Frontline Plc (FRO) 2008 Q2 法說會逐字稿

Good day, and welcome to the Frontline quarter-two 2008 results presentation conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Jens Martin Jensen.

Good morning, and good afternoon everybody who is listening, and welcome to the Frontline Q2 2008 presentation. I hope everybody has had a good summer. As you will be hearing and you can read from the information on our website, we've been having quite a busy summer. And we think we have done pretty well.

The plan for this presentation is that our CFO, Inger Klemp, will go through the highlights and the financial statements, and after that I will make some comments regarding the market and then the outlook. So Inger, if you could take over from here.

Good morning, everybody. I will guide you quickly through the major transactions and the financial highlights in the second quarter of 2008. In April and May 2008, Frontline signed contracts with Zhoushan Jinhaiwan Shipyard in China for construction of six VLCC newbuildings at the contract price of $135 million each and with attractive payment terms. These vessels are expected to be delivered from the middle of 2011 to the middle of 2012.

In May 2008, Frontline agreed with Ship Finance to terminate the long-term charter party between the companies for the single-hull VLCC Front Sabang. And Frontline has recognized a gain of $24.8 million in the second quarter 2008 for the termination of this capital lease.

In May we received a settlement from Bocimar in the amount of $16.6 million, which is recognized for the second quarter of 2008. In May and June 2008, the two remaining heavylift vessels, Front Comor and Front Traveller, converted by Cosco, were redelivered to Dockwise Limited. We have recorded a gain of $102 million in the second quarter relating to the delivery of these two vessels, and also related to deferred gains -- the transaction, which could not be recorded until the last vessel was delivered.

In June 2008 Frontline acquired five double-hull Suezmax tankers from Top Ships at the purchase price of $240 million. One of these vessels were delivered in June, while the remaining vessels, four of them, will be delivered in July and August 2008. In June 2008, Frontline also entered into an agreement to take five double-hull Suezmaxes on time charter from Eiger Shipping for the balance period of existing charters, all the delivery from June until August 2008 and the re-delivery from November 2009 to April 2010.

And in August 2008 Frontline entered into an agreement to timecharter out one of these vessels for the balance of the period. In June and July 2008, the Company has established newbuilding financing, newbuilding loan facilities in an amount of about $550 million with a purpose then of financing 80% of the contractual costs for the newbuildings being built at Rongsheng, Waigaoqiao, and Jinhaiwan shipyards.

In August 2008 Frontline either owns or has a forward position covering a total of 1,508,868 shares of OSG, or approximately 4.9% of OSG's shares.

Moving to slide seven. It's a pleasure to present the strong second-quarter results for Frontline. Frontline reports net income at $318 million, equivalent to earnings per share of $4.25 in the second quarter 2008. This is all-time high second-quarter net income for Frontline. The numbers include gain on sale of assets and shares in a total amount of $155 million.

And as you can see from slide 8, this relates to $16.6 million gained following the receipt of the Bocimar settlement, $12 million gained on the forward contract to purchase shares in OSG, and $24.8 million relating to termination of the capital lease for the Front Sabang, and $102 million related to the delivery of the final two converted heavylift vessels and the deferred gains relating to that transaction.

Net income excluding gains was then $163 million in the second quarter, which is equivalent to earnings per share of $2.18. On the basis of this, we announced a dividend of $3 per share for the second quarter. Frontline reports net income of $539.4 million for the six months ended June 30th, 2008. This is equivalent to earnings per share of $7.21 including gains from sale of assets and shares in the total amount of $192 million.

Net income excluding these gains was $347 million in the six-month period ended June 30th, 2008. This is equivalent to earnings per share of $4.64.

Moving to slide nine. Net income excluding gains is $21 million lower than in the first quarter of 2008. The reduction can mainly be explained by the reduction of on-hire days in the second quarter compared to the first quarter as a consequence of drydocking, upgrading and repairs, and also reduced number of vessels in the quarter, together with docking expenses.

Ship operating expenses increased by $13.4 million compared with the first quarter, of which $9.5 million relates to drydocking costs. Charter-hire expenses have increased by $18.6 million in the second quarter compared with the first quarter, of which $15.6 million is due to the six vessels chartered in from NATs, or Norwegian -- sorry, Nordic American Tankers, under a floating rate timecharter agreement. These six vessels are also included in the result on timecharter basis with an equal increase.

The Company recorded interest expenses in the quarter of $46.8 million, of which $13.6 million relate to ITCL.

Moving to slide 10. The VLCC fleet earned in the spot market approximately $105,200 a day for doubles, and $68,900 per day for singles with an average spot earnings of $103,800 a day. The average for the whole fleet was about $86,300 per day in the quarter.

The Suezmax fleet earned in the spot market approximately $77,500 per day for doubles and $36,900 per day for singles with an average spot earnings of $74,500 per day. The average for the whole fleet was about $72,000 per day in the quarter.

The OBOs earned $44,100 per day in the quarter. VLCC vessels are not included in these numbers.

The time charter equivalent numbers show that Frontline yet again has outperformed the competitors in the second quarter 2008. We have, however, not outperformed the index in the market. This is explained by forward fixing, and we will never be able to outperform the index in an upward moving market. The first-quarter 2008 index for double VLCCs was $92,000 a day, and the second-quarter 2008 index was $130,000 a day.

Results show a continued differential in earnings between single- and double-hull tonnage, and the differential is about $36,000 a day for VLCCs and $40,000 a day for Suezmaxes in the second quarter.

Moving to slide 11. In the quarter, we have drydocked five vessels, which is five more than in the first quarter of 2008. The vessels in question are Front Vanguard, Front Pride, Front Duchess, Front Driver, and Front Alfa. As you can see, we had an average OpEx of approximately $11,560 per day in the second quarter of 2008 compared to approximately $8,300 per day in the first quarter of 2008. OpEx has increased compared to the first quarter, mainly as a consequence of more drydockings in this quarter. This represents $2,000 per day in increase, but also as a consequence of higher running costs.

We are experiencing a upward pressure on crew costs and docking costs. The number of off-hire days in the second quarter is higher than in the first quarter as a consequence of more planned drydockings, but also related to repairs not planned. 120 days are related directly to drydocking in the quarter.

Move to slide 12. Total balance sheet is approximately $250 million higher than in the first quarter 2008. Require lists of newbuildings have increased with installments paid in the quarter, and vessels and equipment have increased as a consequence of taking delivery of the first Top Ships vessel, and vessels under capital leases have decreased, with $60 million as a consequence of termination of one lease and ordinary depreciation in the period.

Short-term debt is higher than in the first quarter, mainly as a consequence of that we have established and drawn down both short-term and long-term pre-delivery and newbuilding financing in the quarter. In addition, we have made accrues for conversion costs for Front Comor and Front Traveler in the second quarter, which were both paid in the second quarter.

Long-term debt is stable compared to the first quarter. Minority interest is booked with $5 million related to the 7 point -- 17.5% in ITCL, which is not owned by Frontline. ITCL is included in the balance sheet with a total of $739 million of debt and obligations on the capital lease.

Debts related to three of the CalPetro Suezmax vessels are not consolidated in the balance sheet with $67 million.

Moving to slide 13. The cash cost breakeven rates are approximately $31,400 per day for the VLCCs, $24,800 per day for the Suezmaxes, and $24,100 for the OBOs. The only change from the first quarter is the cash breakeven rate for the Suezmaxes, which have increased a bit as a consequence of the purchase of the five Suezmax vessels from Top Ships.

Moving to slide 14. Following the recent ordering of the VLCC newbuildings in April and May 2008, Frontline has 10 VLCCs and eight Suezmax newbuildings on order, confirming its position as a leading operator of quality Suezmaxes -- Suezmax and VLCC tonnage. The new building program is developing according to schedule; however, we expect that the eight Suezmaxes built at Rongsheng will be slightly delayed. Total contractual cost for the new building program is approximately $1.8 billion. We intend to finance the new building program with 80% debt either on a running basis or after we have invested in 20% equity.

As of June 30th, 2008 the Company has paid $333 million of the contract price and expects to pay approximately further $177 million in the second quarter -- in the second half year of 2008.

We have established new building financing facilities of a total amount of $550 million for the purpose of financing 80% for the total contract price for the first four vessels being built at Rongsheng Shipyard, and the two first vessels being built at Waigaoqiao Shipyard, and 80% of the first installment for the six vessels being built at Jinhaiwan Shipyard. As per June 30th, 2008 we have drawn down $221 million on these facilities and expect to do a further $110 million in 2008.

Assuming a 20% equity financing of the new building program, we will have it to invest in total $360 million in equity. We have paid net $112 million at the end of June. In the first-quarter report we estimated to have paid net $229 million as of the end of June, and a difference of $117 million is explained by that installments have been moved forward together with more debt drawn down than estimated.

The total remaining equity payments in the second quarter is approximately $250 million, and in the second half of 2008 we expect to pay a further net $67 million.

Moving to slide 15. The graph shows the return on equity for the Frontline share if you had invested $3.38 in the Frontline share in July 1997. Today the dollar value including cash dividends and spin offs in the period has increased to $133.42.

Moving to slides 16 and 17. The number of vessels in the Frontline fleet is 82 vessels including vessels from commercial management and the ITC vessels, and is compounded by 38 double-hull VLCCs, seven single-hull or double-sides VLCCs, one single-hull Suezmax, 28 double-hull Suezmaxes, and eight OBOs. We have contract coverage of 39% in 2008 and 32% in 2009. The average net TC rate for the total fleet is about $42,000 a day in 2008, and $43,000 a day in 2009.

With this I leave the word to Jens again.

We're now on slide number 18. Q2 has indeed been a very good quarter for Frontline. And the bull factors we mentioned in our Q1 results continue with full strength into the second quarter and on till late July, the most important factors being limited fleet growth, we saw continued conversions -- we even saw scrapping -- very high storage in Iran -- at the peak of the quarter we had 18 VLCCs storing off Iran -- the oil prices influenced charters behavior, the high oil price made it very important to secure tonnage. The freight element was not important, and at the height of the market the freight element only contributed around 4% of the value of the cargo.

We saw continued ton-mile factors for long-haul movements from Venezuela and West Africa and Russia, mainly east, and we have again mentioned the China Olympic factor. It is difficult to pinpoint, but it looked like that the Chinese stocked up crude before the Olympics.

Then suddenly the sentiment turned. It's not easy to pinpoint what exactly happened, but around the third week of July the sentiment seems to have been turning in the market from a fear of lack of supply to now, lack of demand. It basically took only three owners to bring the market down in one week with around [100 world scale] points, and this slide has unfortunately continued, the main factors being disturbances in both the oil markets and financial markets, we have reduced storage in Iran, or off Iran, so down five VLCCs, and with it the charters have been holding back and the market has come down. This of course combined with a big drop in the US oil demand, the biggest in 26 years.

If we go to page 19, there's been a lot of talk regarding slow steaming, or fleet optimization as we call it. We have been quoted ourselves in the various media regarding this, and I can confirm that today we are reducing speed on our ships. We have done this for the last couple of weeks.

A graph on the left-hand side shows, at the present rate it actually makes sense to perform voyages with a speed of 11 knots to 12 knots. And on the graph on the right-hand side shows if a speed has been reduced to 13 knots, around 13% to 14% -- would be the equivalent to a fleet -- a total fleet reduction of 13% to 14%. Of course we don't know if all owners are doing the same, but we would assume that a majority are doing as we are to optimize earnings.

Now we're on page -- slide number 20. We have to admit that the orderbook for VLCCs as well as Suezmaxes has increased in the quarter and is now a sizable entity. We still believe, however, that there are certain factors that could change this into positively. For 2008 we will almost see a zero fleet growth due to further conventions -- conversions, sorry -- and the scrapings earlier this week -- a VLCC was actually scrapped. There was a VLCC that could be traded, but the owner thought it was more beneficial to scrap the ship.

If you look at 2009 and 2010, the orderbook for 2009 and 2010 for VLCCs is almost equivalent to the single-hull remaining fleet. So if we believe that the single-hull fleet will be phased out during '09 and '10, the fleet growth will not be that severe. And of course then we hope that maybe the economy has improved a little bit and further growth years going forward.

If you look at the Suezmax fleet, which is slide number 21, we only have a very small percentage left of single-hull ships, so on that basis the Suezmax orderbook may look a little bit large. However, many of these ships are being built at Greenfield yards. We are building ourselves, our whole Suezmax program, at a relatively new yard in China, and we've already seen delays. And the slide that Inger showed earlier, we have been noticed that the ships will be at least delayed one quarter, and that will influence the deliveries quite a lot. This yard in question, Rongsheng, has around 40 Suezmaxes on order, so that's quite a big portion of the fleet.

On slide number 22, a little bit about newbuilding prices, and the small dots is where -- the prices we have ordered at. And when we ordered, we believed we had a pretty competitive newbuilding orderbook, which gives various opportunities both in the cost breakeven but also should we decide to resell some of these units.

We believe that newbuilding prices are leveling off a little bit. The strength of the US dollar has relaxed the shipyards a little bit in the East. The steel price, it is not increasing as rapid as it did before, and before what orderbook is maybe making some owners holding back. So we think that the newbuilding prices could have reached a top-level.

The graph on the right-hand side shows that pretty healthy time-share levels are possible today. Charters are there to pay around $70,000 per day for three years' time share on a VLCC, and mid-40s for Suezmax. Last week a VLCC was fixed for 12 months at $98,000 despite the falling market, so there's still some optimism in the market.

Where does that take Frontline? This is slide 23 now. We believe that we are -- we have a very low financial risk and exposure, we have very competitive newbuilding prices, we have a decent contract cover -- coverage, as Inger mentioned, and we have very low cash breakevens. We've always had a very opportunistic way of looking at things, and -- which was evidenced over the summer where we quickly transacted both purchase and charters.

If we look at the market itself, we believe that the limited fleet growth, limited orderbook up until we say at first quarter 2009 -- it's actually up to mid-2009 -- is not that severe. There will be delays from Greenfield yards.

Another factor which we have not really mentioned is that we see the actual utilization of the fleet as going down. It's difficult to pinpoint, but we have seen of course dockings are taking a longer time now, it's more difficult to find docking space, it's difficult to do repairs, it takes a longer time. So the actual fleet utilization is going down, or has been going down.

This combines with continued strong oil production, which we have seen so far, and maybe we're ready to see a inventory buildup in China again, and then of course as we discussed earlier, possible slow-steaming effect. This will not happen immediately, but hopefully we will see that affect coming into October.

We see now the market is about to level out. The last week or the week before we have seen very few cargoes being quoted. This morning we had -- there were 14 cargoes quoted in the market. So we think that the markets -- the bottom has been reached, and hopefully more positive signs are ahead.

Operator, with that we're ready to take questions now. Thank you.

(Operator Instructions). Anders Rosenlund, ABGSC.

I was wondering if you could just help us understand a little bit better the additions to newbuildings of vessels and equipment in Q2. How much of that was vessels, and how much was installments and newbuildings?

Sorry. Could you repeat?

Yes. On the cash-flow statement, investment activities (multiple speakers) the $280 million, could you split that in installments and newbuildings and other purchases?

Yes. In the second quarter of 2008 we took delivery of the first Top Ships vessel, which I mentioned. So we haven't actually given out the information of this, but it's over the purchase price of the $240 million for those vessels, but if you took one fifth of that purchase price, that is included in the number of $280 million, and also some costs related to the heavylifts are included in that number together with the newbuilding investments.

But how large was the newbuilding investment in Q2? Roughly.

Roughly in Q2 I would say it was approximately $200 million.

Could you also give some indications on -- or guidance on the CapEx in Q3, specifically? You've stated -- you said a lot about the equity installments on the newbuilding program for the second half, but could you be a bit more precise in Q3 on remaining installments from the purchases of vessels Q3?

The reason why I didn't want to be that specific quarterly-wise was that that could be changed in a way, it could be moved from a quarter to another. So that's why I took that in together. However, the $177 million which I said would be paid in addition in the second half of 2008 for the newbuildings -- according to what we see now, we believe that approximately $100 million will be paid in the third quarter, and the remaining in the third (sic) quarter.

At the same time, we have said that we're going to draw down $110 million in newbuilding financing in this connection, and if you would like to have the split of this amount as well, we believe that approximately $60 million will be drawn in the fourth quarter and $50 million in the third quarter. Does that help?

Yes, it helps a whole lot. Thank you very much.

Jon Chappell, JPMorgan.

Thank you. The last couple weeks have been quite volatile. If you had to point to one market factor that's driven the volatility in the market, what would that be? And when you talked about the turnaround, you see the market leveling out, I would think maybe the second-quarter levels might be a little bit lofty to try to get back to, but how strong do you think the market could be in the fourth quarter? Are we looking at a similar quarter to 2007?

It's quite difficult to actually pinpoint what happened. But there was a period during the third week of July when it was very quiet. And I think some owners thought this is probably the end of it, and they start moving the rates downward. So it's actually difficult to say, but it is -- and it's mainly sentiment driven. And of course once the market goes down, the charterers who have the cargo programs, they're holding back. So they have been holding back basically for the last two weeks, and now they're coming back.

Yes, you're right. I hope of course the markets will improve to what we have seen in Q2, but I think it will take some time to reach that. I believe still that before we come in to Q4, we will see rates at a fairly healthy level. I prefer not to say exactly more than that.

But if you look at for instance the FFA paper, you could actually sell Q4 now at around 71 to 73. So there is some underlying support out there, if you can say that. Of course it's different from the physical, but there seems to be people out there with some kind of faith in the market. Thank you.

There were a couple of comments in the press release about opportunities to buy assets or equity given this recent downturn, and the Board was excited about those opportunities. Have you had any discussions with OSG yet regarding your stake in that company, and is that one of the opportunities you referred to in the press release?

Well, we have not had any actual discussion with OSG regarding our shareholdings. Of course, if you look now at the market, the steel prices, or ships prices, are very firm, whereas share prices have had a downturn lately, so of course some companies it's actually cheaper or better to go via the mergers and acquisitions side than actually buying steel. So we're looking at a number of companies all the time, and I am sure other shipping companies are doing the same.

Okay. A couple questions for Inger just for modeling purposes. Out of the seven drydocks in the third quarter, can you break that down between VLCCs and Suezmaxes?

I think it's mainly VLCCs. I think all of them are. All of them are.

Okay. And --

Some of these drydocks are scheduled, some of the drydocks -- some we're moving in. We think that the market is low, it's better to utilize the time now for drydock. So we are talking earlier, so to speak, to do that during the low time, but it's all VLCCs.

So should we assume then that most of the drydocking activity -- or the off-hire days -- is in the second half of the third quarter, because you've taken this recent market activity to shift some around?

Well we have ships in dock now, and we have ships earlier. It's only during last week we have changed some voyage order plans, so some of these ships are driven into dock. It's quite difficult to get docking space, but they have managed to do that. It will be spread out over the quarter.

Okay. And do you completely expense drydocking expenses, or is there any capitalization?

No. We expense off free and clear, completely.

So the third-quarter OpEx will most likely be a little bit higher than the second quarter, given more ships in drydock?

That's likely, yes.

And the final thing -- in the last quarter you had broken out some cash gains that you expected in the second quarter, and most of them are the heavylift deliveries. Is there any gains thus far in the third quarter, whether it's asset or share sales, that boost the cash flow of the third quarter?

No, it's not.

All right. Thank you very much.

(Operator Instructions). It appears that there are no further questions today. I am handing back to Mr. Jensen. Sir?

I would like to thank everybody for listening in to the conference call. Like I did this morning, I'd like to thank everybody at Frontline for a good job. We have had some challenging projects during the second quarter and over the summer. We're very happy that we have completed and delivered our heavylift projects, very happy that we have managed to obtain very good financing for our newbuilding program, happy we have great further equity in the market, and I am happy to say that we have again out beat our competitors, our peers, in the spot earnings. So well done to everybody in the Company, and looking forward to the next quarter. Thank you.

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