Frontline Plc (FRO) 2013 Q1 法說會逐字稿

Good day and welcome to Q1 2013 Frontline Limited earnings conference call. Today's conference is being recorded. And at this time I would like to turn the conference over to Mr. Jens Martin Jensen. Please go ahead, sir.

Thank you. Good morning, good afternoon and welcome to our Q1 presentation.

We unfortunately have a little technical glitch, so you will have to change the slides on your own individual computers. Anyway, we'll go through our usual program for the presentation, with Inger going through the Q1 highlights and main transactions, financial review of the quarter and an update of our small newbuilding program. After that, I will follow up with some market comments and some comments on the present market situation.

If you could start, Inger. Thank you.

Yes. Thanks, Jens, and good morning and good afternoon, ladies and gentlemen.

Moving then to slide four, highlights and transactions. In the first quarter, Frontline has continued to terminate and redeliver older and non-core vessels. The charter party for the single hull Titan Aries was terminated in January 2013 and a gain of $7.6m was recognized in the first quarter of 2013. Also, the charter party for the Suezmax tanker Front Pride was terminated in February 2013 and we made a net compensation payment to Ship Finance of $2.1m for the early termination of the charter party.

In January, Frontline paid $6m for 1.143m shares in a private placement by Frontline 2012. And also, the last item here is at a Special General Meeting held on May 8, 2013, our shareholders approved a decrease in the par value of our ordinary shares from $2.50 to $1 per share, and that was effective May 14, 2013.

Then, moving to slide five, financial highlights. This quarter, Frontline reported a net loss of $18.8m, equivalent to a loss per share of $0.24. This compares with a net loss of $16.6m and a loss per share of $0.21 for the preceding quarter. The loss includes a gain of $7.6m on the termination of the charter party for the single hull VLCC Titan Aries, a deferred gain of $1.8m relating to the sale and leaseback of the VLCC double hull Eagle, and again on the dilution of our ownership in Frontline 2012 of $5.2m.

Then, moving to slide six, income statement. Net loss excluding gains in the first quarter of 2013 is about $32m, which is $3m worse than in the fourth quarter of 2012. And this decrease can mainly be explained by, first of all, that the income on time charter basis was about $22m worse this quarter than it was in the fourth quarter, and that is due to a decrease in TCE per day in this quarter. Contingent rental expense decreased $12.3m this quarter compared with the fourth quarter, and that again is due to the decrease in time charter earnings per day in this quarter.

Ship operating expenses decreased by $2.3m (sic - see press release "$0.4m") compared with the preceding quarter, due to both a decrease in running costs and also a decrease in drydocking costs. Charter hire expenses decreased by $2.4m compared with the preceding quarter, primarily as a result of the redelivery of vessels, which is Gulf Eyadah. Depreciation decreased by $2m due to redelivery of vessels. And otherwise, minor changes to other items this quarter.

Then, moving to slide seven, income on time charter basis. Frontline's double hull VLCC fleet earned $14,600 per day in the first quarter, and this compares with $18,500 per day in the fourth quarter of 2012. The average for the whole VLCC fleet was about $17,000 per day in this quarter, compared with $19,300 per day in the previous quarter.

With respect to the Suezmax fleet, they earned $14,500 per day in this quarter compared with $14,000 in the previous quarter. The OBOs earned $13,300 per day in this quarter compared with $35,100 per day in the previous quarter, as a consequence of the lease terminations made.

The time charter -- the TCE number this quarter was disappointing with respect to the VLCC segment and satisfactory in the Suezmax segment, compared to both peers and market.

Moving then to slide eight, ship operating expenses and off-hire. We had, on the average, OpEx for the fleet of approximately $9,900 per day in the first quarter compared to approximately $9,700 per day in the previous quarter. We drydocked one VLCC in the first quarter, same as in the fourth quarter, as you can see from the graph on the upper right-hand side of the slide.

As you can see from the graph on the lower right-hand side of the slide, off-hire days were 157 days in the first quarter, compared with 42 days in the fourth quarter 2012. So, although we drydocked only one vessel in the first quarter, we commenced drydocking for three more vessels in the first quarter and the total number off-hire days related to docking was 134 days. We expect to drydock two VLCC vessels and one Suezmax in the second quarter of 2013, in addition to complete the drydock for the VLCC drydock in the first quarter.

Then, moving to slide nine, balance sheet. The total balance sheet end March 31 is approximately $100m less than it was at the end of December 31, 2012. The restricted cash has decreased by $17m due to a net outflow after receipt of charter hire and interest on principle paid on the Windsor and Golden State bonds due in the first quarter. Other current assets decreased by $40.5m, mainly due to the decrease in voyages in progress and inventories.

Newbuildings increased by $700,000, due to capitalized interest and newbuilding supervision fees. Vessels and equipment decreased by $4.7m, which relates to depreciation, and vessel and equipment under capital lease decreased by $24.7m, relating to depreciation and the termination of the lease on Front Pride.

Total debt decreased by $5.7m, relating to loan repayment. And then the capital lease obligation decreased by $18m, of which $5.1m relates to termination of Front Pride. Other current liabilities decreased by $63m, of which $52m relates to deduction in related party balances, which is the payment of cash to Ship Finance.

Moving then to slide 10, cash cost breakeven. The estimated average cash cost breakeven rates for 2013, or the remainder of 2013, are approximately $25,500 per day for VLCCs and $18,500 per day for Suezmaxes. These rates are the daily rates that our vessels must earn to cover budgeted operating cost, estimated interest expense, bare boat hire and corporate overhead cost. The breakeven rate excludes vessels on short-term time charter in, CapEx and ITCL vessels.

Moving then to slide 11, newbuilding overview. As per end March 2013, Frontline's newbuilding program comprises of two Suezmax tankers and the Company was committed to make newbuilding installments of approximately $88m, with expected payment of $50m in 2013 and $37.7m in $2014.

Then, moving to slide 12 and 13, Frontline fleet. The number of vessels currently in the Frontline fleet, 48 vessels, including vessels on commercial management and ITCL vessels, and is compounded by 32 double hull VLCCs and 16 double hull Suezmaxes. We have contract coverage of 6% on average in 2013 and 3% on average in 2014. The average net TC rate for the total fleet is about $39,900 per day in 2013 and $40,400 per day in 2014.

And with this, I leave the word to Jens again.

Thank you, Inger. We are now at slide 14. Basically, what was built up rate wise during the last quarter of 2012 was destroyed in early January by seemingly a few owners who pressed the panic button, and the rate in the quarter was quickly down to around operating cost levels. On a relative basis, the Suezmax market and activity held up.

If you look at slide 15, the VLCC fleet, we are now in the last year with a large number of VLCCs to be delivered. A positive is so far only a very few VLCC orders have been placed, and that's only related to Chinese owners at Chinese shipyards. Despite very dismal earnings, very few VLCCs are being scrapped.

Slide 16, an overview of the Suezmax fleet. Also in the Suezmax segment we're in the last year of a huge order book. However, again, despite a relative bad market for Suezmaxes, very few ships have been sold for scrap. The pace of scrapping for both VLCCs and Suezmaxes must improve; otherwise, the fleet will continue to be imbalanced.

Slide 17, newbuilding prices and time charter market. We estimate the new building prices for a good specification VLCC to be in the region of $85m and $55m for a Suezmax tanker, depending on the actual shipyard. Newbuilding prices seem to have bottomed out.

Time charter rates; on paper, a three-year VLCC time charter rate is around $25,000 per day, and we estimate the rate for three-year time charter on Suezmaxes to be in the region of $20,000 per day. There is very limited time charter activity at present.

Slide 18, outlook. Generally, the market is tough. We have seen a spot market close to operating cost levels and secondhand ship values have continued to fall. That toxic combination is starting to take a toll and ships are now being arrested by financing banks. We are seeing improvement in the spot market now, with the increased activity of cargoes from the Persian Gulf as the main driver. As I mentioned earlier, we are in the last year with large newbuilding deliveries, but scrapping must pick up.

Frontline, we have continued our strategy of selling older vessels from the fleet and redelivering charter and tonnage. As Inger mentioned, our VLCC earnings so far have been weak, and instead of being the market leader forcing the spot rates down, we have taken a lot of commercial waiting time. The market clearly lacks direction and leadership, and without that this market will not change for the better in the short term.

Suezmax -- in the Suezmax segment, our earnings on a relative scale was in line with the market. Unless the spot market improves, our cash position is deteriorating rapidly. It will be very interesting times ahead, I think, for all tanker owners.

With that, I think we would like to take your questions. Thank you.

(Operator Instructions). We will take our first question from Jon Chappell of Evercore Partners. Please go ahead. Your line is now open.

Thank you. Good afternoon, guys.

Hi.

Good afternoon.

Inger, you mentioned in the Annual General Meeting the decrease in the par value of the shares. Can you just talk about why that was done? It was a new process to me.

Yes. Well, according to Bermuda law, shares cannot be issued at below par value. And in order then for the Company to provide the Company with the ability to issue additional shares, we suggested then the reduction in par value to the shareholders, which then was approved then at the shareholder meeting and was effective May 14.

Okay. That makes sense. You mentioned in the press release that you may need to issue equity or sell assets if the market doesn't recover, or then a potential restructuring. Given, Jens, your outlook that the market's probably not going to get better any time soon, relying on scrapping which isn't happening to the extent that you would think, given the rates, what's the timing of starting to move forward on any of those options? You mentioned some vessel sales, but have you thought about the timing of issuing equity or potentially discussions with your banks or your charterers for a further restructuring?

I just think we have to consider that as we move along, in a way. We have to just look at the opportunities we have and look at the market and see when you find the timing is right to do that.

Okay. Are there any vessels held for sale right now or any that are being marketed of your older fleet?

Well, I think we always have one or two ships out in the market to test the prices and see if the opportunities are there, so I would say at any given time we will always have one or two ships out for sale.

Okay. And then finally, really quickly, Inger, you mentioned that the three drydocks for the second quarter actually started in the first quarter. What's the anticipated off-hire time in the second quarter for those drydocks?

Well, I think it would be more in line with what you had as the off-hire days in the first quarter, in a way.

Okay. Thanks. Thanks, Inger and Jens.

Thank you.

Thank you.

Our next question comes from Fotis Giannakoulis of Morgan Stanley. Please go ahead. Your line is now open.

Yes. Hi, and thank you. You mentioned about the refinancing and the maturity of the convert. How shall we think of this maturity and what are the different alternatives that the Company has in relation to this convert?

All the sorts of alternatives, of course, that everyone has with relation to such a financial instrument. So I guess you shouldn't think differently upon this. That it has a maturity in April 2015, that's for sure. And for the time being we are paying as we are paying interest on the convertible. That's what we're doing. And we just have to see what we would like to do or what kind of opportunities or considerations we will make going forward on that.

Okay. Thank you. And I just want to ask if you had any discussions with Ship Finance in relation to the lease payments. Have you been in discussions right now? And if not, when do you think that such a discussion might begin?

We have not had any discussions on that. I think we're looking at the market situation and we're trying to see where we are going forward, but there have not been any discussions on that at present, no.

Okay. Thank you. And in relation to the market, can you give us your outlook? And what do you want to see in order for VLCC rates to recover? Do we have to dismiss completely 2013 in terms of market recovery, is this a 2014 event, or we might have some drivers that they can move rates for VLCC lower?

And also, if you can explain why the smaller vessels, Aframaxes, for example, they are performing better compared to VLCCs?

The market view, of course, so far -- or traditionally the first quarter used to be quite good, but unfortunately at the beginning of January it just completely came down. So I would say unless we see much more scrapping than what we have seen so far, the market is imbalanced. We still have a lot of ships being delivered. And despite increased activity lately, I think it will be a difficult year, 2013.

On the Suezmaxes and Aframaxes, there seems to be much more cross-trade opportunities. We see a lot of movements from the Mediterranean going east on Suezmaxes, which is of course adding a lot of tonne-mile. I think when the rates are so depressed, many traders or oil companies actually prefer to ship in smaller size and for inventory cost, and I think that's why we have seen relatively better earnings in the Aframax and the Suezmax market.

My last question is there's a lot of discussion about newbuilding vessels, that they have much lower fuel consumption. There is also strong support that these vessels they can earn $4,000 to $5,000 higher charter rate compared to conventional vessels. Can you give us your perspective about the size of the fuel savings of newbuilding vessels versus existing vessels? And do you have any concerns that existing vessels might become obsolete when newbuildings hit the water?

I think the VLCC -- the new designs of VLCCs, if you look at the high speed, service speed, 13.5 to 14 knots, you could have a potential saving of 30 tonnes per day compared to old VLCCs. But of course what we are seeing right now, everybody is slow steaming, or most owners are slow steaming down to 9, 10 knots. Then the saving is not so big on the modern ships.

I think positively, right now, even though newbuilding prices may be tempting, I think everybody's view is that the present markets do not support VLCC newbuildings. And equally, there's beginning to be more and more attractive second-hand transactions, which is maybe putting a bit of a damper on people ordering ships.

Thank you very much for your time.

Thank you.

Thank you.

Our next question comes from Isaac Arnsdorf of Bloomberg News. Please go ahead. Your line is now open.

Hi, Jens. You mentioned ships getting -- starting to be arrested by their financers and I was just wondering is that having any impact in the market, either from charterers or from a rates perspective?

What we have seen, that seems obviously correct. So some charterers will not touch certain ships where they know the owner has financial problems and the ships could be arrested. Some ships have been arrested but also some ships are in potential danger of doing that. So we are seeing that, which is of course helping the market a little bit.

About how many ships are we talking about?

I would probably say -- not that are actually arrested, but I would say the ships with potential financial problems, probably between 10 and 20 ships.

And what kind of problem does that present for traders or oil companies that need to move their oil around?

Well, less ships, higher rates, I guess is the easiest reply. But I guess everybody has some financial due diligence now before oil being shipped, so I think it's positive for owners of a good standing that this is actually happening. It should probably have happened before.

Thank you.

Thank you.

Our next question comes from Justin Yagerman of Deutsche Bank. Please go ahead. Your line is now open.

Hi. It's actually Josh on for Justin. Good afternoon.

Afternoon.

Good afternoon.

I just wanted to follow up on some of the newbuilding talk and maybe, I guess, discuss some of your current newbuilding program. You mentioned that you have payments due in both 2013 and 2014. Does that mean that one of the vessels will be taken this year and one next year?

Yes. As it looks now, one will be in the fourth quarter this year and the other one will be in the first quarter next year.

So is the current plan to still try and take delivery or should we expect to see maybe some of these contracts marketed as re-sales, or even the possibility for further maybe yard payment reductions or restructuring?

I think we intend to fulfill our obligation towards the shipyard. That's our intention. But I think it's too early yet to determine what we will end up doing with the ships.

And then, maybe touching back on the restructuring or, sorry, not the restructuring but on the potential for one going forward, I guess you said you weren't talking with Ship Finance or any of your charterers now to reduce rates. But given your weak market outlook for 2013 and the cash burn we saw in Q1, I guess my question is would it be easier to go to some of these guys now, while you still have a substantial amount of cash on your balance sheet, rather than waiting through this weak 2013 period where those balances are going to decline further?

It is a discussion we will probably need to have later in the year, what we do with these leases and what can be done. But like we mentioned before, we have not had that discussion yet.

Got it. Well, I appreciate the time. Thank you.

Thank you.

Thank you.

Our next question comes from Eirik Haavaldsen of Pareto Securities. Please go ahead. Your line is now open.

Hi. Thank you. I actually had my question answered, but can you maybe give us a bit more color on your performance in Q2 and whether you've been able to capture any of the recent uptick you've seen there in the market?

Of course, the uptick has basically only happened within the last week to 10 days, so it's kind of very tail end in the second quarter. It is of course very welcome that we have this boost, but it will not, unfortunately, assist the second quarter much. But of course, what is important is that the market continues at this level, so we can build on it into the third quarter. That is what, of course, I guess everybody is hoping for right now.

Right. Thank you.

Thank you.

Thank you.

Our next question is from John Reardon of Crowell Weedon. Please go ahead.

Good afternoon. Could you talk about the recent boost? Was that just the luck of the draw, or is there something in -- what's your opinion of what's going on? It's been impressive.

It's been very impressive, actually, and I wouldn't say surprising. I think it was about to boost -- I think the VLCC fleet has been quite spread out. A lot of ships have been ballasting into the Atlantic and taking oil there, so there's suddenly a shortage of ships in the Persian Gulf. But we're also seeing quite an increased activity from ships loading for China. Apparently there's some haulage problem in China and there seems to be ships stuck outside Chinese ports congesting, so that could be one of the reasons also why suddenly we have seen extra oil being moved. But there's definitely much more activity.

And as a follow-up, could you talk about the US oil shale production? And what I mean by that is originally a lot of people looked at that and said, oh boy, that's bad for the tankers. But now I'm reading some things where some of the traditional suppliers to the US, like Nigeria and Venezuela, are now having to ship their product farther afield, which is helping on a revenue tonne basis -- mile basis. Is that correct or am I incorrect?

There has actually been an increase in the tonne-mile over the last 12 months. Unfortunately, the fleet increase has been larger. But you are right, there seems to be much more oil moving from the Caribbean out to the Far East and also from West Africa, so that has helped the tonne-mile situation. But you had a tonne-mile plus of about 2%, unfortunately, as we have 8%, 9% fleet growth over the last two years including this one, so there's clearly an imbalance there.

Thank you very much.

Thank you.

Thank you.

Our next question is from Michael Webber of Wells Fargo. Please go ahead. Your line is now open.

Good morning, guys. How are you?

Morning.

Good morning.

I just wanted to go back and touch on the liquidity question again and relate it to the newbuilds. You guys have said in the release and on the call that you guys are committed to the newbuild commitments, but if recruiting is going to be a long-term issue, you're cautious on the market and a market recovery is what you need to avoid a restructuring and you're calling out the 2015 notes as a fulcrum security, why are you still committed to those newbuild commitments?

Well, it's not easy to get out of a shipbuilding contract; otherwise, I'm sure we'd have looked at that. But I think, of course, going forward, we will see when the ships are delivering and of course we could always resell them in the market. It may have to be done at a loss. But it depends, of course, also what kind of finance we can establish. So that's something we will look at going forward, but we could end up maybe reselling the ships.

Okay. All right. Thoughts around new equity, and you touched on this a bit earlier. I'm just curious, given what's most likely a negative NAV, normal math goes out the window, when you think about potentially doing something on the equity side, I'm assuming it's a deal size that matters is what you would look at, what number do you think would be enough to be meaningful, or I guess below what floor is it not a viable option?

What kind of number -- what are you thinking about? Number with respect to what?

Outside of -- relative value on a rate is out the window, considering that you've got a negative NAV, but if you think about basically what size rate is worthwhile for you all at this point, when you think about your liquidity, what would be the threshold that you would actually think about doing something in terms of what's available to you in the market?

It's much too premature, in a way, to start saying or to answering that sort of question. I think what we did now in the first period is to tell you, in a way, that if the market doesn't improve and we are not able to raise equity or sell assets, we might have difficulties. But we haven't really made any specific plans yet with respect to what you're asking.

Okay. No, no, no, that's fair. But these dynamics have been in place for a while, so I'm just curious as to when you guys think you would start taking a harder look at that?

It really depends -- as I said earlier, it really depends on the development in our market, in a way.

Got you. Okay. Just one more for me, on turnover. Jens, you talked about scrapping not meeting expectations and not being where it needs to be. If I look at it from a perspective of long-term charter rates getting down towards somewhere between OpEx and cash breakeven as an indicator that the long-term sentiment has really bottomed and that people are going to start scrapping, if you look at it that way, where do you think the rate is that we would need to see as an indication that scrapping will finally pick up, or are we already there and it just hasn't happened yet?

I think we are already there and we have been there almost for the last 12 months. So $10,000 a day operating costs, some of these ships have to be drydocked. So if you're having maybe over a year $12,000, $13,000 operating cost, we should have seen much more scrapping than we have seen now, but hopefully that will pick up.

Okay. All right. Thanks. That's all I've got. Thanks for the time, guys.

Thank you.

Our next question is from Greg Lewis of Credit Suisse. Please go ahead. Your line is now open.

Yes. Thank you and good afternoon.

Afternoon.

Good afternoon.

I guess my question -- I just want to circle back to the two newbuilding Suezmaxes that you have. Clearly there are some decisions that need to be made. But has one decision been thought about, and that would be maybe the decision to potentially convert those Suezmaxes, or not even convert them, maybe upgrade them into being product tankers? And if that has been done, how much roughly would that cost to upgrade that order to a Suezmax product tanker?

Of course we have thought about it, and normally these ships are actually fitted with gas oil when they come out of the yard. But the problem is you can of course convert them and you use them almost as a floating Suezmax product tanker; you can't really engage in the product tanker trade with them because they'll be too large for the product terminals or ports. So it's a possibility that can be done. You have to apply the full tank coating of these ships will probably be around $5m and you have to do some upgrading to some of their valves and so on, but it's around $5m upgrade.

Okay, guys. Hey, thank you very much.

Thank you.

Thank you.

Our next question is from David Beard of IBERIA. Please go ahead. Your line is now open.

Hi. Good afternoon.

Afternoon.

Good afternoon.

What are your thoughts relative to repurchasing your converts in the open market? Is it a question of the price of the bonds or whether you want to use cash to do that? Could you give us a little insight into that option?

I think we will have an opportunistic approach on that. We have bought back some converts at a previous point in time. However, we will of course continue just to see in the future whether we think that is the right thing to do. So, apart from that, I don't think we have any plan which is figured out, in a way.

Okay. Thank you.

Thank you.

(Operator Instructions). We have a follow-up question from John Reardon of Crowell Weedon. Please go ahead. Your line is now open.

Yes, just a quick follow-up. I seem to recall you have a significant shareholding in Frontline 2012, which is worth, I believe, somewhere between $70m and $80m. Any thoughts on liquidating that to raise some money?

Again, as we stated in the press release, these are of course options that we have with respect to selling assets going forward. So that needs to be taken into consideration going forward, when we consider the development.

Okay. Thank you.

Thank you.

Thank you.

(Operator Instructions). As we have no further questions at this time, I would like to hand back to our speaker for any closing or additional remarks.

I'd just like to say thank you all for listening and dialing in, and I would like to thank everybody in Frontline for their work and efforts in this difficult time. Thank you very much. Thank you.

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