. And-- and so the decision to sell the ship, as such, was based upon the price achieved compared to what we expect would be the benefit of continuing to operate the ship and run it ourselves.

What we do when we sell a ship like is, is that it's Ship Finance who is selling the vessel and then there is a negotiation between Ship Finance and Frontline as to what compensation Frontline should receive by releasing Ship Finance from their charter party obligations.

Okay. Okay.

And that's on a mathematical basis because of the-- the fixed-- the fixed rates that we have with. We have a fixed time charter rate and a profit split and you could use net asset-- net present value of the commitment that we have.

Right. Okay, okay, that helps. Because what I was trying to figure out here is it a joint decision or is it Frontline that initiates those conversations or Ship Finance or what have you?

It's kind of joint because you can't tell what third parties want. Because Ship Finance is the owner of the assets and Frontline is the charterer, so they need an agreement from us. And since we are mostly in the market, I mean, we are coming up with the ideas and thoughts and we are discussing them with Ship Finance as to what they also want to achieve.

So it is a discussion and it's a joint-- it's a decision by each company, but-- but basically we discuss-- it's a joint discussion.

Okay. Okay. And then in terms of cash payments, if I'm not mistaken, that Ship Finance profit sharing payment, that's made in March, correct?

Yes.

Okay. Okay. And then the final question that I had has to do with some of the KG options that are in existence. Can you talk a little bit about those in terms of what some of those prices are that can be-- that those options can be exercised at and whether or not they are favorable compared to current asset values and what-not?

Yes. First of all, I have to say that the first option is at the tail end of the year and they are following thereafter for the next 2 or 3 years, until 2011, I think. And it is fair to say that you have substantial increased values compared to-- the option values compared to the market values today, the way we see it today. And, of course, we are getting the benefit today because of the charter rates compared to what we achieve.

So we get that benefit so far, but-- but, of course, that will be, in a way, much clearer when we declare the options.

Right. All right. Thank you for the time.

You're welcome.

Thank you. Your next question comes from Omar Nokta from Dahlman Rose. Please ask your question.

Hi. You talked about ITC and just looking at how those are all on long-term contracts, is there-- is there a way that-- or are you guys looking at maybe spinning that off into something that can realize maybe a higher value than under the Frontline structure right now?

Yes, we are-- we are working on ITC and that's an area that we would like to look into. Because you could say that there is an interest play there. You have very good charterers, very long-term and fixed income of those-- of those vessels that are in ITC.

So far, there is not that much we can do to get ships loose because of the-- it's still terrible for, of course, the charterers the way the market is today. But it could be that there is-- there is a value of the cash flow stream that could be spun off, yes, in the future. It could be.

Okay. And just with respect to Sea Production and Sealift, now that you've spun those off as separate entities, do you see yourselves as holding just a purely equity stake and not participating, really, in some of the conversions? Like I know you're taking on the Sealift conversions yourselves. Is that something that down the line now is going to be up to those 2 companies and you're just going to be participating mostly from just the equity side and sale of assets side?

That's correct. And for Sealift it's 4 ships that we have the obligation to finalize, converted, and the 2 others, the number 5 and 6, it will be up to Sealift. And the same thing will be for Sea Production. So we are more like a shareholder right now, yes, that's true.

Okay. Thanks a lot, guys.

Okay.

The next question comes from Robin Byde, HSBC. Please ask your question.

Oh, good afternoon, everybody. Just on your drydocking costs on slide number 12, are you mainly going to be drydocking younger vessels, the 5-year-old vessels, this year or older vessels? And on my calculation, I think I've got 450 off-hire days. Is that about correct?

Well, I can't say really the off-hire days right now, but I think it will be quite a few younger ships that will be drydocked this year.

Okay, great. And just secondly--

But there will, of course, be some of the older ones, too, of the mix of the fleet, but it wouldn't be as special as for 2006.

Okay, thank you. And just one other question. On your average time charter lengths, can you talk us through what your average time charter lengths are across each of the segments? And are you actually seeing charter lengths getting longer or shorter at the moment?

Sorry, the charter lengths?

Yes.

Okay. If you think about the slide on the page number-- slide number 4.

Yes.

Yes, we have-- what we've done on the OBOs is that we have-- we've done a few-- one 2-year that we reported and one-- the last one is a 3-year charter for the OBO carriers. But that we will consider, really, that is the rate and the period. But, as we said, the last one, that has not gone into the chartering of the OBOs was done for 3 years at $45,000 gross.

And we have-- we have a VLCC that we did recently, just before Christmas, of 3 years. So basically if we do time charters now, then, it's primarily for the long term, we would like to-- we wouldn't consider to do 1 or 2 years right now. We think that it should be 3 to 5 years if we're going to do a time charter.

Right. Okay. Thank you.

Your next question comes from Philippe Lanier from the Banc of America. Please ask your question.

Yes, thank you. First, a couple of accounting questions. With the sale of a number of assets from Ship Finance to yourselves, will you be releasing some of your restricted cash into operable cash?

Yes, that's true. Per ship-- there will be an amount per vessel, yes.

Do you know how much that is, roughly?

It will be $5-- roughly $5 million per vessel.

Okay. And then another question, I'm not sure if you mentioned it on the call, so I apologize if you ask-- if I'm asking this again, for the 2 new vehicles, have you determined yet whether you'll be using equity method or consolidation for those accounting methods?

That would be equity method, I would assume. They're below 50%.

Right. And you don't-- you don't anticipate any-- any problems on the accounting side with your auditors like you had in the past with Ship Finance on getting that through.

Hopefully not.

Hopefully not, yes. Okay, good. We can all hope.

Yes, we are-- I don't think it's that-- we are not long-term shareholders in this-- in those 2 companies.

Right.

Basically, we will either, as I said, sell either through a kind of consolidation or dividend it out to our shareholders.

Okay, great. And then just one last question, just on the kind of macro outlook. You were talking about kind of the futures market on the TD3 route. From your opinion and the way you guys look at the market, if you were going to assume that OPEC would increase production by, say, half a million barrels in the next 2 months, is that baked into what the current futures market is assessing or do you think there's reasonable upside if that happens?

I would think there is an upside if that happens, yes.

Okay. I think that answers the question for me. Thanks.

Thanks.

Your next question comes from Peter Testa from One Investments. Please ask your question.

Yes, this is Peter Testa, actually, with a T. A couple questions, please. I was wondering, if you could give on the Sea Production side some idea of the cash that would be released. You made a comment on the issues with the lift-- the heavy-lift conversion from Sealift, from Sea Production there is purely related existing assets under construction. Can you give some idea what you think the cash will be released and does that link, somehow, to the implied $60 million of profit?

We will-- we will-- we have retained 28% of the shareholding. So that's a part of that which we have invested in there.

Indeed.

It's basically when we decide to do something with those-- with that shareholding.

Okay, because you said a net cash fact that would be material in Q1. I wonder what "material" means.

Well, we've had a cash effect that we also partly used for dividend payments in Q1.

Right, okay. And on the Sealift side, can you give some, maybe, range of what the-- the implication of the open issues could be in terms of the impact on the total cash from that-- released to Frontline from that transaction?

I think it is-- I'm a little bit hesitant for doing that right-- right now. So I think if you will be a little bit more patient. We'll come back when we present our first-- the first quarter figures.

Okay. Well, can you say whether the-- because if you have payments and conversions and so on, it will be over the next 6 quarters, there'll be some cash both ways or is it generally a cash inflow, net of these--

It's inflow.

Yes, okay. Then a question on ITC. Can you just say what the cash flow on ITC-- the assets on the ITC base are?

It's a per boat hire and it's interest charges and its repayment of loans.

Okay, but the-- what-- if you look at 2006, for example, what was the net cash flow from the assets under that structure?

I think the P&L was about $8 million for ITC.

Okay, but is that representative of the cash flow or no?

I would assume so, yes.

Okay. And then just a last question on the-- the single-hull charters. The figures on slide 4, the 8 new vessels, are they-- are they net of the vessels which have been transferred into the new ventures or--?

Yes, these are the-- these are single hull-- the 8-- that's the deal-- they are not part of the new ventures.

Yes and the 6 on the Suezmax, are they--?

Of the 6 Suezmaxes, 1 is commented upon below, which is going to be sold that's last quarter and 3 of the others are on bareboat charters to Frontline until certain dates in 2006. So there will be only 2 remaining at the end of 2007.

Yes, okay. And then the charter out on the VLCCs, you give an average coverage for 2007, but these charters extend through the remaining of the fixed commitment period. Can you give some idea of what the-- the structure of the time charter rates are for periods following 2007?

It's about the same.

About the same. Okay.

You have some profit split on top there.

Right. Okay, that's great. Thank you very much for that.

Your next question comes from [Thomas Hollmer] from [Queens-- Dragon Imports]. Please ask your question.

Yes, the next dividend, will that be a [inaudible]

Sorry?

The next dividend payout, how much will that be?

Well, we haven't decided yet. It depends upon the earnings that we have and the consequences of the transactions that we just done in Q1, the timing of the Sealift and the Sea Production.

I see. Do you have any idea when that will be announced?

That will be announced in--

End of May.

--end of May, I would assume, yes.

I see. And the next-- this payout now, in March, when will that be announced?

It has been announced now and it will be-- it will be paid out in early--

In 22nd of March.

So the 22nd of March.

Oh, I see. And how much is the amount on that in March? I'm sorry.

In March is $2.05 in cash and then it's-- it's shares in Ship Finance corresponding to about $2.79, based on the share price of Ship Finance shares, as of last Friday.

Oh, I see. Okay, I'm sorry.

That's okay.

Thank you very much.

You're welcome.

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