Frontline Plc (FRO) 2012 Q4 法說會逐字稿

Thank you, good morning, good afternoon and welcome to our Q4 2012 presentation. We will follow our usual program for the presentation with Inger going through the Q4 highlights and main transactions, thereafter a financial review of the quarter and an update of our small newbuilding program. After that I will follow up with some market comments on what we saw in the fourth quarter and a bit on where the market is at present. So, Inger, if you could start, please.

Thank you and good morning and good afternoon, ladies and gentlemen. As Jens said, I will go through the highlights and the financial reviews in the fourth quarter 2012 and so far into the first quarter of 2013.

Moving then to slide 4, highlights and transactions. Frontline has continued to terminate and delever a number of older and non-core vessels in the fourth quarter -- the long-term charter parties for the OBO carriers Front Climber and Front Driver which were made in October and in November 2012 respectively.

The charter parties for the two single hull, VLCC Tyson Ocean and Titan Aires, were terminated in November 2012 and in January 2013 respectively. And again of $11.2 million was recognized in the first quarter and we expect to recognize a gain of (technical difficulty) $7.5 million in the first quarter of 2013 respectively.

In February 2013 Frontline agreed to terminate the long-term charter party for the Suezmax (technical difficulty) Front Pride. In December 2012 Frontline agreed to an early termination of the time charter out contracts on the two OBO carriers Front Viewer and Front Guider and received a compensation for loss of hire of $35 million gross.

Frontline also agreed to terminate the long-term charter parties for these two vessels and paid $23.5 million to (inaudible) as compensation for the early termination of these charters. In December 2012 Frontline re-delivered the charterer-in VLCC Gulf Eyadah to its owner.

Moving then to slide 5, financial highlights. Frontline [re-posted] a net loss of $16.9 million equivalent to loss per share of $0.21 in the fourth quarter 2012. This compares with a net loss attributable to the Company of $49 million and a loss per share of $0.63 in the preceding quarter. For the full year 2012 Frontline announced a net loss of $82.8 million equivalent to a loss per share of $1.06.

Moving then to slide 6, income statement. Net loss excluding gains and (inaudible) and impairment loss in the fourth quarter of 2012 is about $23 million better than in the third quarter of 2012. And this increase can mainly be explained by the following items.

First of all income on time charter basis was about $14 million higher this quarter than in the third quarter, and that was mainly due to an increase in TCE per day in the fourth quarter. Contingent rental expense or cash (inaudible) increased about $2 million this quarter compared with the third quarter due to the increase in time charter driven (inaudible) per day in this quarter.

Ship operating expenses decreased by $7.4 million compared with the preceding quarter due to a decrease in [renting] costs and also a decrease in dry docking costs of $4.8 million. Charter hire expenses decreased by $2.5 million compared with the preceding quarter primarily as a result of the re-delivery of vessels. Otherwise minor changes to other items this quarter.

Then moving to slide 7, income on time charter basis. Frontline's (inaudible) VLCC fleet earned $18,500 per day in the fourth-quarter compared with $13,300 per day in the third quarter. The average for the whole VLCC fleet was about $19,300 per day in the fourth quarter compared with $12,300 per day in the third quarter.

The Suezmax fleets earned $14,000 per day in the fourth quarter compared with $10,500 per day in the third quarter. And the OBOs earned $35,100 per day in this quarter compared with $33,700 per day in the previous quarter. TCE numbers show that Frontline this quarter has outperformed our peers both in the VLCC segment and in the Suezmax segment.

Now moving to slide 8, ship operating expenses/off-hire. We had average OpEx for the fleet of approximately $9,700 per day in the fourth quarter compared to approximately $11,800 per day in the previous quarter. The decrease is due to the increase in (inaudible) costs and dry docking costs as we drydocked only one VLCC vessel in the fourth quarter compared to four vessels in the third quarter, as you can see from the graph on the upper right hand side of this slide.

As you can see from the graph on the lower right hand side of the slide, off-hire days were 42 in the fourth quarter compared to 144 days in the third quarter. And we expect the drydock three VLCC vessels in the first quarter of 2013.

Then moving to slide 9, balance sheet. The total balance sheet ended December 31, 2012 is approximately $38 million less than at the end of the third quarter of 2012. There are no extraordinary movements in this quarter.

Moving then to slide 10, cash cost breakeven rate. Estimated average cash cost breakeven rates for 2013 are approximately $24,200 per day for VLCCs and $18,800 per day for Suezmaxes. These rates are daily rates our vessels must earn to cover budgeted operating costs, estimated interest expenses [payable to hire] and corporate overhead costs.

Moving then to slide 11, newbuilding overview. As for December 31, 2012 Frontline's newbuilding program comprised two Suezmax tankers and the Company was committed to make a newbuilding installment of $87.9 million with expected payments in 2013.

Moving then to slides 12 and 13, Frontline fleet. The number of vessels currently in the Frontline fleet is 48 vessels including vessels on commercial management and ITCL vessels and is compounded by 34 double hull VLCCs and 14 double hull Suezmaxes. We have contract coverage of 6% on average in 2013 and 3% on average in 2014. The average net VLCC rate for the total fleet is about $39,800 per day in 2013 and 40,400 per day in 2014. With this I hand over to Jens again.

Thank you, Inger. We are now at slide 14. The spot market finally picked up in the middle of the fourth quarter; unfortunately it did not last very long. Positive factors in the quarter were increased ton-mile, mainly strong Atlantic basin movements going into China and India.

And we finally saw some resistance from the ship owners. And otherwise there was increased activity with the use of winter season finally starting. As these numbers of older ships were sold to storage and conversion projects, but newbuilding deliveries still resulted in the fleet growth in the quarter.

Now we are at slides 15 and 16, the VLCC fleet orderbook. According to Fearnleys, 49 VLCCs were delivered in 2012 against (inaudible) orderbook of 56 vessels, still a large number of deliveries in the already exaggerated fleet. 47 Suezmax were delivered last year against (inaudible) orderbook of 66 vessels again according to Fearnleys.

I think the most positive to be said about the present orderbook is that 2013 is the last year of a large orderbook and we are moving into a more moderate fleet growth.

If you look a little bit about newbuilding prices and time charter rates on slide 17, we estimate the newbuilding prices for boat specification VLCCs to be in the region of 80 -- $80 million to $85 million depending on the actual yard. Mass ton, confirmed orders at a Chinese shipyard is $85 million for a domestic order. [Good spec] Suezmax newbuildings are priced in the $55 million range.

Time charter rates, again this is very much on paper -- the three-year VLCC time charter rate is around $25,000 per day and we estimate the rates for three years on Suezmaxes to be in the region of $20,000 per day. I think it is fair to say that there are very few time charters out there at these levels.

Slide 18, outlook -- a little bit about the market. January quite amazing; it took us and other ship owners six months to push this market up and this has been completed historic in the beginning of 2013 and we are now at spot rate of about $5,000 a day for VLCCs depending on the actual destination. This poor market is starting to take its toll and more ships are being mentioned as having technical difficulties and getting difficult to employ in the market because of this.

As mentioned earlier, this is the last year with a high amount of newbuilding deliveries both in the VLCC and Suezmax segment. However, despite this the growth in the fleet outpaces the ton-mile situation and only increased scrapping can turn this market around on a short-term and [immediate] basis.

For Frontline we have continued our strategy of selling older and non-core vessels from the fleet and re-delivering charter [in-tonnage]. We still have a few more older units we potentially would like to dispose of. We have continued to outperform our peers in the VLCC segment for the full year of 2012 which is positive, and we hope we can improve our performance in the Suezmax segment.

I think we can all say there will be very interesting times ahead for all the tanker owners. With that we are ready to take your questions. Thank you.

(Operator Instructions). Jon Chappell, Evercore Partners.

Jens, first question is on the Suezmax fleet. You had an interesting slide on page 7 of your performance and you compared it to the Orion pool and in the fourth quarter you significantly outperformed the pool. Was there anything specific that caused that outperformance for the first time this quarter? Was that a function of the fleet specifically, any timing issues, any regions that you are operating in?

We exited the Orion Suezmax pool during the fourth quarter last year and I guess you can say our timing of going out in that pool was fortunate as the market -- spot market picked up and of course that different positioning of the various vessels.

So I think it will be unfair to our ex-pool partners to say that we have completely outperformed them even though the figures show that, but it is probably more fair to look on a longer-term basis going ahead. But as I mentioned, I hope our performance on the Suezmaxes can improve and we can keep up the earnings.

Okay and you mentioned continuing to sell non-core assets and re-delivering chartered in. How many chartered in ships do you have remaining, non-SFL ships?

We had one VLCC which we can be easily (inaudible) the double hull DHT Eagle and then if the older non-core ships which we need to re-deliver. We have one OBO which Inger has already mentioned we have sold and that will be terminated end of March and then potentially some of the older Suezmaxes we will do that during the year.

Okay, so just the DHT Eagle chartered on the VLCC side. In the end of the press release you mentioned if the market doesn't improve by 2015 and without any equity the convertible bond may be at risk and you would have to do another restructuring. I know 2015 is a long way away, but what other kind of restructuring could you do outside of what you have already done?

Sorry, what (inaudible) restructuring -- what was the question (multiple speakers)?

Yes, what kinds of options remain for Frontline if you needed to restructure if the market doesn't recover? You have already kind of restructured all your charter agreements; you are selling the older ships, what is there left to do?

Well, I guess we would have to restructure again then. You can always do it twice.

Okay that kind of leads to my last question then which is what does Frontline Limited want to be? I mean Frontline 2012 is the growth company now; outside of the two Suezmax newbuilds there is no ship more modern than nine years old. Are you just hoping for a recovery and then a recovery is going to help the Company survive? Or how do you view this Company developing over the next couple years if the market remains weak?

I think like all tanker owners and [large] tankers, what we have been through the last three or four years is of course a massive orderbook which has been delivered into the market. Now we are finally starting to see the end of the tunnel in that and we are seeing a small number of ships being delivered. At the same time we believe and hope that some of the older ships will actually disappear from the market and, depending on the world economy, maybe there will be an uptick in demand.

So I think it is a question of trying to reduce the loss a little bit and hope for upswing in the spot market and keep the Company going (inaudible) for the other company which also has a different strategy in newbuildings and modern tonnage. But I think we would still like to consider ourselves we are the big fleet on the water and potentially can be able to consolidate the market which we clearly (technical difficulty).

Okay, thanks, Jens. Thanks, Inger.

Gregory Lewis, Credit Suisse.

I guess just following up with Jonathan's question, when we look at those newbuildings, and I guess they are scheduled for delivery at a certain point this year, is everything lined up so that we can take delivery of those two Suezmaxes in a smooth -- smoothly?

Well, like we mentioned, we only have two Suezmaxes as our orderbook and -- yes, (inaudible) being constructed and the delivery is sometime during second half of the year. I can't say so much more regarding that for the time being.

Okay, and are there any more installment payments or is this all upon delivery?

The majority of what we have given as on delivery, yes.

Okay, perfect. And then just, Inger, when I was walking through the revenue, I mean clearly it was a nice boost up. Is that primarily related to -- I mean rates were up a little bit sequentially, but when I think about it, I mean it was pretty much just that the receiving of that $35 million compensation payment that boosted it up? I am sorry if you mentioned it in your prepared remarks, it maybe just was going a little bit fast.

No, that isn't true. As you are saying, we have recorded the $35 million gross from termination of these leases in operating revenues. So (inaudible) boost the revenues this quarter. However, we also have of course then have costs related to termination of the vessels or the charters then, either in the form of a loss on the (inaudible) charters or in the form of an impairment loss on expected termination of charter. So the gain, if you can call it that, on the this transaction is for $[23] million as we have outlined in the press release.

(Multiple speakers) and you can see, which we mentioned a bit earlier, of course you will see the revenues for each segment, both the VLCC and Suezmaxes, of course are quite improved compared to the third quarter.

Absolutely, let's hope that Q1 is the same. Anyway, guys, thanks for the time.

(Operator Instructions). Eric Stavseth, Arctic Securities.

My question regards the new Suezmax newbuilds. You said you paid in $27 million on your balance sheet and you have remaining CapEx of $87.9 million, that makes a total of $115 million, but the original price to my recollection was $62.5 million per vessel. Have you been given a discount on the vessels?

We have restructured our position with the shipyard a little bit so that seems right.

Okay, thank you. Secondly, I am just noting that over the past -- or in January really, we noticed quite an up-tick in Chinese VLCC orders and well, both in 2011 and 2012 there were these worries about the Chinese coming in and ordering anywhere between 50 and 100 VLCCs. That hasn't happened, but it seems to me that they want to take more crude on Chinese keel. Is that something you are seeing in the market, that more of Chinese volumes are going on Chinese vessels?

Oh, yes, for sure. We I think five or six years ago the declared goal was that 50% of all crude oil going into China should be carried on own keel, and they are working towards that. VLCCs were ordered last year; it is not close to the 50 to 100 that was talked around. But I guess we have around 20 to 25 ships which have been ordered now.

I see it both as a desire to build up the fleet on Chinese keel, but it is also a tool to assist some of the shipyards which has not been able to attract orders last year. So I think it is a combination of aid to the yards and expanding their domestic fleet. So I don't know how many more ships will be (inaudible), but I am sure we will see a few more.

Okay, thank you.

[Randy Lakshman], [ODM Group].

A quick question regarding the termination of those OBOs was -- I know you reflected the revenue in the quarter. Was all the cash flow related to those compensation payments and the termination with Ship Financial, is that all reflected in the fourth quarter as well or is there going to be a cash flow impact in the first quarter?

No, everything is reflected in the fourth quarter.

Okay. Can you give us more detail as far as the timing of the new deliveries and the CapEx that you expect to spend?

As mentioned, on the level of newbuilding OBO, the remaining installment that we paid is around $88 million. And we expect the ships will be delivered during the second half of this year. I can't say more precise regarding delivery yet, but that is the facts as per today.

Okay, great. And then finally, just related to the OpEx -- fleet OpEx per day, can you provide some guidance as far as where you expect, on an OpEx per day basis where you expect 2013 to be or where your target is?

Well, of course our fleet is getting older, but at the same time we have managed to sell some of the older ships in the space of the OBOs which has traditionally always been higher operating costs. So we hope we can maintain at least the operating cost in 2013, which (inaudible) in 2012. In 2012 we had a quite a lot of drydockings, expensive drydockings. So I hope we can maintain or hopefully improve the operating cost a little bit this year.

Great, thanks for taking my questions.

Fotis Giannakoulis, Morgan Stanley.

I want to ask you how was the market in the first quarter the last couple of months? And what drove time charter rates and fixtures from the Middle East so much lower? And also if you can give us your view about the next three months, Motiva is back and there are some hopes that there are going to be some more flows from Middle East to the USA. Have you seen these fixtures taking place right now?

We start with your first question regarding what certainly drove the market. As I mentioned, it took us six months (inaudible) ship owners to build up this market which finally happened in the middle of November. And we had off course hoped that it would last well into the first quarter. Unfortunately some ship owners they had no clue how to run their business and they seem to just drop their rate.

And we believe the market is more tight. Of course it is quite strange to talk about a tight market when we are having VLCC earnings of about $5,000 a day. But with a bit of more knowledge and discipline we should have marginally been better by now.

I agree with you there is some hope for more long-haul transportation, it's basically the Motiva refinery is up and running again which of course will give much-needed (inaudible) west movements and we have seen of course both China and India have taken much more crude from mainly West Africa. That of course has hurt the Suezmaxes, but all long-haul Suezmax rate has developed.

So there are some positive signs, but of course we are still struggling with an oversupply of ships and that is where we of course need to be reduced or there should be some more let's say stamina from the ship owners.

So have you seen any of these fixtures from the Middle East going towards the US Gulf at this point?

Yes, we have seen it quite a lot. We're quite amazed that some owners still actually do at minus $5,000 to minus $6,000 a day. But I guess everybody has their own motives.

And in -- how is this explained? Do you think that many of the companies -- are they getting their Chapter 11 right now, they are underbidding the market? And do you believe that companies, that they have financial difficulties right now, they will continue to put pressure to time charter rates?

I guess each -- in all fairness each company has their own policy and I guess some owners think that it is better to make $5,000 a day instead of holding out and creating a better market platform. But I will not say it is because of the owners who are in a restructuring or chapter 11. But there seems to be some owners who are quite happy to go for rather low returns and I guess we all have our own strategies.

Okay, thank you very much for your time.

[Eric Havalson], Pareto.

I just have one, if you can elaborate a bit on your reported spot rates. You do report numbers significantly higher than some of your competitors. Is there anything we are not seeing there or --?

No, I think we always try to -- we are not afraid of taking commercial waiting time. We have seen that the market is going up or we believe the market is going up, we wait and then we wait for the rates to increase and then we go ahead. So I guess you could say that our market view was different or better than somebody else.

Of course what is also a big factor, even though I believe that most ship owners are doing it, is running at slower speeds, especially on the ballast leg and we (inaudible) do that extensively, but that's still different, some ship owners seem to proceed at higher speeds than we do. But I think disciplined slow steaming and maybe a different market view helped us a bit during last year.

Has that been sort of helping you in going into Q1 as well or --? Can you --?

It did in the beginning but the market has certainly changed. So I guess it depends a little -- we will see when the quarter ends and how we are faring compared to our competitors I guess. If you had ships take longer voyages end of last year we could potentially come out with a better result. But it is difficult to judge quarter to quarter but I would say on the VLCCs we did fairly well last year in relative terms.

Okay, thank you.

We have no further questions at this time.

well, I'd like to say thank you for everybody for dialing in and I would like to thank everybody at Frontline for their work and efforts during 2012 which was a difficult year. I think we can all hope better times ahead. Thank you.