Frontline Plc (FRO) 2008 Q3 法說會逐字稿

Good day, and welcome to the Frontline Q3 2008 results presentation conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jens Martin Jensen. Please go ahead, sir.

Good afternoon and good morning to the people who have dialed in from America. Welcome to Frontline Q3 presentation. We will start the presentation with our CFO, Inger Klemp, going through the financial highlights and major transactions, and a review of our financial situation and new building program.

After that, I will give a rundown of the market situation and how we see markets moving ahead. After that, there will hopefully be time for some questions and answers. So, Inger, if you could start with the financials, thank you.

Thank you, Jens. Good morning to all of you. I will guide you quickly through the major transactions and the financial highlights in the third quarter 2008, together with a run through of the building program, as Jens just said. So then, moving to slide four and five in the presentation. In July 2008, Frontline received approximately $207 million after the completion of a private placement of 3 million new shares at a subscription price of NOK357 per share. Further, in June 2008, Frontline acquired five double-hulled Suezmax tankers on blocks from Top Ships, and that was at a purchase price of $240 million.

One vessel was delivered in June and one was delivered in July and the remaining vessels were delivered in September. Further, in June 2008, we also entered into an agreement to take five double-hulled Suezmaxes on time charter from Eiger Shipping for the balance period of existing charters, all with the commencement of charter from June to August and the delivery from September 2009 to April 2010. And in September 2008, Frontline completed a syndicated loan facility for $180 million to partly finance the acquisition of the five double-hulled Suezmaxes purchased from Top Ships.

In September 2008, Frontline chartered out Front Guider and Front Viewer for a period of five years, with commencement of charter early December this year and mid April 2009 effectively. Further in November 2008, Frontline Chartered out Front Energy for three years' period, with delivery in mid November and Front Champion for a period of one year, with commencement of charter early December 2008.

And, as a consequence of the increased time charter coverage, the average time charter date has increased from 2008 to 2009 with $2,500 and further $2,400 from 2009 to 2010. In early December, we will be delivered Cosglory Lake after the total length of the charter partly of approximately 3.5 years.

So then, moving to slide six. Then we will have a quick run-through of the financial highlights in the third quarter. Frontline reports net income of $108 million, equivalent to earnings per share of $1.39 in the third quarter 2008. Net income in the third quarter includes a $29.3 million mark-to-market loss on a forward contract for the shares in OSG, which has been recorded under non-operating items.

Net income, excluding this loss, was $137 million in the third quarter, which is equivalent to earnings per share of $1.76. On the basis of this, we announced a dividend of $0.50 per share in the third quarter. The decision to reduce the cash dividend payment this quarter compared to previous quarters does not in any way constitute a shift in Frontline's dividend strategy. The decision was taken after part of evaluation of Frontline's new building commitments, the weaker fundamentals in 2009 and also based on the existing squeeze in the credit markets.

The decision further reflects the fact that there are an interesting number of attractive corporate opportunities. Frontline reports net income of 647.2 million for the nine months ended September 30th, 2008, equivalent to earnings per share of $8.53. This includes gains and losses on sale of assets and securities in a total amount of $163 million. Then net income excluding these gains and losses was $484 million in the nine-month period ended September 30th, 2008.

Then moving to slide seven, net income, excluding gain, is $26 million lower in the second quarter -- than in the second quarter 2008. The decrease can mainly be explained by the reduction in time charter equivalents in the third quarter compared to the second quarter, as a consequence of our strategy to seek short during June and July, when the rate essentially was more than 100 World scale points between long and short voyages, which proved wrong when the market took such a sudden fall at the end of July.

Ship operating expenses increased by $13.3 million compared with the second quarter, mainly as a consequence of more vessels, more dry-docking, the costs related to more vessels dry-docked, which explains $6.9 million, and a general cost increase. Charter hire expenses have increased by $10.4 million in the third quarter, compared with the second quarter, of which $16 million is due to the five vessels chartered in from Eiger Shipping, offset by a $3 million reduction for the six vessels chartered in from Nordic American tankers under a floating rate-time charter agreement, and $2.6 million reduction for the two vessels chartered in from Knightsbridge Tankers under a profit-sharing arrangement.

Then, moving to slide eight, [the rates] the sea fleet earned in the spot market, approximately 88,600 per day for doubles and 11,800 per day for singles, with an average spot earnings of 86,700 per day. The average for the whole fleet was about $74,700 per day in the quarter. The earnings per single relates to only one vessel, which was the Front Duchess, was caused by uncertain positioning due to dry-docking. The Suezmax fleet earned in the spot market approximately 66,200 per day for doubles and 60,200 per day for singles, with an average spot earning of 65,900 per day.

The average for the whole fleet was about 62,700 per day in the quarter, and the earnings for the singles relate to only one vessel, the Front Voyager. The OBOs earned 44,100 per day in the quarter. The TCE numbers show unfortunately that Frontline this quarter has not managed to outperform the competitors in the third quarter 2008, like we usually do.

As I mentioned, this is due to that we followed the strategy to fix short during June and July, when the rate essentially was more than 100 World scale points between long and short voyages, which proved wrong when the market took such a sudden fall at the end of July. Then I just want to mention that the ITC vessels are not included in the numbers, in the time charter equivalent numbers.

Then moving to slide nine. We have dry-docked eight vessels in the third quarter of 2008, which is three more than in the second quarter 2008. As you can see, we had average OpEx of approximately $13,500 per day in the third quarter, compared to approximately $11,600 per day in the second quarter. OpEx has increased compared to the second quarter mainly as a consequence of more dry-dockings in the quarter. This represents $1,150 per day, but also as a consequence of higher running costs.

We have experienced an upward pressure on crew costs and docking costs. The number of off-hire days in the third quarter is higher than in the second quarter as a consequence of more planned dry-dockings. We expect to dry-dock four vessels in the fourth quarter. Here one vessel is overlapped from the third quarter and we expect also to dry three vessels in the first quarter 2009.

Then, moving to slide 10 -- the total balance sheet is approximately 150 million lower than in the second quarter 2008. Book values [for risk] higher than in the second quarter 2008. Book values on new buildings have increased with installments paid in the quarter and vessels and equipment have increased as a consequence of taking delivery of four Top Ships vessels. Total portion of long-term debt and long-term debt is higher than in the second quarter, mainly as a consequence that we have established the rundown financing of the Top Ships vessels.

Minority interest is booked with $6 million in the quarter, relating to the 17.5% in ITCL not owned by Frontline. Equity is increased as a consequence of the equity offering done in the beginning of July, and earnings in the period set off with dividends paid in the period. ITCL is included in the balance sheet, with a total of 697 million of debt and obligations on the capital leased.

Debt related to three of the [capacities] vessels are not consolidated in the balance sheet, with $67 million. Moving then to slide 11. The cash cost breakeven base are approximately $34,700 per day for the VLCCs, $24,800 per day for the Suezmaxes and $22,800 for the OBOs. These rates are the daily rates our vessels must earn to cover budgeted operating costs, estimated interest and scheduled loan principle repayments, bare boat hire and corporate overhead.

These rates do not take into account capital expenditures, loan balloon repayments at maturity, which we expect to refinance with new loans, and vessels on short-term time charter in.

Cash cost breakeven base have increased for our VLCCs from the previous quarter, mainly due to an increase in docking and running operational costs. The cash cost breakeven base does not allow for the contract coverage the Company has. Assuming that the contract coverage is used to subsidize spot vessels, we will need a lower breakeven base for the spot vessels.

Then moving to slide 12. This is a picture of the launching of the first VLCC, her number 2396, to be delivered from SWS in January, on January 8th, 2009. She will be named Front Kathrine. Moving to slide 13, we had 10 VLCC new building contracts and eight Suezmax new building contracts. Total contractual costs of the new building program is approximately $1.8 billion. Frontline's new building program is developing according to schedule. However, we expect that the eight Suezmaxes being built at Rongsheng shipyard might be somewhat delayed compared to original schedule.

As of September 30th, 393 million in installments have been paid on the new buildings, as compared to 333 million at the end of the second quarter. The remaining installments to be paid for the new buildings amount to 1.4 billion.

The company has established long-term pre and post-delivery new building financing in an amount of $420 million, representing 80% of the contractual cost of four of the new buildings being built at Rongsheng shipyard and two of the new buildings being built at SWS shipyard.

As of September 30th, 2008, 92 million have been drawn down on this financing and expect to draw further 51 million in the fourth quarter 2008. In addition, the Company has established short-term pre-delivery and new building financings in the amount of $129.6 million, representing 80% for the contractual cost of the first installment for the six vessels being built at Jinhaiwan shipyard.

This facility matures in June 2009 and on September the 30th, 2008, this facility was fully drawn down. The total equity investment as for the 30th of September, 2008, is therefore $172 million. Indications on obtainable financing in today's credit market for the unfinanced new building contracts are a minimum $60 million for VLCC and $45 million for a Suezmax.

Then moving to slide 14, in this graph we have shown the installments to be paid under the new building contract in the different years for the large blue columns. In 2009, we have also as a worst-case assumption included the short-term pre-delivery financing of $129.6 million, which matures in June 2009. The dark blue column includes the established financing, the estimated financing obtainable for the new building contracts not yet financed and the fixed contract revenues about cash cost breakeven rates.

Based on this, the Company expects maximum 300 million in additional funds will be needed to complete the full financing of the Company's new building commitment. If the credit market doesn't improve before 2012, this might have to be funded from the operational earnings for existing and new vessels. Such a solution might reduce the dividend capacity temporarily.

Moving to slide 15, this slide shows the different new building contracts with estimated delivery dates, installments paid, and contract price for your information. Then moving to slides 16 and 17 -- the number of vessels in the Frontline fleet is 82, including vessels on commercial management and the ITC vessels and is compounded by 38 double-hull VLCCs, seven single-hull or double-hull VLCCs, one single-hull Suezmax, 28 double-hull Suezmaxes and eight OBOs.

We have contract coverage of 39% in 2008, 36% in 2009 and 20% in 2010. The average net TC rate for the total fleet is about 41,300 per day in 2008, 43,800 in 2009 and 46,200 per day in 2010. In addition to this fixed rate time charter coverage, we also have an additional 5% time charter coverage in floating income in 2009. With this, leave the word to Jens.

Thank you, Inger. We are now on slide number 18, the earnings slide. As you can see, in the gray zone, the rates dramatically changed in the third quarter of 2008. There was a complete sentiment turn, basically from fear of oil supply to far of demand. The high rates for VLCCs were 164,000 per day to lows down to 29,500.

At the end of July, the market for VLCCs fell more than 100 World scale points within one week. And our strategy, as Inger mentioned, of fixing short, higher-paying [AGEs] voyages proved to be wrong. We should instead have gone for longer voyages versus [AG West], or West Africa East voyages, or maybe voyages into the US west coast.

The steep fall in the positive traits has to some extent been compensated by the falling bunker prices. However the positive effect of this is lagging, i.e., it takes time to consume the expensive bunkers. The negative oil demand sentiment has turned and it has continued and obviously the OPEC cut on the 24th of October did not help the sentiment.

With further oil company tanker [redebt] headed in the market, that was pressure on the market. We estimate that the spot VLCC rate today is about $45,000 per day, with spot [bunkers]. The [Tulene] incident in the Malacca Strait, which is a single-hull VLCC has proven that there is definitely rate pressure on single-hull VLCCs and the gap is widening.

If you look at the Suezmax graph, a similar pattern at the VLCCs from high rates, $153,000 per day, down to $41,000. However, in relative terms, the Suezmax margin has remained more healthy compared to VLCCs. The main positive factor on the Suezmax rates in the third quarter has been that many VLCCs -- many [covers] are recently moving out of West Africa with some VLCCs and instead they put on Suezmaxes, and we have seen the [shoom] loading of the various pipelines in the Mediterranean, plus, we have seen an increased number of export cargoes from Brazil.

If we move to slide 19, this is the traditional slide we normally show for the order book for VLCCs, and this is from Fearnley's beginning of November report. 27 ships have been added this year, 24 have been taken out for various conversion projects and scrapping. 13 ships on paper remains to be delivered for the rest of the year. However, we think most likely some of them will be deferred until the beginning of the new year.

If you look at the order book for 2009 and 2010, this is almost maxing the cost-bundling phase out of the single-hull fleet. We think that the single hull phase out will be accelerated because of the deteriorating market factors.

If you look at the Suezmax fleet, similar patterns there. We have actually had a negative fleet growth this year, with only two to four more ships being delivered the rest of this year. Slide number 21, we have put a slightly different and closer look at the order book, and this could maybe make things a little bit more interesting if you look from a tanker market.

If you look at the Suezmaxes first, the main wildcard in the tanker order book for Suezmaxes is that basically half of the order book is ships going to build a greenfield shipyard, i.e., shipyards that have not built any Suezmax tankers before and delays will happen and it's already happening.

As Inger mentioned, our sales have eight ships on order have seen delays and we have already adjusted our deliveries with one quarter and we expect further delays there. The light blue in 2008 is five ships from Rongsheng that should have been delayed this year and they will be delayed onto next year, so we see further delays there.

If you look at the VLCC graphs, that the number for greenfield yards is obviously quite limited. There's not many new yards who are able so far to build VLCCs. It's only in 2011 onwards. I think, though, growth for Suezmaxes and VLCCs, one thing it's important to remember, the present financial crisis will have an impact on both the yards and the owners and I think if you look at this graph in the years to come, the order book will look quite different and the deliveries will be quite different from what we see now on paper.

Page 22, the dramatic fall in the bulk rates, mainly on the capesize that witness not the graphs on the left-hand side, I think it's safe to say there will be very few tankers converted into bulkers. 2008 has seen a very high number of conversions. We have tracked 29 VLCCs being converted, 19 to bulk carriers of VLOCs, takes us to FSOs and for also scrapping.

As mentioned before, the present spot market for single-hull VLCCs is around, worst case, 45 AGEs, which is equivalent to about $10,000 a day only, which we think will mean there will be further scrapping, despite the low scrap prices.

There are two more known ULCC projects firmly done, which is the two ships from OSG and [Urnaux], will be moved into offshore storage. Now we are on page 23, or graph 23. This is the development of the new building price. The small dots is where our orders are. They are still well below the line, despite falling prices. The last VLCC orders which has been recorded is a new building at [SGX] on 151 million. There has been no recent Suezmaxes, but we estimate prices to have gone down to around 90, so we still have some room in our prices compared to the market.

The TC markets we estimate today to be for three years 55,000 and 40,000 for three years for Suezmaxes, e.i., they are still at very healthy levels. We are now at slide 24. Some interesting development has happened in the oil movement. Finally, the oil price is in contango, meaning that the forward price is higher than the present price. The contango right now is around $7 to $8 per barrel six months ahead, which has made it attractive for various oil companies and oil traders to fix VLCCs and put the ships in storage. We ourselves have fixed two ships and we worked on a third. This is periods anything from three to 12 months and the rates are in excess of the spot market.

We have also mentioned here as a positive thing in the market is various stimuli packets which have been introduced. We hope that of course they will mean increased demand for oil and consumption. Strategic stock building in China has not happened yet. There have been various discussions that maybe one way of spending money in China is to buy oil at the present low price and do some stock building. This will of course be a positive for the tanker market.

Changes to the order book, as we mentioned before, going forward, will mean maybe a less -- more positive feet development and positive consolidation we have also mentioned, very likely in these financial markets that will be owners emerging. There will be various acquisitions and the accelerated phase out will of course also be positive for the market.

Finally, the Gulf of Aden we have put in there. That's a lot of media attention these days of piracy and most likely some owners already have decided they will go around the cape and we ourselves will put in a policy that we will try and follow the escort ships or marine ships lining the region, so there will be some delays.

Finally, about Frontline, we still believe we are quite a lean and mean positive organization. We have very competitive new building prices. As Inger mentioned, we have 36% of our fleet has been secured for time share on a fixed income for 2009, and additionally we have 5% of the fleet being fixed on time charter, on floating rates, but still that means there will be no waiting time. I think we are ready now to take your questions, so that the moderator can arrange that. Thank you.

Thank you. The question and answer session will be conducted electronically. (Operator Instructions)

We are now taking a question from [Robert Silvia] from [RE Silvia and Associates]. Please go ahead.

Yes, when you gave the presentation, the lady gave a reference to corporate opportunities. Could you expand what you mean by corporate opportunities?

I mean, that could be a lot of things, but of course you know that there's a lot of companies which are quite inexpensive in the market nowadays, but it could be anything.

We have not met any specific companies, but obviously we are following other companies, industry, and as Inger mentioned, many of these companies on paper now are looking quite attractive, so this is something that we are looking at and I'm sure other companies are as well. Thank you.

Very good. Is that why the dividend was reduced so much, to conserve cash to make it possible to do such corporate opportunities?

As we explained in the press release, the reduction in the dividend was taken after a thorough evaluation of different items, but of course the new building commitments, the weaker fundamentals that we foresee in 2009 and also the squeeze in the credit market was important in that consideration. And in addition to that, we also considered the opportunities, as we just spoke about.

All right, thank you very much.

Thank you.

(Operator Instructions) The next question from [Sheila Lerman] from Independent.

Yes, thank you. Can you please tell me what you have set for the ex dividend date?

The ex dividend date, just a moment. It's stated in the press release and that -- December the 5th, December the 5th, 2008.

December 5th?

Yes.

Thank you so much.

Not at all.

Thank you.

You have now a question from Stephen Williams from Simmons. Please go ahead.

Yes, hi. Should you have any more difficulty than you currently envisage with regard to refinancing or any kind of problems in the credit market, is there any possibility of, and would you give any consideration to, cancellation of any of your new bills?

I think there is probably other things that we will look at before we do that. Of course, that's always one option, but we have quite well priced new buildings and we believe, should we have to, we could sell these ships in the market, even though overall prices are under pressure. We still believe that we could sell some of these. Of course, if cancellation is a must, this is something that we can look at again, Stephen, but we have not done that yet.

Okay, and just on a theoretical basis, if you were to go and sell any of these new buildings today, what sort of price do you think you could get?

I think without of course knowing it for sure, but speaking to a few potential buyers, brokers in the market today, I believe that a new building, you can probably sell in the market between 130 million and 140 million, basic delivery now.

Okay, that's great. Thank you.

Thank you.

(Operator Instructions)

We're taking a question from Anders 2038374 from ABG. Please go ahead.

Hi. I don't know if I quite heard what you said on reselling and new building contracts, but did say that you expect that you could resell a new building contract for 130 million?

Yes.

Okay, but dos that also apply to your Chinese vessels, which were contracted at a significant discount to the market quotations at the time?

That would be for VLCC being delivered now, let's say the first quarter next year. I believe you could sell that between 130 million and 140 million in the market now.

Okay, great. Thank you very much.

Thank you.

(Operator Instructions)

You have a follow-up question from Robert Silvia from RE Silvia and Associates. Please go ahead.

I know you have a lag on bunker prices, using them up, but with the new bunker pricing where it is, how long do you think that will take before it will significantly impact at the lower prices?

Well, on some of the ships, of course, we have been able to bunker and consume at these lower prices, so it of course depends a little bit on the voyages. But within hopefully the fourth quarter itself, we are down to bunkers at the present level -- so they will take two to three months to burn the bunkers out.

Okay, given the same situation that you've had now during the third quarter, would you anticipate that the dividend would be approximately the same in the fourth quarter?

I wouldn't think that we would say anything al that for the time being. That's what the future will show.

Okay, very good. Thank you.

As there are no further questions, I would like to turn the call back over to Mr. Jensen.

Well, everybody, thank you for dialing in and spending your time and for people dialing in from America, Happy Thanksgiving. We are sorry we had to put this conference during your vacation. I think it didn't cross our mind when we blocked off this date, but thank you, everybody, for dialing in and showing interest in our company. Thank you.

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