Frontline Plc (FRO) 2008 Q1 法說會逐字稿

Good day and welcome to the Frontline first quarter 2008 results presentation conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to your speaker today, Mr. Jens Martin Jensen. Please go ahead

Good morning. And welcome to Frontline Q12008 financial presentation. My name is Jens Martin Jensen. I'm the Interim CEO of Frontline. I'm 44 years old, I'm married, I have five children. Until last week I was working for the Company in Singapore.

The program for this presentation will be that our CFO, Inger Klemp, will go through the financial and highlights of the first quarter and thereafter we'll talk about the market and after that we'll take your questions. Thank you. Inger, please.

Thanks Jens. Good morning and I'll guide you quickly through the major transactions and financial highlights in the first quarter 2008. Please would you move to slide four.

We invested $24 million in Navig8 in February 2008. Navig8 includes 30 vessels including new buildings and activate time-charter fleets. The investment should be considered by purely financial from Frontline's point of view, but it gives also Frontline at the same time a foothold in the clean petroleum product market. In February we spunoff 17.5% of ITCL to the Frontline shareholders and we listed a Company on the OTC exchange in Oslo.

In March, Frontline announced together in companies indirectly controlled by Mr. John Fredericksen, our main shareholder, had 9.7% holding in OSG and on the 20th of May we filed a schedule 13D, saying that companies indirectly controlled by Mr. John Fredriksen had reduced their holding to 245,000 shares approximately. And the aggregate holding as of May 20, for Frontline and Company stand indirectly was controlled by Mr. John Fredriksen amounts now to 1.794 million shares corresponding to 5.2% ownership.

In April 2008 we announced we had entered into contract with Zhousan Jinhaiwan shipyard in China for the delivery of four VLCC new buildings for delivery in the second half of 2011. The contract price for these vessels will be $135 million each. In May 2008, we declared options for further two similar VLCC new buildings at the same yard and at the same contract price for delivery in the first half of 2012.

The single hull Suezmax Front Maple was sold in January 2008 by Ship Finance and the charter with Frontline was terminated. Frontline has recognized again in the first quarter 2008 of approximately $17.1 million related to the termination of that lease. Further in line with our necessity to reduce exposure to single hull tonnage, Frontline has in the first quarter 2008 agreed with Ship Finance to terminate the charter party between the companies from single hull VLCC Front Sabang and Ship Finance has also leased a vessel to an unrelated party.

Frontline has received a compensation payment of approximately $25 million in the second quarter of 2008, for the early termination of that charter party and that will be recognized in the second quarter of 2008. In May, we received settlement from Bocimar in the amount of $16.6 million, which will be recognized in the second quarter 2008. This relates to a guarantee that Frontline made to go motion in connection with a spinoff in December of 2004, which we later done paid to go motion and have now been settled Bocimar for this amount.

This was something which was related to the charter party with Bocimar at that time. The third heavy lift vessel from Comor, converted by Cosco was redelivered for quest limited in May 2008. Please move to slide six. It's a pleasure to present a strong first quarter results of 2008. Frontline reports net income at $221 million and earnings per share of $2.95 in the first quarter 2008. This is including a sale of assets and securities in a total amount of $37 million.

As you can see from slide seven, this relates to $18 million gain on the spinoff of 17.5% of the Company's share holding in ITCL. A $3.5 million on the forward contracts to purchase shares in overseas ship holding group and a $17.1 million gain relating to the termination of the lease of the Front Maple. In addition to that ,we had offsetting items of $1.6 million related to increase delivery costs for delivery of Front Target. Then net income, excluding gain, was $184 million in the first quarter and earnings per share of $2.46. On the basis of that, we announced a dividend of $2.75 per share for this quarter.

Further, based on transactions made in the first and second quarter, I will also mention some accounting affects in the second quarter 2008. If you look into slide seven, you can see that as mentioned the settlement of Bocimar in the amount o$16.6 million will be recorded in the second quarter.

We have terminated the charter on the Sabang and will record a termination payment in the amount of $24.6 million in the second quarter and lastly we have delivered from Comor, converted to heavy lift vessels to Dockwise in the second quarter and expect to deliver from Traveler during the second quarter as well.

The estimated gain in this connection together with deferred gain related to transaction will amount to approximately $106 million. There of $73million will be contingent on deliver of the last heavy lift vessels to Dockwise. Please move to slide eight. Net income excluding gain is $127 million higher than in the fourth of 2007. The main reason for the improved result is a stronger stock market, which has resulted in an increase in result on time-charter basis.

AS a result of the stronger market, we have recorded a profit share expense to Ship Finance of $33.6 million in the first quarter, which is 18 million higher than the fourth quarter. Total ship operating expenses in the first quarter compared to the fourth quarter have decreased by approximately $6 million and that is mainly related to that we did not dry dock any vessels in the first quarter.

Charter high expenses have increased by almost $21 million in the first quarter compared to the fourth quarter of 2007. This is mainly a consequence of chartering in six vessels from the Nordic American tankers, under floating rate time charter agreements. These six vessels are also included in result of time charter basis with $19.8 million and about 450 training days.

The administrative expenses in the first quarter reduced to approximately $5 million compared to the fourth quarter 2007 and this is mainly as a consequence of accruals made in the fourth quarter of 2007 and also some sort of reversal of this cost in first quarter 2008. The company recorded interest expense in the quarter of $48 million, of which $13.6 million related ITCL. Moving to slide nine, the VLCC fleets earned in the stock market approximately $105,000 a day, for double-hull vessels and 39,600 per day for the singles.

That gives an average spot earnings of 90,800 a day. The average for the whole fleet was about 82,400 per day in the quarter. Seuzmax fleet earned in the stock market approximately 53,700 a day for doubles and 44,600 a day for singles, with an average spot earning of 53,100 per day and the average for the whole fleet was about 51,600 per day in the quarter. The OBO's earned 43,200 per day in the quarter.

The ITCL vessels are not in the included in these numbers. The TCE numbers show that Frontline has out performed the competitors, which have announced their numbers in the first quarter 2008 and at the same time we have out performed the market. The results also show a continued differential in earning between single and double-hull tonnage and the differential is about $65,000 a day for the VLCC's. This only relates to one vessel and it's 9,100 per day in Seuzmaxes in the first quarter. Moving to slide ten. As I mentioned, we did not dry dock any vessels in the first quarter of 2008 and that is three vessels less than in the fourth quarter 2007.

As you can see then from the slide, we had an average operating expense of approximately $8,300 per day in the first quarter of 2008, compared to approximately $9,500 per day in the fourth quarter 2007. We also have less off hire days in the first quarter than the fourth quarter, again related to we had no dockings in the first quarter. Moving to slide 11.

The total balance sheet is approximately $13 million less in the first quarter than it was in the fourth quarter 2007. The book values of new buildings have increased with installments paid in the quarter. Long term assets have increased with investment in Navig8 of $20 million. Vessels under capital lease have decreased to approximately 62 million, as a consequence of termination of one lease and normal depreciation in the period.

Short-term debt is higher than in the fourth quarter and that is mainly a consequence of that the tax lease related to one of the ITCL vessels, British Pioneer. It's classified of a short-term lease since the maturity of the leave is less than 12 months. The opposite of that is of course that long term debt is reduced equally. Minority interest is booked with $5 million and that is relating to the 17.5% in ITCL not owned by Frontline. Moving to slide 12.

The cash cost break even rates are approximately $31.500 per day for lease and $23,500 per day for the Seuzmaxes. 24,200 is the cash cost to break even base for the OBO's. The cash cost break even rate does not allow for the contract coverage that the Company has. Assuming that the contract coverage is used, subsidized to stock vessels, we will need another break in rate for the stock vessels. Moving to slide 13.

Holding the recent ordering of the VLCC new building contract in April 2008, Frontline has now ten VLCC new buildings and eight Suezmax new buildings on order. This confirms our position as a leading operator of quality Seuzmax and VLCC tonnage. The new building program is developing according to schedule, however we expect that the eight Seuzmaxes built at the Zhousan Jinhaiwan industry yard in China, will be slightly delayed by approximately one month.

The total contractual cost of the new building program is approximately $1.8 billion. The current market value of these new building contracts are estimated to be at least several hundred million dollars higher than the original contract prices. We intend to finance the new building program with 80% debt either on a running basis or after we have invested 20% equity, And after March 31st, 2008 the company has paid $136 million of the contract price and expects to pay approximately a further net of $93 million in the second quarter of 2008.

Moving to slide 14 and 15. The number of vessels in the Frontline fleet is 72 vessels, that includes the vessels on commercial management and at sea vessels as well. This is compounded by 38 double-hull VLCC's, seven single hull VLCC's, one Seuzmaxes single hull and 18 double hull Suezmax, together with the eight OBO's that we have

We have a contract coverage of 39% in 2008 and we have 30% in 2009. The average time charter rate for the total fleet is 41,400 a day in 2008 and it's 42,000 a day in 2009. And with this, I leave the word to Jens again.

Thank you, Inger. I think we're now on slide number 16, which has to do with the market update and earnings. As you can see from the red graph, first quarter 2008 was a very volatile quarter, but at the same time the average was quite firm.

As Inger said, earnings from VLCC's was around $100,000 a day and Seuzmaxes around $50,000. This market really kicked off in the end of 2007, when the Saudi producers started giving a huge discounts to mainly the U.S. destinations, which gave a rather long haul 12-mile which started the market.

Subsequently we have seen the Chinese oil imports rising quite a long and increasing activity to the east. At the same time we have seen big movement from mainly Venezuela east, where before we would have seen two three shipments per month and now we're around 15 which is positive for long haul market.

We have put in a little bit about stock building. We believe that China has been adding extra imports, maybe to build up stocks before the Olympics, should they decide to use a little bit less coal for pollution reasons. The strikes at Lavera, again happened around March this year. The French people are normally very good around striking around the holidays and they've done this around the last ten years in a row now, but this has been positive for the Suezmax market.

At the same time we've seen unusual storage activities in Iran. Right now there seem to be at least 12 VLCC's storing high sulfur crudes, which they've not been able to sell in the market. Normally they sell quite a big volume to the far east buyers and India. There seems to be a pricing disagreement between the parties, so this has been positive for the market.

The fleet growth, everybody had predicted that the fleet for 2008 would actually grow by 8% but we will show you in a later slide that actually we're coming out this year best with a negative growth maybe even actually losing tonnage. As Inger mentioned, there has been quite a multi tier market single-hull versus double-hull. It's now actually a four tier market with small and larger single-hull, older and modern double-hull. This is also giving quite irregular trading patterns and irregularities but it means the market has been more tight.

Finally, we've seen forward fixing than we've seen before and what we're seeing now is fixes being didn't for the end of June, which would mean these results will come into the third quarter, so even the third quarter has done quite well this year. If we go to slide number 17, which has to do about the general outlook and oil demand. The top curve looks a bit dramatic but actually China came out with a first quarter GDP increase of 10.5%. Had not been for the bad weather mainly in the southern part of China, expectation would be have been up to 13%.

Of course we have seen a slowdown on the U.S. side and in Europe but overall, there is a very positive growth demand. Actually, the next slide, which is number 18, is my favorite slide. I think any tank owner should have a copy of this happing on the wall in his office, which is what is happening when you make money and oil is being consumed. This is a graph showing what the oil use per day per person in relation to the GDP.

Obviously the biggest oil consumer has been America for quite sometime, with about 25 barrels per person per year. We're not saying that China will ever reach the same standard as the U.S. market, but we'll be quite happy if you see China, which is about two barrels now per person just move up to Thailand that would be around five barrels per person. There's 1.2 billion people in China, so that's quite a lot of oil that needs to be transported.

To put a little comment on that, the bottom line we've put in in America for every thousand people they own 1023 cars, in China that number is nine. In Q1 alone in China the car sales increase by 20% and 1.8 million cars were sold in Q1. This is very positive obviously for crude and refinery. On graph or page number, sorry 19, we have just mentioned the oil prices.

Of course everybody knows what is happening to the oil price. And a little comment on the bottom regarding the bunkers. We are of course lucky that the mark set more spot related and we're being compensated in the strongest spot market for the bunker cost like the airlines and other industries which are not, they are always catching up to this factor but we are actually -- okay for the time being.

And on the other side it's about the oil price which for the last ten year has been in contango, which means it will make sense to store oil as the oil price will always go up, now with the oil prices actually been in backwardation going forward, but it seems oil prices can coming almost back to contango. So this meaning that we'll have a little bit of oil storing again.

Regarding the VLCC fleet. Coming into 2008, and looking back a few years, it looks like the fleet growth in 2008 would have been around 6%. But actually, with various conversions, scrapping and utilization into other ships, we actually see now the fleet going out at 2008, will be minus one VLCC. Forty VLCC's are tied up in various projects, 17 has already been converted and 23 are in the process of being converted.

The same is happening for the Seuzmaxes which is on slide number 21. Again, beginning of the year going back, we look like 4% growth but this is actually also coming out at a flat growth. Just going back to the VLCC's, if you look for the next two years in 2009 and 2010, we'll have about 120 ships being delivered, all going well. When we come out at the end of 2008, there will be around 100 single hull VLCC's left. This is almost the same as the new building program.

So we think since VLCC's will have to be phased from the oil or converting into other nonoil fleet we see undramatic fleet growth. The Suezmaxes is the same. We do not have so many single-hull ships left in comparison to the fleet, but what we see in Suezmaxes is that many are built at Ocean field yard on of them is Zhousan where we ourselves are building eight ships, and we have mentioned in our report is that our first ship will actually be a little bit delayed so that are only come into 2009. And we believe that the ships will of course be delayed, so it will be delivered but there will be a delay throughout all of the new yards and we'll see the audible being stretched out so the impact of these new buildings will not be as strong as feared.

Slide 22 is showing the actually, what has happened with the fleet in 2008. There's been convergence into VLOC lots or carriers, tri-hull ships and we've had three ships also just sold for pure scrapping demolition. Same story for Suezmaxes. We've seen conch version to bulk carries, FPSOs and FSO's. Now we are on slide number 23. New building prices, at present is around $155 million for a VLCC and for Suezmaxes is around $95 million.

Our average new building cost for all the VLCC is $120 million and for Suezmax it's around 72. So we have quite a big potential upside on the assets of our ship it's we want to sell them or do otherwise with them. The graph next to the new building prices shows the development of the time charter market. Right now you could fix a VLCC for three years at around $60,000 and a Suezmax for around $40,000.

But it's more interesting, we see now Asian, owners Asian oil companies fixing VLCC's in for 2011 delivery at low 50s. So there is a potential to lock in our new building should we want to do so, at quite healthy rate which will give us a good return. On slide 24, about prospects, we believe that the prospects for Frontline are pretty good. We are quite a trim Company. We're only 50 people throughout.

We're a very low cost operator since we've been since the beginning of the Company. We have a very well priced fleet and we have a well priced new building program. We have a certain contract coverage but at the same time we have room to enjoy the spot market. We have very low cash break even like Inger said and we're always looking for new deals to make a fast buck.

If you look at the market in general, the order book is we do not think is the concern as big as other people think. We think there will be lesser impacts that will be delays, green repair yards that will be a much quicker phase out into other trades. Another thing which we've not mentioned is actually the utilization of the present fleet. If you look at dry docking VLCC, two to three years ago it would take around 15 to 20 days, now the same process will take 30 to 50 days, almost doubling in time.

This is due to all of the repair yards are stretching with conversion work, some are even taking new buildings so that is difficult and that could be utilization of the fleet down. We have seen new players coming in, consolidating the market, Taiwanese owner called TNT, he has taken 20 VLCC's on charter and this has helped positive in the market also this year with a bit of consolidation in the fleet.

Finally of course with the high oil price being experienced now, we have seen many countries trying to pressure OPEC to produce more oil. The American president was successful last week in getting the Saudi Arabians to increase their output and we think this could happen more. So overall, we are quite happy. The first quarter was great.

So far what we have done in the second quarter is very good and third quarter is looking good as well. Thank you.

And with that, we are ready to go into Q&A session. We have put a picture of an animal feeling or at least what I feel, I should say and in a quote from one of the great tanker builders in the world who will soon retire and I think we're ready to take your questions now. Thank you for listening.

Thank you. (OPERATOR INSTRUCTIONS) Our first question will come from Mr. John Chappell from JPMorgan. Please go ahead.

Thank you. Good afternoon. Jens and Inger. Frontline has historically sold vessels, sale and purchase market has been very good to you, and you mentioned both in the press release and your comments that your new buildings could get much stronger prices in the current market cetera than what you paid for them.

What is your plan with the new build, especially as you add more VLCC's and exercise some options? Do you think the Frontline will essentially ultimately take deliver of all of those assets or do you think that they'll?

Well if I may reply? When we started to enter into a more aggressive new building program it's of course to replace our second hull fleet and we have so far sold out around five or six VLCC's and of course seven or eight Suezmaxes, which have been sold to conversion into heavy lift.

So our main idea right now is to replace our remaining single-hulls with the double-hulls. but of course at the same time as you say, that's quite a big potential in these values of the ships and maybe it's the right decision to sell out, capitalize on the market and maybe charter instead. We are constantly monitoring this process and we look at all possibilities. Thank you.

(OPERATOR INSTRUCTIONS) We have no further questions. Pardon, we have another question from [Eston Resalman] from H.B.K. Go ahead.

Hi there. I was wondering what the net cash impact from the heavy lift vessels you will deliver to Dockwise, will be in the second quarter?

Well we haven't given specific information about that, but obviously we will -- we will deliver the two last vessels as planned in the second quarter. One is already delivered and the second one will eventually be delivered towards the end of the quarter. And we will then have a book day in connection with that, which is calculated to approximately $106 million, where of $73 million will be contingent upon delivery of the last heavy lift vessel.

This is again is calculated on the basis of both the gain related to each of the vessels delivered, but also it's calculated on the basis of a deferred gain, which we haven't been able to record until we are delivering the last vessel. That's why we come up to $106 million. But this is a book gain to start with.

But at the same time of course when we are delivering these two vessels to Dockwise, we will receive $80 million in total, repayment of the sellers credit, which we extended to Dockwise in connection with the sale back in March 2007. At the same time, we also will have of course some cost conversion cost, which we also are paying in the quarter. So the effect will be the balance of that.

And roughly how big is the net cash effect?

Related to that quarter? Well I guess related to the delivery of those two vessels, I would you say maybe $30 million, if you take the incentive credit less the rest of the remaining expenses.

Okay. For ITCL, when do you plan to report first quarter numbers?

We have not set the date yet, but it will be within May.

Okay. And also, in the balance sheet. You said new buildings is $199 million. In the presentation you said they're paid in at $136 million for the new buildings. What is the difference?

What is the difference between 199 and the installments paid? We have some payments made on the heavy lift and that has been just well as you know, the convergence.

Okay. Thanks a lot.

Okay.

And now we have another question from John Chappell from JPMorgan. Please go ahead.

Thanks. My line cut off the first time. I hope you heard my first question. I didn't hear the answer though.

It was a very good answer. Do you want to hear it again?

Please. I never heard it to begin with.

Yes, I think your question was about potential asset gain if we were to sell this new building, these new buildings. And as I mentioned that originally when we ordered these ships to replace the single-hulls as they phase out or get sold out. But we're always looking for opportunities. Sometimes it's good to sell, make a profit, maybe charter instead, so we're constantly looking at what to do and we will not exclude that we will maybe sell some of the ships, but as of right now we have not decided that yet.

And you'll forgive me if these other questions were asked because I didn't hear anybody else's questions were asked. Question on the north American tanker charter end. What is the length of those contracts and as far as accounting is concerned is it a wash between revenue and charter hire expense, they're basically the same number?

Accounting wise, the charter hire expense and revenue is approximately the same number, yes.

And the duration is of one year. It's a renewable rolling one year deal.

Okay. And then finally, Inger, is there an updated dry docking schedule for the second quarter through the fourth quarter of this year?

No. But for the second quarter I think we will dry dock three vessels. But into the future, I don't have the new number, do you Jens?

No. But of course, in this high market we're trying to defer dry dock as much as possible and we have three dockings under way. This will be done in the second quarter and we have not finalized the planning for the fourth -- the third and the fourth quarter yet. But this has to do with of course dock availability and when we see the right timing to do it.

And the vessels in the second quarter, are those V's or Suez I?

Both.

Okay. That's all I have. Thanks Jens and Inger.

(OPERATOR INSTRUCTIONS) And we have no further questions and I would like to turn the call over back to Mr. Jensen.

Thank you very much to the people listening in. Q1 has been a very good quarter for the Company. We feel we are going strongly into the second quarter, we are quite fine to the second quarter. Things are looking very well and we're very optimistic about going forward in the market.

We know that world financial value is in a bit of a turmoil and of course the high oil price is putting a damper on certain countries, but at the same time we believe that there could be further production of oil coming out of OPEC. We see big productions potentially coming out of west Africa and well as Venezuela and these will be going to each destination and we will get quite confident going forward. Thank you. Thank you for listening. Thank you.

Thank you. This will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.