Frontline Plc (FRO) 2007 Q1 法說會逐字稿

Welcome to the Frontline Q1 2007 results conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, the 30th of May, 2007. I would now like to turn the conference over to your speaker, CEO Bjorn Sjaastad. Please go ahead, sir.

Thank you very much and good afternoon or good morning to every one of you listening in and welcome, again, to this conference call where we are going to present Frontline results for the first quarter of 2007.

We have sent out the presentation beforehand, and I will go through that presentation and refer to the respective pages.

Also participating will be Inger Klemp, our Chief Financial Officer, and she will deal with the financial section.

If you'll now turn to page number 3, the agenda, you will see that we want to cover, very briefly, the strategy of Frontline, the first quarter of 2007 financial review, corporate overview, industry overview, as well as outlook, and then we open up for question sessions afterwards.

If you turn, then, to page number 4, the strategy we have listed Frontline shall be a leading spot tanker operator primarily through the operation of VLCCs and Suezmaxes for the transportation of crude oil.

In addition, we own eight OBO carries trading dry, which are fixed on long-term time charters, which we will refer to alter on.

Frontline focuses on shareholder return through high quarterly dividend payout ratio. Our policy is that what we don't need, we want to pay to our shareholders. If we need more money later on for new projects, then we ask the market for funds.

Scale and critical mass is important for Frontline. We see that when we have sold the single-hull Suezmaxes and got them delivered during the course of 2008, we will be on the low side in terms of the number of Suezmaxes that we have, but then the newbuilding program at Rongsheng will compensate for that into the future.

Frontline base its activities also on outsourcing of services where focus is on specialization, and we outsource ship management to high-quality international ship managers, and we have an extensive follow-up program on their performance.

We also outsource post-fixture on the operational side. This is done in order for us to focus on business development, chartering, financial engineering to develop the company. And we end up with an opportunistic investment approach for the business, where we both focus on the purchase acquisition of new buildings, secondhand tankers, fleets, or companies.

It was atypical, I would say, that we sold the Beijing, which was a double-hull tanker, but the profit element was so big that we felt it was right to do that.

We also looked at OMI when that was up for sale, but we felt that we were not there to meet the last bid. But we are looking at a lot of projects, but we feel that lately a lot of asset classes are priced expensively even though we see that what we felt was expensive two years ago seems to be reasonable today, but only time will show.

But values have definitely gone up maybe more than what was expected a few years back.

If you now turn to slide number 5, briefly, we go through financial highlights, and the first quarter was a reasonably good quarter for Frontline when net income came in at $159 million of which $61 million were sales profits, none of which from Sealift for the time being. This gave an earnings per share of $2.12, and the board has decided upon a dividend per share of $1.50 in cash.

During this quarter we have also spun off the remaining 11.1% of ship finance at a value, then, of $2.79 per share.

So all told, even though the seasonality was somewhat poorer in the winter market for the first quarter, still we feel that it wasn't so bad. We feel that we have been competitive on the employment of our double-hull VLCCs where we averaged about $56,000 a day, and we also feel that we have been competitive on the Suezmax tonnage and the OBO carriers have gradually seen improved returns, which we'll be -- come back to later on.

If we look at the major transactions during the first quarter of 2007 on page 6, the first one we mention is Sealift, which went out before, and I think it is fair to say here that the profit element in that transaction will be about $155 million. Later on we have -- while we did this transaction, we said that that was the first step, we wanted to work for further consolidation in this business.

And that we did, and later on we were able to make an agreement with the owners of Dockwise to amalgamate the two companies, where we felt both parties that were great synergies, and the two companies were complementary to each other. Sealift, with a big fleet of new ships coming into the market was the Dockwise had an extensive marketing network, market position, but did not have a big order book. Frontline retains 17% of the shareholding of the new company.

Also, I am happy to announce that the first of the converted heavylift carriers Sealift transporter was delivered today, and that's also a milestone.

The objective of Frontline is to sell or dividend out our remaining shareholders to shareholding -- or shareholders either sell or dividend it out to our shareholders. And also there is an extra profit element since the share price has gone from about $2 to about, I would say, $4.65, approximately that.

The second big transaction in the first quarter was the Sea Production transaction where we sold Front Puffin and the Sea Production Management Company for $210 million, and the profit element on this transaction was about 55% and Frontline retained 28% shareholding.

I am also here pleased to say that it has been agreed that the Puffin will be delivered on contract on June the 5th, and from that point receive [thereabout] higher.

Frontline will also sell or dividend out the shares for the remaining shareholding in Sea Production. And also here there was an improvement since the share price has gone from about $2 to slightly below $3 per share. Still there is also an appreciation here.

On page number 7, we have listed a few more transactions. We sold the single-hull Suezmax tanker transporter for $38 million and Frontline got a compensation of about 14.8. Further, we agree in Q1 to sell the Vanadis, which is a single VLCC with a compensation payment to Frontline of about $13 million. That will be delivered in Q2.

We also declared options for further four Suezmax newbuildings at the Rongsheng shipyard in China with delivery in 2010 to compensate for the reduction in fleet that we will get as we deliver the single-hull tonnage.

We have also entered into long-term time charters for the bulk of our OBO carriers, which we will come back to a little bit later, and then, as we have said, that we spun off 11% of ship finance valued at $2.79, which we did also in Q1.

If you'll now turn to page number 8, I would also leave the microphone to Inger Klemp, who will go through the financials of this quarter. Please, Inger.

Thank you, Bjorn. Good morning to you all. My name is Inger Klemp, and I am CFO in Frontline. I will try to guide you through the first quarter of 2007 results.

In the first quarter of 2007, we have three accounting issues worth mentioning before we review P&L and balance sheet in more detail, and the issues are deconsolidation of Ship Finance and thereby lease accounting and sale of Sealift and Sea Production.

In March 2007 we spun off the remaining percent of the shares in Ship Finance while dividending the shares on a per-offer basis to the shareholders of Frontline on March 22nd of 2007.

And as a result of that spinoff, the company no longer consolidates Ship Finance as of March 31, 2007. The company is, however, representing a consolidated income statement for the first quarter as if the spinoff occurred on March 31, 2007, and therefore reports a minority expense its full effect in the first quarter.

We think and hope that the deconsolidation of Ship Finance will make it easier for you to analyze and understand the financials of Frontline in the future.

As for March 31, 2007, the balance sheet reflects lease accounting for records leased from Ship Finance, and report vessels as vessels under capital lease. They are then depreciated over the term of the lease. One exception from this is two vessels, which are reported as operating leases.

Similarly, the company now reports its lease obligations, the long-term charters that Ship Finance as obligations under capital leases. Apart from the two charters, which are reported as operating leases.

Frontline invested $60 million in Sealift in the private placements, and these investments have been recorded as investments in associate companies or $39.8 million, or 33% of the net book value of the vessels at the time of sale to Sealift.

Total estimated gain for Frontline deconsolidated the Ship Finance of the Sealift transaction is approximately $154 million. Subject to the actual heavylift conversion costs for four of the vessels.

Under the revenue recognition rules, the gain on this transaction is currently being deferred, and this gain may probably be recognized in connection with delivery of the vessels, that's $135 million approximately, and partly if and when the shares are sold, which is $20 million, roughly.

If we choose to dividend the shares to Frontline shareholders, part of the gain of (technical difficulty) investments to $20 million will not be realized as gain but will form part of the dividend.

In other long-term debt, we have recorded an item of $358 million, which consists of deferred gain of remaining heavylift conversion costs in connection with the Sealift transaction.

Other items -- there is also a deferred gain on the KG leases.

In Q1, 2007, we are recording a gain on the issuance of shares by Sea Production offsetting $9.8 million representing 72% almost of the total estimated gains of the Sea Production. Twenty-eight percent of the gain is offset against the carrying costs of the Sea Production shares, and the investment is booked as an investment in assorted companies at $35 million.

This balance will be recognized if and when the shares are sold. Again, if we dividend the shares to the Frontline shareholders, this part of the gain will not be realized in the accounts.

Moving to Slide 9 -- as a starting point, I will mention that when comparing the P&L numbers for first quarter 2007 with the same quarter in 2006, we have to take into consideration that we have four more vessels at (inaudible) in 2006 than we have in 2007.

The profit and loss shows total operating revenues in the quarter of $361.5 million. This is compared to $482 million in the first quarter of 2006. The reduction is explained by decrease in time charter rates in 2007 compared to 2006, and I will revert to the breakdown list on the next slide.

(inaudible) recorded a gain from sale of assets in the amount of $21 million relating to the sale of Front Transporter, and in the first quarter 2006 again in the amount of $12 million was recorded.

Total operating expenses show a reduction of $21 million in the first quarter 2007 compared with the same quarter in 2006, mainly explained by a reduction in voyage expenses as a consequence of reduced voyage revenues due, as I mentioned earlier, to lower freight rates in the first quarter 2007 against first quarter 2006.

Operating expenses I will run through on a later slide.

Operating income, or EBIT, was $180 million, and EBITDA was $229 million in the quarter. And in the same quarter in 2006 operating income was $270 million and EBITDA was $323 million. The main reason for the decrease is, as previously mentioned, reduced revenues in 2007 compared with 2006.

The company recorded interest expense in the quarter of $56 million of which $15 million relates to ITC. This is slightly higher than in the first quarter 2006 due to the higher outstanding debts.

The total for other financial items including forex gains are positive with $5.1 million in the quarter. Comparable numbers, first quarter 2006, was positive $14.7 million. In 2007 this is primarily related to valuation losses of $2.5 million recorded for the interest rate swaps in Ship Finance and valuation gains of $6.1 million recorded for the bond swaps in Ship Finance.

As previously mentioned, we have recorded a gain of 39.8 million on issuance of shares by associates.

An after minority expense for a full quarter of $22 million, net income ended at $158.8 million in this quarter, or $2.12 per share, which is an improvement over fourth quarter 2006 of $24 million. And, as mentioned, we are distributing a dividend of $1.50 per share.

Moving to Slide 10 -- the VLCC fleet earned in the stock market approximately $56,600 per day for doubles and $40,300 per day for singles with an average spot earning of $54,800 per day. The average for the whole fleet, the whole VLCC fleet, was about $50,200 per day in the quarter.

The Suezmax fleet earned in the spot market approximately $48,000 per day for doubles, and $22,000 per day for singles with an average spot earning of $35,400 per day. The average for the whole Suezmax fleet was about $34,900 per day in the quarter.

The OBO carriers earned $36,600 per day in the quarter.

The active sea vessels are not included in these numbers. The spot time charter equivalent rates and the average for the whole fleet for VLCCs and Suezmax actives were lower in the first quarter of 2007 than in the same period in 2006 but shows an improvement for all segments compared to the fourth quarter in 2006.

Moving to Slide 11 -- we have drydocked two vessels in the first quarter 2007, which is the same number as in the same period in 2006. The vessels in question are Marble and Front Voyager. As you can see, we have averaged opex of $8,700 per day in the first quarter of 2007, which is in line with the fourth quarter of 2006.

However, there are fewer drydockings in the first quarter of 2007, and the same average cost can be explained by time lag. The numbers exclude the container vessels and the ITC vessels.

Moving to Slide 12 -- the balance sheet shows the effects of the consolidation of Ship Finance, and I will, in the following, comment on some of these items. In long-term assets, we have recorded vessels and capital leases of $2.7 billion compared to $7.7 billion as per 31st of December 2006. This reflects the vessels on long-term charter from Ship Finance (inaudible) vessels and the capital leases in this quarter.

Newbuildings and purchase options show the decrease of $58 million in the quarter, which is [extend] partly by an increase of the consequence of newbuilding installments paid in the quarter and partly by a reduction attributable to that SBSO and heavylift conversion costs recorded in the balance sheet at the end of 2006 now is removed.

Other long-term assets in the fourth quarter 2006 includes [CH03] recorded as investment in finance leases which, as for the March 31, 2007, is not included as a consequence of the deconsolidation of Ship Finance.

Investment in associated companies has increased with Sealift of $39.8 billion and Sea Production of $35.2 million. Deferred charges and other long-term assets have been reduced compared to the end of 2006 as a consequence of the deconsolidation of Ship Finance, since most of these items related to Ship Finance.

Long-term liabilities in the first quarter of 2007 includes other long-term debt both $358 million, which mainly reflects the deferred gains and remaining heavylift conversion costs in connection with Sealift, along with the deferred gains on the KG leases.

Otherwise, the total long-term debt is in line with the end of 2006 that were categorized differently since we have shifted from long-term bank and bondings in Ship Finance to obligations on the capital leases as a consequence of the deconsolidation of Ship Finance.

Finally, the minority interest deleted in the balance sheet as of the end of March 2007, again, as a consequence of the deconsolidation of Ship Finance.

At the bottom of the page you will see that the cash breakeven rates are approximately $29,500 per day for the VLCCs and $22,000 per day for Suezmaxes and OBO.

Moving to Slide 13 -- the tanker business is cyclical, as you all know, and the 6.25-year period highlights show the impact in time charter equivalents and earnings.

In 2004 Frontline had an average time charter equivalent of $78,000 per day for the VLCCs and $58,000 Suezmaxes while they were down to $22,500 for VLCCS and $18,400 for Suezmaxes in 2002. In a six-year-and-three-month period, Frontline had, however, a net income of $3.1 billion. This gives an average income of $494 million per year.

In the same period, the company has paid out more than $2.9 billion in cash dividends, giving an average direct return of $US6.30 per share.

Moving to Slide 14 -- from the start of Frontline in 1997, the company has paid $40.85 in cash dividends per share; $22.22 in spinoff per share; and with a share price as per May 25, of $42.74. This shows a total equity return of $105.50 per share compared to a share price of $3.38 in 1997.

Moving to Slide 15 -- the Frontline share trade today, as I mentioned, at a share price of close to $43 has a market cap of $3.2 billion and an enterprise value of $5.7 billion. With this, I return the work to Bjorn.

Thank you. I think we move to Slide 16 where you will see the corporate structure as you have seen before, and I will only bring your attention to the two boxes to the left, where we show our 17% ownership in Sealift and 28% in Sea Production. The total value of the shares of those two companies is about $3 Frontline share, which, most likely, we will sell our dividends during 2007.

The box to the very right shows the owned tonnage that we have, including the KG vessels where we will declare options as they come due. Today there are substantial research in the values there.

We also have the newbuilding program owned and directed by Frontline. For the time being, the newbuilding program is about $1 billion, and we have yet not decided how to finance that -- whether we do a 100% finance through a lease arrangement, or we do normal bank finance. That is an assessment that we will make, taking into consideration the leverage, the breakeven rates, and the return for the cost of capital.

On page 17, we highlight the Frontline fleet and what is special here, when you go through the various lines where we have divided the VLCCs and the Suezmaxes and double hulls and single hulls, is that primarily the double-hull tonnage of Frontline, both the Suezmaxes and the VLCCs, are traded spots whilst the single-hull VLCCs are fixed on time charter for the balance of the committed period that we have for these ships, vis-à-vis Ship Finance, and we also have the profits on most of these.

We have a few double-hull VLs fixed on charter, and we have one double-hull Suezmax fixed on charter for about three years. Also, what is special is to see here that all our OBO carriers are fixed for 2007 and mostly of 2008. And the total time charter coverage for the total fleet for 2007 stands at 39%, both for 2007 and for 2008.

If you turn to the next page, we have showed the development on the coverage of our OBO carriers, because that is -- we have had a big change there since the last time we presented figures. We have entered into agreements for two ships for three years, one ship for four years, and two ships for fives years in the last period, giving us a completely different and longer time charter period for our OBO fleet.

So when you look here, you will see that the average coverage for 2007 is 100%; '08, 97%; and then it declines to 15% in 2012, whilst the average net time charter rate is $39,000 a day for 2007 increases to $43,000 and $44,000 in 2008 and 2009, respectively. And then 60% is covered in 2010 at $44,500 a day.

We have used the window of opportunity of a very strong dry cargo market to do this fixture. It really enhances our earnings, it enhances our ability to pay dividend, but it also provides us with a safety net as it reduces the breakeven rates otherwise for the tonnage on the tanker side. So we are very happy with what we've done on the time charter business for the OBO carriers.

On page 19, we have listed our newbuilding program. To me, it's important to say that this really demonstrates that we are there for the future; that we want to also be a player in the Suezmax tonnage despite that we have sold quite a few of our single-hull ships for other purposes now.

So, basically, this order book will replace our existing fleet, and it is also good for us that we have so many similar, and that we will get more homogeneous fleet into the future, and the price level that we have paid is attractive compared today's prices.

On page 20 we start to go through the industry overview, and first we look at some of the factors driving demand. The most important factor is obviously the world economic growth, which has been very good for the last three or four years.

Secondly, all demand which is caused by the world economic growth and the long term, but also we will have seasonal trends, we will have changes in stock levels, refinery activity, the oil price, ton mile situation, and, for instance, for ton miles, what is special now is that we see that Venezuela is moving a lot of their crude oil production to Asia instead of to the U.S., probably for political reasons.

We are also seeing that the Chinese are also buying crude oil from West Africa and not totally from the Arabian Gulf, all of which increases the ton miles demand for our services which, of course, we think is a good thing.

We also have disruptions, and last year we all remember that we were without these disruptions, and it was very quiet on the hurricanes. We know that we are going into that season and who knows what will happen this year.

Also, political events are impacting demand for our services, and I think primarily it's the situation with respect to Iran and the rest of the world that is the most important part here -- plus the Palestinian situation.

Now turn to page 21, we see a graph of the GDP growth and the world oil demand and, again, the world GDP growth of around 5% total for four consecutive years, that's very good. This is driven not only by Asia and China but also in the OECD world, it's been a good growth activity.

We also see that oil demand is expected to grow from a slump in 2006, which is also positive for demand for our services.

When you look at page number 22, you will see that the biggest growth area is in Asia, as we know, where they expect a higher growth than in the rest of the world. Asian growth is forecasted at about 4% in 2007.

Page number 23, we have shown a graph showing the OECD oil product demand. The average from 1997 through 2005 just showing the seasonality of the business and, right now, we are into the driving season in the U.S. and, therefore, a demand is expected to come up.

If you now turn to page number 24, we have also showed a graph on the crude throughputs, which is historical and where we expect that the pattern will follow the same as this year. So now the maintenance season is basically over, and the throughput is expected to go up substantially for the next few months.

The graph to the right shows the crude oil stocks in the OECD area showing, then, the range from 2002 to 2006, and we are on the upper part of that but below 2006, and this also shows that -- or to put it differently, as the consumption is increasing every year, if you want to have relatively the same proportion of oil and stocks, then the stock level needs to go up a little bit every year.

If you look at slide number 25, we just show, then, oil price development showing that the oil price has gone up quite substantially over the last short-term period but also we realize that the world absorbs an oil price in excess of $60, and that was maybe a little bit unexpected if you had thought about that some years back.

Short-term price volatility also impact demand for transportation.

If you now turn to page number 26, we focus on factors driving supply, and supply is normally the critical factor impacting both values and time charter earnings. Newbuildings is obviously the most important factor, but also scrapping and changes in legislation where we have had a lot of, over the last few years, environmental and safety issues also impacting fleet efficiency.

We also have conversions to other types of ships -- heavylift FBSO and FSOs, and also lately conversion of VLCCs to VLOCs and to dry cargo ships, where we have heard that about 8 to 10 ships have been sold for conversion in the last period.

The fleet picture for VLCCs on page 27 shows that the current fleet is about 490 ships, the double-hull fleet is 330, and the non-doubles then 160, and the order book, for the time being, stands at 154, about the same as the non-double fleet.

If you then look at the graph below, you will see that below the zero line, we have included scrapping in the years up to 2003. What is special is to see that since basically 2003, very few ships have been scrapped, and the demand has basically absorbed the increases in supply.

Thus, from this graph, it shows that for the next period up to the very end of 2008, there will be only modest deliveries of -- or not modest, but deliveries that is in line with the last year's deliveries of new ships and even if you assume that there will be very little scrapping or conversions, then the market would not be impacted dramatically from that.

The big bulk of newbuildings comes into the market at the tail end of 2008 and 2009. And, of course, there we feel that we depend upon some deletion of the single-hull fleet, which we really do expect will happen when we see the differential in earnings between the single-hull and the double-hull tonnage, plus the conversion that's already been addressed.

It's also fair to mention that with the present scrap prices you obtain about $20 million in value or in price if you sell one of your VLCCs for scrap.

If you turn to page 28, you will see the same picture for the Suezmaxes. The only thing to say is that the non-double fleet is, relatively speaking, smaller compared to the order book. It's 69 ships whilst the order book is 129.

But, similarly, here, very little scrapping or deletion has occurred since 2005, and there was a big bulk of the order book coming into the market as from 2009 onwards. Apart from that, the fleet supply is about the same for 2007-2008 as the years behind.

And also, here, we know that there will be ships that will go out of the market over things because we have, in fact, sold some of them for heavylift conversions.

On page 29 we just explained, or we illustrate for VLs and Suezmaxes the newbuilding price and secondhand price as well as three-year time charter rates. And the green line shows that there has been a continuous appreciation of newbuilding prices whilst the price levels for five-year-old ships has been relatively stable even though I must say that in the last period we think also prices have gone up, at least there are a lot of buying we question and few sell, it seems, whilst the time charter market has also been pretty stable.

We have done one -- the last six months, we did one three-year time charter for one VLCC at around $50,000 a day. I think that today there is a lot of requirements, but that few owners are willing to fix on time charters.

And the same thing goes for the Suezmaxes where you see that the newbuilding prices have gone up as well as the secondhand prices, and I think also following there, over my transaction, clearly, the values have appreciated further.

To summarize,then, on page number 30, if you look at the macro side, we are, I would say, rather comfortable with the immediate future. We are approaching the driving season, and the medium-term global economic outlook looks healthy. We think that the risk of OPEC reducing production is less than OPEC increasing their production, which is good for us. We think also that the delivery schedule for new ships will be rather modest in the period to come, and that there also will be conversions that will impact the markets.

Frontline's position is also acceptable. We have made the spinoffs with one of profits, as we have mentioned, which will impact our dividend capacity and earnings for 2007. We have an order book that's attractively priced, which will secure our market position and earning capacity also for the future.

We feel that the breakeven rates that Inger mentioned are definitely on the low side compared to other tanker owners also with newer ships having a breakeven rate to cover not only operating cost but also installments and interest.

We have a time charter coverage that are -- that have gone up, particularly, since we fixed the OBO carriers, and we are pretty confident with what that gives us.

We are far into the second quarter, and so far it seems that the second quarter seems somewhat better than the first quarter, but it's a little bit too early to conclude yet. Still, we look for business opportunities and, yes, if there are opportunities, we will definitely look at that.

Okay, that's all we wanted to say right now, and also a colleague from the marketing project side, (inaudible) he is also present here, and we then now invite for questions or comments. Thank you.

(Operator Instructions) Jonathan Chappell, JP Morgan.

Bjorn, my first question is for you -- when I look at your balance sheet, there's about $250 million of cash that's not restricted cash. Is that cash that you're saving for some of these future opportunities that you talk about or is that something that can be distributed in periods of weaker earnings?

Well, part of that is also cash that we need to pay out for the conversion of the heavylift vessels that we have under reconstruction.

How much is that?

It's about -- do you have the figure, Inger?

The remaining, you mean?

The remaining, yes.

$150 million I should think.

It's a big part of that, a big part. So, basically, yes, it's not the cash you should look at, it's the cash generated in the future that you could see us as a basis for dividends.

And you cannot actually look at the specific date in question at the end of the first quarter, I mean.

Okay, and, Bjorn, you also mentioned that you were aiming to spin off the Sealift and the Sea Production. Did I hear correctly that was going to be, most likely, a 2007 event?

Yes, I hope so. That's the plan.

With the acquisition of Dockwise and talk that there may be future consolidation, would it be possible to maybe hold on with the expectation that maybe Sealift has more value, going forward, as that industry consolidates?

Well, now that we have done on the heavylift market, I think that the consolidation between Sealift and Dockwise is a huge one, and I doubt there will be further consideration in that market. Definitely, if we dividend it out to our shareholders then, of course, they can decide whether they want to sell or they want to maintain or keep the shares. Just for Frontline, it is to say that it follows the strategy that we are a tanker company, we are a crude oil transportation company, so when we feel that the job has been done, then we are ready for dividending it out.

That's fair. And one more for you, Bjorn, on page 16, that nice corporate structure chart, on the right-hand side, there's the ITC vessels and then there's also the KG vessels as part of your own fleet.

Yes.

What's your flexibility when it comes to those assets? I know you're basically just managing the KG vessels or -- are you able to sell them or do you need to get approval from the KG owners and the same thing with ITC? What's your flexibility with maybe disposing of those vessels if the market presented itself?

For ITC, I would say we are very inflexible. That's more like a closed circle, giving in that profit of our own $10 million plus every year. So it's far into the future where it opens up opportunities for us to be flexible.

When it comes to the KG vessels, the period is much more narrow to us. There is one ship -- an option coming open at the end of this year, and then there will come over the next three to four years. But, still, I regard those ships there that that's a way of financing. So we will get the income generation from those ships, and that will be a part of the dividend capacity that we will have.

But it's difficult for us to sell those ships. Then we should rather sell other ships for the time being.

Right, and then, if I can, just one last one for Inger. As we look to model Frontline, going forward, with deconsolidated Ship Finance, what are the major line items that are going to change from what we've seen historically in the P&L statement?

The first thing is, of course, that we won't have any minority interest expense in the P&L. So what you will have is that you will have the interest expense will increase as a consequence of that you are then having interest expense on the total obligations on the capital leases, which is a bit higher than the bank debt and bond left in Ship Finance.

And then you will have this profit share expense, going forward, which we will then account on a quarterly basis now, record on a quarterly basis, which is different from what we did previously when we included in the minority interest towards the end of the year in a way the main part of the profit share expense.

So I guess we will then include in the top of the P&L, include it in total operating revenues, I think we will have included the cost of the profit share expense -- in Ship Finance, I mean.

I think that's the main thing.

And, of course, we will have no non-Frontline-related income items into the P&L at all, which we have --

Only Frontline.

Yes, so that's a very good thing. But this is only Frontline business.

What about the charter hire expenses? Is that going to have flow through now as well?

No, I mean, you won't see any charter hire expense in the P&L because it will be divided between interest expense on the capital leases, and the operating expense element, which is already into the accounts and, of course, the depreciation of the vessels on the capital leases. And then you will have the repayment of the leases in the cash flow segment.

Robin Byde, HSBC.

Just on Slide 11, on your opex, you mentioned that there were some time lags in your cost base. Could you explain in a bit more detail what those are, please? And does that imply that your costs may fall in Q2?

What I said was that since the cost level in the fourth quarter 2006 was equal to the cost level in the first quarter of 2007, and there were double -- twice as many drydockings in that quarter, in the fourth quarter. Then I explained that why that some of the expenses rated to the fourth quarter because actually had the time lag into the first quarter. And also, I guess, there is some -- I think also some part of the dockings, which are in a way, attributable to the second quarter has been, in a way, expensed in the first quarter for 2007.

Okay, thank you, and just, secondly, just going back to the potential dividending out of the Sea Production, Sealift, businesses, what are the processes behind your decision to do that for this year, say, against, say, next year?

We think that we have to ensure that recent liquidity that is satisfactory before we do that, and obviously we have tried to seek a listing for Sea Production then and also for the combined Sealift/Dockwise.

And so do you think we'll get clarity on that over the next quarter?

I think so. You will have clarity of that over the next quarter so that at least we will have -- know more about the potential dividend out, yes.

Stephen Williams, Simmons.

Just a more general market question -- we know -- we're seeing that that's clearly a single-hull discount in terms of the rates you can get in the spot market, a single-hull vessel. I am just wondering if there is also more of a kind of a utilization issue, I mean, is there then kind of like an area where there are too many vessels? Are we seeing single hulls left idle, and that's keeping double-hull vessels utilized almost fully, or are the single-hull owners flushing their prices until they debate who is to take market share?

When rates, in general, are under pressure, the single-hulls are seeing more idle time and have probably fixing, and that's just a result of the general market situation. When the market is tighter, and the rates go up, and single hulls are not finding the same problems in finding employment, it's just a matter of preference and economy that the double hulls are earning more especially in the weaker market, the singles are suffering from idle time.

Just a quick question on the newbuild program -- these vessels are being built at fairly new yards, I take it, that haven't really delivered a lot of vessels, so far. Are you confident that these vessels are going to be delivered on time and so they're right quality and all that kind of stuff? Or is there any issue with building vessels at new yards?

Of course, there are issues building at new yards, but there are benefits at building at new yards, also, with the equipment that they have. But, of course, particularly work force -- they have to get qualified and welders and other workers at the yard.

We have a lot of people out there to supervise the construction so that the quality aspect should be taken care of, and I think it's also fair to say that Chinese yards have been performing well, also, in the past, and that there is a lot of experience, then, in China for construction here. So I think that, well-managed, then, it shouldn't pose a problem and, so far, you know, it's so early in the process that we can't say anything about potential delays at the time.

(Operator Instructions) There are no further questions at this time, please continue.

Okay, then, thank you very much. Bye-bye.