Frontline Plc (FRO) 2009 Q2 法說會逐字稿

Good day and welcome to the Frontline Q2, 2009 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.

Thank you. Good morning and good afternoon and welcome to Frontline Q2 2009 presentation. The program for this presentation will be that our CFO, Inger Klemp, will go through the second-quarter highlights, thereafter a financial review, update on our newbuilding program. Thereafter I will discuss a little bit about the market for Q2 where we see things going forward. And there should be time for some questions after that. So, Inger, if you can take it from now.

Good morning and good afternoon to you, ladies and gentlemen. I will quickly run through then the highlights and the financial review in the second quarter 2009, as Jens said.

So that moving to slide 4. In (inaudible) 2009 we amended the time charter agreement for Front Lady and Front Highness to bareboat agreements, and extended the contract for one additional year (technical difficulty) 2011 respectively. These vessels will be operated as floating storage units, and have ceased trade as regular tankers.

In May we took delivery on a second newbuilding, Front Queen. Further in May 2009 Frontline Frontline agreed with shipyards to cancel four Suezmaxes and two VLCC newbuildings contracts, representing a total contracted cost of $556 million, or 33% of our newbuildings program. Installments already paid on the canceled newbuildings will be applied to offset against the payments on the remaining newbuildings.

In May the Company further secured long-term (technical difficulty) [cost of living] newbuilding financing, representing 70% of the contractual cost of the last two newbuildings being built at Waigaoqiao shipyard.

And late last in July, Frontline agreed to terminate the long-term charter party for the single-hull vessel, Front Duchess, and to receive a compensation payment of approximately $2.8 million in that respect.

Moving to slide 5, then we go quickly through the financial highlights in the second quarter 2009. Frontline reported net income of $28 million, equivalent to earnings per share of $0.36 in the second quarter of 2009. And on this basis we announced a dividend of $0.25 per share for the second quarter. For the six-month period ending June 30, 2009 Frontline reported net income of $104 million, equivalent to earnings per share of $1.34.

Moving to slide 6, net income in the second quarter is $48 million lower than it was in the first quarter of 2009. And the decrease can mainly be explained by, firstly, a reduction in the time charter equivalent rates in the second quarter compared to the first quarter, which has led to a reduction in common time charter basis by $60 million.

The profit-sharing payable to Ship Finance has increased in the quarter with $6.5 million. Ship operating expenses increased by $2 million (technical difficulty) for more dry dockings in this quarter. Charterhire expenses have decreased by $7 million in the second quarter compared to the first quarter.

Moving (technical difficulty) slide 7. The VLCC fleet earned in the spot market approximately $38,700 for double-hulls and $28,300 for single-hulls, with an average booked earnings of $37,700 per day. And the average for the whole fleet was about $38,400 per [day] in the quarter.

The Suezmax fleet earned in the spot market approximately $24,400 per day for doubles and $13,100 per day for singles, with an average spot earnings of $23,800 per day. And the average for the (technical difficulty) [full fleet] was about $26,800 per day in the quarter. The overall (technical difficulty) in the quarter.

[ICC numbers show the front-ended] quarter has traded (inaudible) market indexes and competitors with respect to the VLCC fleet, and also bested the indexes and [some of the other] competitors for the Suezmax fleet. The (inaudible) investments are not included in these numbers.

Turn (inaudible) to slide 8. We have dry docked four vessels in the second quarter of 2009, which is one more vessel than in the first quarter. As you can see from the slide, we have average OpEx for the fleet of approximately $10,000 a day in the second quarter 2009 compared to an OpEx of $9,700 per day in the first quarter of 2009.

OpEx and off-hire days have been increased compared to the first quarter as a consequence of the -- that we had dry docked more vessels in the quarter. We expect to dry dock five full in the third quarter of 2009.

Moving down to slide 9, the total balance sheet is approximately $38 million lower than it was in the first quarter of 2009. The main items explaining the changes are the short-term and long-term restricted cash is $48 million higher than the end of first quarter, mainly due to exchange rate movement. (technical difficulty) vessels are increased [to $51 million] as a consequence of the delivery of Front Queen. And the [current] newbuildings is reduced as a consequence of this sale.

Long-term debt is reduced as a consequence of the net effect of repayments of long-term debt of $138 million, and draw down on long-term debt of $83 million.

Further obligations on the capital leases have decreased by $60 million as a consequence of the net effect of the increase of a consequence of exchange rate movement, and a reduction due to the repayments in the quarter.

(inaudible) is included in the balance sheet, with a total of $585 million of debt and obligations from the capital lease. Debt related to (technical difficulty) are not calculated in the balance sheet with (technical difficulty) million dollars.

Moving to slide (technical difficulty). The cash cost breakeven rates were approximately $31,900 per day for VLCCs, $25,200 per day for Suezmaxes and $26,600 per day for OBOs, which is somewhat less -- somewhat down from the first quarter. These rates are the daily rates our vessels (technical difficulty) operating cost estimated into expenses and scheduled loan (technical difficulty) corporate overhead cost. These [basically] do not take into account capital expenditures or balloon -- loan balloon repayments at maturity.

Furthermore Kensington and Hampstead, the five Genmar vessels we have tucked in and the two vessels on payables are not included in the cash cost breakeven rate.

Moving to slide 11 and 12. In the second quarter Frontline agreed with two shipyards to cancel four Suezmaxes and two VLCC newbuilding contracts, representing a total contracted cost of $556 million or 33% of our newbuilding program. As I mentioned, these installments already paid on the canceled newbuilding will be applied and set up against a future payments on the remaining newbuildings.

Total number of vessels in Frontline's newbuilding program after the cancellations is four Suezmax tankers and six VLCCs, which constitutes a contractual cost of $1 billion. After June 30, 2009 a total of $353 million in installments have been paid on these newbuildings, compared with $394 million at the end of the first quarter, which also included installments on Front Queen, which now is delivered in the second quarter 2009.

The remaining installments to be paid for the newbuildings after June 30 amounts to $680 million, with expected payments of approximately $138 million in 2009, $272 million in 2010, $216 million in 2011, and $54 million in 2012.

Moving to slide 13. The Company has established long-term pre-and post-delivery newbuildings financing, reflecting 80% of the contractual cost of four of the newbuildings being built at Rongsheng and two other newbuildings in [Waigaoqiao] shipyard. As of June 30, $234 million had been drawn down on this financing and expected to offer the $156 million distributed between 2009 and 2010.

In the second quarter we established a long-term pre-and post-delivery newbuildings financing, representing 70% of the contractual cost of the last two newbuildings being billed at Waigaoqiao. This facility is undrawn at the end of June, 2009, and expect to draw approximately $60 million in 2009 and the remaining in 2010.

The four new VLCCs being built at Jinhaiwan shipyards are the only vessels in our newbuildings program which are currently unfinanced. These vessels will not be delivered until the second-half of 2011 and the first half of 2012. We assume that obtainable financing in today's credit market will be unfinanced newbuildings or a minimum [$60 million] per vessel.

Moving to slide 14. In this graph we have shown the installments to be paid under the newbuilding contracts and short-term loans related to the newbuilding contracts in the different years, and with a total of $750 million in the large blue column. The dark blue column includes established financing, the estimated financing obtainable for the newbuilding contracts not yet financed, and a fixed contract revenue above cash cost breakeven rate in the different years, and with a total of [$795] million in the period.

Moving to slide 15 and 16, the number of vessels in the Frontline fleet is 84 vessels, including vessels on commercial management and ITCL vessels. And it is compounded by 39 double-hull VLCCs, 29 double-hull Suezmaxes, 7 single-hull VLCCs, one single-hull Suezmax and 8 OBOs.

We have a contract coverage of 40% in 2009 and 27% in 2010. The average net TCE rate for the total fleet is about $43,300 per day in 2009 and $45,200 per day in 2010. In addition to this fixed rate contract cost coverage, we also have additional 15% TCE covered on growth in the income in 2009 and 9% in 2010. With this, I leave the word to Jens again.

Q2 was an interesting quarter, with earnings rate structuring from basically zero to around $45,000 for VLCCs. According to Clarkson the average VLCC earnings in the second quarter was $20,600, and the average Suezmax earnings was $20,000.

We managed to obtain or maintain a certain number of VLCCs on storage contracts at rates better than the spot market. And otherwise our east-west positions were more balanced in the quarter, which resulted in better earnings than what the spot market could provide.

Positive factors in the market was that the Asian countries seems to have been weathering the financial storm strong better than the Western world, and we see positive growth in certain contracts, mainly of course China, which has a huge crude oil import and demand year on year.

VLCCs on storage, around 45 to 50 VLCCs were utilized on storage during the quarter, which was almost up to 10% of the total fleet, which also put some bottom in the earnings.

The OPEC output in July slightly increased from June. Other factors which obviously have been on the more negative side was a very high volatile bunker prices, almost 200 tons difference in the quarter alone. And that is of course can be seen when you are burning around 80 to 90 tons per day on a VLCC. All of our sliding worldwide demand and an amazing low scrapping rate for older tonnage, despite many of the single-hull ships were trading at negative earnings.

If we move to slide 18, the VLCC fleet and order book. The best news in the quarter of VLCC was that no new VLCCs were ordered. At the same time several ongoing charters between (inaudible) banks and shipyards, and we expect further voluntary delays of ships from Q4 into Q1 2010. Hopefully the owners will then be able to find some financing.

On the VLCC fleet there is quite a big number of single-hull tankers left. Around 90 ships are still trading. If these ships disappear within the next 12 months when the phaseout date is due, and we see a slight change in the order book, we could potentially be in a negative fleet growth scenario. So there is some movement for both optimism and hope and maybe surprise in the VLCC fleet going forward.

Now we are at slide 19. On the Suezmax fleet, no Suezmaxes were ordered in the quarter. However there has been reported up to four ships ordered during the summer, two for Swedish (inaudible) and two for Greek owner [Sacos] at a Korean shipyard.

If we look at the single-hull fleet it is not as big as on the VLCC side, but still we have around 35 single-hull ships trading. And these ships are also finding it hard, so we hopefully can see an accelerated phaseout of these vessels. What could change the order book going forward on the Suezmax fleet is of course that many of the ships have been built at so-called green field yards in China, where they already have seen a substantial delay, and that could change the supply going forward.

Slide 20, newbuildings prices and time charter rates. As mentioned, nothing has really been ordered lately. I would estimate VLCC prices at current will be around $100 million and Suezmaxes between $65 million to $70 million. The small dots under the price curve is where Frontline has ordered the ships.

If you look at the time charter market slide, the time charter market for VLCCs for 3 years is around $36,000 per day, and for Suezmaxes around $25,000 per day. But it is fair to say that there are not many charters queuing up out there today to take ships on charter.

Slide 21, a little bit about the single-hull ships. The single-hull tankers, mainly of course VLCCs, are finding it very difficult to trade. Limited trades are available, mainly AG/East, and also a limited number of charters are now accepting single-hulls. Today's returns on AG/East on VLCCs and Suezmaxes are close to zero, so hopefully that would mean accelerated scrapping.

During the first six months of 2009 five VLCCs went into storage, including our two own, as Inger mentioned before. Two VLCCs were scrapped, five Suezmaxes were scrapped, and three VLCCs were converted into bulk conversion. So ships are disappearing, but we need them at a bigger pace.

Slide 22. As mentioned earlier, storage played quite a huge role in the second quarter, and so far continues to do that in the third quarter. We estimate up to around 50 VLCCs are still utilized in storage, of course anything from short to longer period. And as seen on the graph on page 22, the oil is still in contango -- three months is around $2.1, which should still give room for economy for oil companies and charters to use vessels for contango gain.

Page 23, China. Not only the bulk carrier owners can thank China for a lot these days, but also the tanker owners. If you look at the import side in China, year on year import the increase is 40%. But what is good about China is, of course, they source the oil from basically wherever they can get it, and a lot from Latin America and West Africa, which gives a positive ton mileage.

If you look at the refining capacity and going forward estimates the refining capacity in the last year has almost increased by 20% in China. And if we go forward, estimates coming out of China is by 2015 this could be more than 40 million barrels per day. Obviously 6 million cars were sold in China in the first six months of this year, and if those numbers continue throughout the year, China will surpass America in car sales during the year.

Also the strategic reserves have been built up and China, around 5% increase year on year. And with the new storage facilities being built, on the projection it could be up close to a 50% increase on today's levels. Of course, we do not know when these facilities will be used, or will be filled, but it is a positive sign in the market. If everything is perfect, China can be accountable for almost 60% of the expected tanker growth demand over the next three years.

If you look at slide 24, a little bit about the outlook. The order book is still big for both tankers and Suezmaxes, but there could be a surprise element in the VLCC fleet with 90 single-hull ships still available. And if these ships will be phased out earlier than what they have to do on paper there could be some surprises in the fleet development going forward.

Floating storage is still an attractive option for owners and charters, and we expect that to continue throughout the year. We also expect to see increase in cancellations and deferred deliveries, as the financing for shipowners and newbuildings remains tight.

We look a little bit on the world, as mentioned, China has ramped up both imports and refining. I think we all agree, or at least we hear in the newspapers and televisions daily that the world economy seems to have bottomed out, so hopefully we will see some more oil demand going forward.

One country is supposed to double their production over the next six years, and that is Iraq. If you look at our own situation, Inger has mentioned that we have reduced our order book going forward via cancellations, but still as our fleet gets older we still need to have a newbuilding program, so it is just a matter of course on the right timing what we will expand further with newbuildings.

We have sold the single-hull Front Duchess, otherwise we have used the other ships for what we call value-added purposes, floating stores and so on.

Finally we have the potential to be able to basically reduce our fleet with 20% over the next 12 months. If we think it is the right thing to do, it can be early terminations on the single-hull remaining VLCCs. We can redeliver some of the lead ships we have from the [KT] market, German owners. And we also have some time charter ships which can be redelivered between October and March this year.

Now we are ready to take your questions. Please moderator, if you could set that up. Thank you.

(Operator Instructions). John Chappell, JPMorgan.

Very impressive second-quarter rates, especially on your VLCCs. I'm just trying to figure out, you mentioned in your comments that your East-West balance fleet deployment definitely helped your rate versus maybe the Carlson's Index. But also, how many of your open days were on maybe short-term floating storage or just real short-term contracts, 30 to 60 days, that were at rates that were much higher than what the spot market was showing?

We had about eight of our VLCCs on storage business during the second quarter at rates higher than the spot market, anything from 20 to 60 days that helped out. And as you mentioned, we had managed to position quite a number of ships with where we could do some transatlantic business and Northern European business or US call, which is giving better than the terms on the usual AG/East.

And I assume on page 16 of your slide presentation, where it shows your time charter coverage, that only includes longer-term contracts; not the 20 to 60 day storage contracts?

That is correct. What we define as time charter is more than six months.

Right. So now that we are two months into the third quarter is that VLCC number from the second quarter, is it similar, higher or lower for third quarter short-term storage?

We don't normally give any prediction going forward. But of course the present market is definitely more challenging than what the second quarter was.

Okay. That is fair. Two other short real quick questions. On page 7, where you lay out the rates that you earn on your fleet, I'm just having a little bit of problem understanding how the Suezmax whole fleet rate was $26,800 a day, where all the components of it were actually less than that number. So if the double-hulls are $24,400, and the single-hulls are $13,100, how does the whole fleet average higher than all those other numbers?

That is due to the contract coverage. We have vessels on contract.

The ships on time charter are not mentioned here. This is the spot earnings ships.

I understand. Thanks. And one last one, the profit sharing you reported in the income statement for the second quarter was about $8 million. Ship Finance reported last week -- they reported $5 million. What was the discrepancy in those two numbers?

Well, I must say I cannot comment on Ship Finance's numbers. (multiple speakers). Our numbers are correct.

Our numbers are correct.

Okay, so they potentially had higher profit share then? Great. Thanks very much for your time.

(Operator Instructions). [Urd Doerr], [Laza Capital].

Actually I apologize, John, got my question. A very informative presentation, thank you very much.

Is there any more coming?

(Operator Instructions). [Stephen Williams], Simon.

We have heard quite a few things about potential for a lot of newbuilds starting to get canceled. When do you think that will actually sit become firmly apparent? When will we definitely see tonnage on new vessels clearly being canceled?

I think there are a lot of discussions going on right now. Of course, this is for -- most of the discussion between the owner and the shipyard, but obviously the shipyard will probably have similar discussions with its bank to see how much support he can get. So I think it will be a combination of how long can you survive in a tanker market like this. And if you can't get financing then you will probably have to travel out and see your shipyard (inaudible) either canceled or get some kind of delay.

So I think we could probably -- we know there are quite many discussions going on, but I think you will probably see more of this during the autumn and winter of this year.

(Operator Instructions). Anders Rosenlund, ABG SC.

What is the minimum cash balance you can have, and not including restricted cash, but the $121 million, how low could that go?

I guess zero. I guess it is impossible to answer that question. It really depends on the situation going forward in a way. So theoretically you can of course have zero if you [earn] a lot of money going forward.

But is there -- I'm sorry.

No, no, that is fine.

Is any of this cash tied up anywhere?

This $121 million which you are referring to on the balance sheet is free cash, which is not tied up anywhere. The cash received tied up is the restricted cash.

As we have no further questions, I would like to turn the call back over to you, Mr. Jens Martin Jensen, for any additional or closing remarks.

I would just like to say thank you for everybody to listening to our presentation and dialing in. And I would like to say thank you for everybody in Frontline for an acceptable second quarter. Thank you.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.