Frontline Plc (FRO) 2009 Q3 法說會逐字稿

Good day. And welcome to the Frontline Q3 2009 Results Presentation. Today's conference is being recorded. At this time, I would like to hand the conference over to Jens Martin Jensen. Please go ahead, sir.

Good morning and good afternoon. And happy Thanksgiving to our American listeners. Welcome to our Q3 presentation. Q3 was a very difficult quarter. And unfortunately, we came out with a loss. I think there is light at the end of the tunnel. And we are seeing more positive signs going forward.

The program for this presentation will be that our CFO Inger will go through the major transaction and highlights in Q3, thereafter look toward the financial review. Then I will explain a little bit what happened marketwise in Q3 and how we see the outlook. And thereafter, there should be time for some questions and answers. So, Inger, if you could start the presentation, thank you.

Thanks, Jens. And good morning and good afternoon to you, ladies and gentlemen. I will quickly (inaudible - background noise) the highlights and financial review in the third quarter 2009 together with a run-through of the new building program.

Moving to slide four, in July 2009, Frontline agreed with Ship Finance to terminate long-term charter party for the single hull VLCC Front Duchess and received a compensation payment of approximately $2.4 million in October.

In November 2009, Frontline entered into an agreement to time charter out the OBO carrier Front Striver for a period of at least five months at the time charter rate of $40,000 per day.

Early November 2009, we redelivered two of the five Suezmax tankers chartered in from Eiger and expect to redeliver two more vessels in December 2009 and the remaining vessel in the first quarter of 2010.

Moving to slide five, Frontline reports a net loss of $5.6 million, equivalent to a loss per share of $0.07 in the third quarter of 2009. Last time Frontline made a loss was in the third quarter 2002. Despite the loss, it's positive to note that Frontline also this quarter has outperformed the market and competitors.

We booked a gain of $3 million on the termination of the lease for Front Duchess. And excluding this gain, we report a loss of $8.7 million, equivalent to loss per share of $0.11 in the third quarter. On this basis of this, we announced a dividend of $0.15 per share for the third quarter. Frontline reports net income of $98.8 million and earnings per share of $1.27 for the nine months ended September 30, 2009.

Moving to slide six, net income is $36 million lower than in the second quarter of 2009. The decrease can mainly be explained by, firstly, a reduction in time charter equivalents in the third quarter compared to the second quarter, which has led to a reduction in income on the time charter basis by $45 million.

Secondly, the profit share and payable to Ship Finance has decreased in the quarter with $3 million. Thirdly, ship operating expenses increased by $2 million compared with the preceding quarter, primarily as a result of increased dry docking costs as one additional vessel dry docked in the third quarter compared to the second quarter.

Then lastly, charter hire expenses have decreased by $7 million in the third quarter compared to the second quarter due to the weaker spot market, which has resulted in reduced expenses on floating rate charters and profit share payments on two vessels.

Then moving to slide seven, the VLCC fleet earned in the spot market, approximately $26,800 per day for doubles and $20,000 per day for singles, with an average spot earning of $26,300 per day. The average for the whole fleet was about $32,100 per day in the quarter. That included the contract vessel.

The Suezmax fleet earned in the Gemini pool $14,866 per day. As a consequence of that, some of our Suezmax vessels traded outside the pool at a lower TC rate. We earn on average in the spot market approximately $12,800 per day for doubles and a negative $2,200 per day for singles with an average of spot earnings of $12,100 per day. And the average for the whole fleet was about $15,900 per day in the quarter.

Only Front Voyager traded in the spot single hull segment. And the negative rate is due to a negative adjustment from the second quarter in addition to the vessel being unfixed at September 30th. The OBOs earned $43,000 per day in the quarter. And the TC numbers show that Frontline this quarter has traded better than market indexed on competitors with respect to the VLCC fleet and also for Suezmax vessels in the Gemini pool.

Moving to slide eight, we have dry docked five vessels in the third quarter 2009, which is one more than in the second quarter. As you can see from the slide, we have average OpEx for the fleet of approximately $10,200 per day in the third quarter compared to approximately $10,000 per day in the second quarter. OpEx and (inaudible) day have increased compared to the second quarter as a consequence of more dry dockings in the quarter. And we expect to dry dock four vessels in the fourth quarter of 2009.

Moving to slide nine, the total balance sheet is approximately $100 million lower than in the second quarter of 2009. Main items explaining the changes are short-term restricted cash has increased with $51 million. And long-term restricted cash has reduced with $80 million, mainly due to that one tax lein in ITCL is due in third quarter 2010.

(inaudible) vessels are reduced with $61 million as a consequence of depreciation. And (inaudible) new buildings is increased with payments of installments made in the third quarter and capitalization of interest expenses.

Short-term and long-term part of long-term debt is reduced with $9 million as a consequence of the net repayment of long-term debt in the quarter. Obligations on the capital leases has decreased [with just $6 million] due to repayment in the quarter, termination of the lease on Front Duchess, and FX related to tax lease in other sales.

Other sale is included in the balance sheet with a total of $568 million of debts and obligations on the capital lease. Debt related to three of the (inaudible) Suezmax vessels are not consolidated in the balance sheet, which is just $7 million.

Moving to slide ten, the cash cost breakeven rates are approximately $32,900 per day for VLCCs, $27,100 per day for Suezmaxes, and $26,100 for OBOs. The cash cost breakeven for VLCCs and Suezmax have increased from previous quarter as a result of higher expected dry docking costs and dry docking costs carried over from the third quarter in addition to maintenance projects on vessels.

These rates are the daily rates our vessels must earn to cover budgeted operating costs, estimated interest expense, scheduled loan principle repayments, pay with hire, and corporate overhead costs. These [variable] rates do not take into account capital expenditures or loan value and repayment of maturities.

Furthermore M/T Kensington and M/T Hampstead, the (inaudible) Genmar vessels chartered in, and the two vessels on (inaudible) charter are not being treated in the cash cost breakeven rates.

Moving to slide 11 and 12, the total number of vessels in Frontline's new building program after cancellations and restructuring is four Suezmax tankers and six VLCCs, which constitutes a total contractual cost of $997 million compared with $1.033 billion as of June the 30th, 2009. Out of the total, the financial exposure on two of the VLCCS of $252 million can be limited to the $54 million already paid in installments.

As of September the 30th, installments of $364 million have been paid on the new buildings compared with $353 million at the end of the second quarter. Remaining installments to be paid for the new buildings amount to $435 million with expected payments of approximately $92 million, $254 million, and $19 million in 2009, '10, and '11, respectively. In addition, we have a predelivery financing of $52 million, which is due over the next three quarters.

Moving to slide 13, the Company has established long-term pre- and post-delivery in new building financing, representing 80% of the contractual cost of four of the new buildings being built at Rongsheng and two of the new buildings being build at Waigaoqiao shipyard. As of September 30th, $230 million have been drawn down on this financing. And we expect to draw further $162 million distributed between 2009 and '10.

In the second quarter, we established long-term pre- and post- delivery in new buildings, representing 70% of the contractual cost of the last two new buildings being built at Waigaoqiao. And as of September the 30th, $44 million is outstanding on this facility.

The four VLCCs being built at Jinhaiwan shipyard are the only vessels in our new building program which are current unfinanced. These vessels will not be delivered until the second half of 2011 and the first half of 2012.

We have received indications of obtainable financing in today's credit market for the unfinanced new buildings, amounting to $65 million per vessel. Based on secured committed financing and indications of financing for the two unfinanced VLCCs, the net required equity investment in the new building program has produced approximately $94 million.

Moving to slide 14, in this graph, we have shown the installments to be paid under the new building contracts and short-term loans related to the new building contracts in the different years and with a total of $488 million in the light blue column. The dark blue column includes established financing, the indicated financing obtainable for the new building contracts not yet financed, and the fixed contract revenues above cash cost breakeven rates in different years with a total of $585 million.

The graphs show that we have $97 million more in financing from the contract coverage above breakeven base than necessary to finance the total CapEx, assuming that the spot vessels can earn their cash cost breakeven rates.

The minimum spot rates for the spot vessels, if they include the extra financing from the contract vessels, are approximately $30,000 per day and $25,000 per day. If the spot rates are above these minimum rates, the Company will generate free cash available for dividends.

Moving to slide 15 and 16, number of vessels in the Frontline fleet is 83 vessels, including the vessels on commercial management and the ITCL vessels, and is compounded by 39 double hull VLCCs, six single hull VLCCs, one single hull Suezmax, 29 double hull Suezmaxes, and eight OBOs. We have contract coverage of 39% in 2009 and 25% in 2010.

In addition to the fixed rate contracted coverage, we have also an additional 16% contracted coverage on floating income in 2009 and 9% in 2010. And the average net TC rate for the total fleet is about 42,000 per day in 2009 and 46,700 per day in 2010. With this, I'll give the word to Jens again.

Thank you, Inger. We are now on slide number 17. As mentioned, the third quarter was a difficult quarter. But we came out relatively well on the VLCCs. But the main contributor to our loss in the quarter was the chartering five Suezmaxes.

As always, the importance of balancing the fleet east versus west was evident in our better results in Q3 compared to our benchmark, compared to [showed that] Clarksons reported average earnings for VLCCs at around $23,500 per day and Suezmaxes at around $13,200. But actually we saw fluctuations from basically zero to $40,000 in the quarter.

Positive signs in the quarter were slower fleet growth due to delays, the new building program, and scrapping and conversion picked up as we had predicted in the second quarter but still at a relatively slow pace. 50 ships, VLCCs, remain in storage.

Negative factors, if we can say that, was our virtually no weather or port delays. This we have finally seen in this quarter, mainly in the Black Sea. We have very high and fluctuating bunker prices, still single hull tank has been used. But now the pressure is on as we will talk about a little bit later. And then -- sorry to say it again -- some weak owners out there who do not know how to calculate properly it seems like.

We go now to slide 18. The VLCC order book--nothing new has been ordered in the quarter. And as you can see, there's still around 90 single hull VLCCs in the fleet. If whatever things look like, there will be a phase out next year, then we will actually come out 2010 with a negative lead growth. Should some of the single hull ships manage to trade into 2011, you will still see a very limited fleet growth in '10 and '11.

We are now on slide 19. The Suezmax order book, we do not have the same single hull situation as we do on the VLCCs. But mainly about one-third of the Suezmaxes are being built at greenfield yards. And we have seen huge delays so far. And we expect further delays and maybe cancellations in this order book. So we will also see a smaller fleet growth than predicted.

Slide 20, new building prices -- nothing fresh has been ordered. I would estimate new building prices today for VLCCs to be around $95 million and around $62 million for Suezmaxes. Time charter market today for three years for VLCC is around $35,000 per day and around $25,000 a day for Suezmaxes.

Slide 21, here we have put some numbers down looking at the VLCC order book a bit more in detail. There's 184 ships on order, about 50% of the VLCC order book at order prices in excess of 130 million.

If you look at the present new building prices of around $95 million and what seems to be the consensus of available financing, it's $60 million. And then the question is -- where would the rest of the money come from? And how many ships will actually be delivered? I think there's interesting times ahead here.

Slide 22, not to spend too much time on that, but we have seen increased trading difficulties for the single hull tankers. And more ship sites have been scrapped. We have seen an increased stronger dry bulk market, which has been leading to dry bulk conversions. And finally, the scrap prices have picked up a little bit. So we expect more ships to be scrapped soon.

Now we're at the outlook page on page 23. So how do we see the situation at Frontline? As I started out saying, Q3 was a very difficult quarter. I think we are coming out of the tunnel. And we see light at the end of the tunnel. We are looking at a potential negative fleet growth for VLCC next year. We're looking at further cancellation and delays across VLCCs and Suezmaxes. And of course, the single hull story is not a question of if. It's just a question of when it will be (inaudible).

At the same time, increased oil demand is being put forward. It's being stepped up at around 2 million barrels per day. You'll see increase in OPEC production. And of course, China is still storming ahead with 15% crude oil import increase year on year. At the same time, we have seen decreases in production in the near sea market, which will result in longer ton-mile.

So how are we prepared to tackle this? We have not spent much time talking about cost cutting in Frontline because we don't have to. We've always been very lean operating. And we are well prepared to tackle the market with our low administration costs. We have redelivered or in the process of redelivering some of the expensive charter-in units.

The five Suezmaxes we have had on charter, we have so far lost around $29 million year to date. Two of the ships have been redelivered, as Inger mentioned. And we're in a process of redelivering the rest. We have no reorganized our new building program. Our exposure is limited.

And finally, we have extended some of the ships we have had on charter at lower rates, whereby we have reduced our breakeven rates. So I think we are ready to tackle the coming strong [wind to] market. With that, we are ready to take your questions. Thank you.

(Operator Instructions). We'll now take the first question from [John Packer] from Jefferies. Please go ahead.

Good morning. You talk in your press release about ships in storage. And I've seen some published reports that show your ships in storage. Wondering if you can give us any color on the relative charter rate you receive on those relative to the average fleet charter rate. And also, should we think of those as having a lower daily operating expense when they're used in storage?

Well, we have a number of ships in storage, some shorter period, some longer period. There's quite a short redelivery time on some of the storage. So we cannot reduce the actual operating cost on these ships. We have to have them fully manned, so to speak. We have ships in storage anywhere from around 30,000 to 50,000. So that's the spread. I would say the storage rate right now for in the market is probably high 20s, around 30,000 per day.

Okay. Thank you very much. That's all I have.

Thank you.

We'll now take our next question from [Michael Weber] from Deutsche Bank.

Hey, good morning, guys. How are you?

Morning.

Morning.

Morning. Just quick questions -- you talked about the possibility of I guess negative fleet growth next year. And I'm assuming that that's baking a pretty high compliance number with the single hull phase out. I guess in general, I mean, what do you guys think single hull utilization is right now and I guess inclusive and then exclusive of storage?

And as we see -- how do you think that 2010 phase out is going to actually function throughout the balances next year? And is it going to take six to nine months to get up to the compliance rate that you guys are using in your internal models? Or is this going to be more of a lengthy process?

I would say the utilization of the single hull fleet now is around 20%. But if you saw earlier this week, it meant that the market was going up, immediately for single hull ships was fixed. So it would be quite good to get rid of the older single hull ships from the market.

If you look at our slide on page 18, actually the last quarter we had only 70 ships being phased out next year. We believe we can spin over into 2011. This quarter, we have adopted the figures from firms who believe there will be almost a full phase out next year. We think also there will be a phase out next year on most of the trading ships.

Okay. And I guess that 20% utilization number, is that -- are those -- do you still have single hulls bidding for business? Are they still impacting I guess the --

That's an impact in the business. You see Thailand, Korea is, of course, the biggest market for the single hull ships. And they're being fixed on a continuous basis.

Okay. All right. Real quick then, you guys have talked a little bit about the potential leverage available for you guys to finance I guess the remaining orders in your order book. In general, what kind of leverage is available to the average owner right now and at VL rates or VL prices that are below $100 million certainly now? I mean, are you guys buyers at current levels?

Like we talked about in the presentation, I think a more general level of financing for VLCC I would say is $60 million for a new building VLCC. So -- and what we stated was that we had indications of $65 million. So it's more or less in the same area.

Right. But looking at that, right, I mean, it shows -- I mean, that's about 70% leverage for the average owner. And then if I look at the cost bases on your old new build, it's $60 million. I mean, that's about 50% leverage. So I'm just trying to get a sense of there and whether, I mean, you're still finding the market attractive at the current prices and then whether or not you're likely to see some more downside.

I'm not sure I understood your question. Could you please repeat?

In general, just--I guess maybe to simplify, given where asset values are, are you guys buyers at current levels? Or do you still think you need to see some more downside before you would reenter the S&P in the new build environ?

We right now see more upside in (inaudible) from charter. We have just extended three, which we mention in the press release. And we're taking one more at below $30,000 a day. So we think it's more attractive to charter than to buy right now.

Okay. All right. That's all I had. (inaudible).

Thank you.

Thanks.

Next question comes from Stephen Williams from Simmons. Please go ahead.

Yes, good afternoon. I guess you mentioned the collapse in the new build VLCC price. And that's part of the reason why it might be difficult for people who ordered at the top of the market to get the financing to complete these vessels. At what point do the yards just completely renegotiate the price, even on existing contracts and say we will build this for $100 million today because that's better than seeing you cancel?

It's difficult to say. I can say that probably a lot of discussions ongoing right now between shipyards and ship owners. Some owners, we have heard some grief considering walking away from contracts. They've ordered in the 150s and leaving the first 20% installment on the table. So there could be some discussions going on there. I can't really say what the shipyards will do. Of course, the big shipyards have, of course, the big container orders as well. So I'm sure there's a few outstandings that will have to fall in line.

Okay. I'm just trying to get a sense for whether these vessels really won't be built. Or is it always better for the yard to eventually cut the price and still build the vessel, which doesn't help the fleet outlook?

I don't think the shipyards' financial situation is that strong either. So I don't think they will just build on pure speculation. I can't see that happening.

Right. Okay. Thank you.

(Operator Instructions). We'll now take the next question from Ole Stenhagen from SEB. Please go ahead.

Yes, hi. Could you explain a little bit more about those two VLCC contracts where you seem to have made a change? It seems to me that you now have the option for those two 2012 deliveries to walk away from what you've paid so far without having incurred any further obligation. Is that correct?

That's correct.

And there is no further payment giving you this. This is just an agreement you reached with the yard.

I think you described it right. It's an option which we have. And of course, an option is an option. It, of course, depends on what will happen going forward. And we don't have to do anything about that option now. It's an option we have. And we have agreed and discussed with the yard. That's correct.

Okay. Thank you.

Thank you.

(Operator Instructions). As there are no further questions, I'd like to hand the call back over to Mr. Jensen for any additional or closing remarks.

I'd like to say thank you for listening and dialing in. And we're looking forward to a strong winter market and hopefully 2010. I'd like to say thank you to everybody in Frontline for I would say difficult but hard work in the quarter we have just seen. Thank you.

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