Frontline Plc (FRO) 2013 Q4 法說會逐字稿

Good day and welcome to the Q4 2013 Frontline Ltd. earnings conference call. Today's conference call is being recorded. At this time I would like to turn the conference over to Jens Martin Jensen. Please go ahead, sir.

Thank you. Good morning, good afternoon, and welcome to our Q4 2013 presentation. We will follow our usual program for the presentation with Inger going through the highlights of the quarter and the main transactions. After that, our financial review of the quarter. And after that, finally, I'll make some comments on the market and some comments on the present market and our own situation. So, Inger, if you could start, please?

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

Moving down to slide 4 -- highlights and transactions. In October 2013 (inaudible) [finance] to terminate the long-term charter parties for the 1998 and the 1999 build VLCC, Front Champion and Golden Victory. And just [financing these] (inaudible) has sold these vessels to unrelated third parties.

In October 2013 Frontline entered into a private agreement to exchange $25 million of the Company's 4.5% convertible bonds for an aggregate of about 6.5 million shares and a cash payment of $2.25 million.

Frontline issued 1.2 million new shares in the fourth quarter under the ATM offering announced in June 2013. In January 2014, Frontline increased the amount that [may be based] from the ATM from up to $40 million to up to $100 million. And Frontline issued 8.8 million new shares under the ATM offering during January 2014.

Moving down to slide 5, Financial Highlights and slide 6, Income Statements. Frontline reports a net loss of $13 million, equivalent to a loss per share of $0.15 in the fourth quarter of 2013. This compares with a net loss of $36.4 million and a loss per share of $0.46 for the preceding quarter.

The net loss attributable to the Company in the fourth quarter includes a net gain of $13.8 million, which was recognized under Lease Terminations of related fees from Champion and Golden Victory.

Further, the net loss includes a loss of $12.7 million. This was recognized on the conversion of the $25 million of the Company's convertible bonds linked to cash and shares.

Net loss excluding then gains and losses in the fourth quarter was about $14 million compared with $29.6 million in the third quarter. The improved result from operation in the fourth quarter compared to the third quarter is mainly due to an increase in time charter rates in the fourth quarter compared to the previous quarter, which led to an increase in the sales on time charter basis by $11.1 million; and a decrease in shift operating expenses of $3.8 million compared to the third quarter, mainly due to a $1.5 million increase in [charter day] costs and also a decrease in running expenses following lease terminations and vessel redeliveries.

Moving down to slide 7, income on a time charter basis. Frontline's double hull VLCC fleet earned $21,600 per day in the fourth quarter compared to $13,900 per day in the third quarter. The average for the whole VLCC fleet was about $22,400 per day in the fourth quarter compared with $16,100 per day in the third quarter.

The suezmax fleet earned $12,900 per day in the fourth quarter compared with $12,400 per day in the third quarter.

Moving down to slide 8, chief operating expenses and off hires. The average OpEx for the fleet in the fourth quarter was approximately $9,000 per day. This compares to approximately $10,000 per day in the third quarter. We chartered (inaudible) in the fourth quarter compared with two vessels in the third 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 dates were 11 in the fourth quarter compared with 124 days in the third quarter as a consequence of less [charter days].

There were no scheduled dry dockings in the first quarter of 2014.

Moving down to slide 9, balance sheet. The total balance sheet ended December 31, 2013 is approximately $41 million less end September 30, 2013. And this is mainly explained by (inaudible) by $25 million mainly due to payments made to (inaudible) for the termination of Golden Victory and from Champion of about $800 million, payments of $2.25 million to the bondholders, and also from ordinary payment of capital leases.

In addition, we [took] the cash increase by $9.1 million, due to our annual loan and interest payments in (inaudible).

Vessels and Equipment and vessels under capital lease decreased by $23 million, which relates to quarterly depreciation. Long-term debt decreased by $25 million, following exchange of $25 million of the company's 4.5% convertible bonds and exit of about 6.5 million shares and a cash payment of $2.25 million. In addition, obligations under the capital leases decreased as a consequence of the lease terminations on Golden Victory and from Champion.

Otherwise, there were small changes to other balance sheet items this quarter.

Moving down to Slide 10, Cash Cost Breakeven. The estimated average cash cost breakeven rate for the remainder of 2014 are approximately $23,100 per day for the VLCC and $18,100 per day for the suezmaxes. These rates are the daily rates our vessels must earn to cover budgeted operating costs estimated into Expense, [payables] higher, and corporate overhead costs.

And these breakeven rates -- they exclude CapEx in our (inaudible) vessels.

Moving down to slide 11, newbuilding overview. As of December 31, 2013, Frontline's newbuilding program comprised two Suezmax tankers and the Company was committed to making a newbuilding installment of approximately $88 million to be paid in 2014.

Moving down to slide 12, the Frontline fleet -- the number of vessels in the Frontline fleet, currently it's 46 vessels, including the vessels we have on commercial management and also the ITCL vessels. It is compounded by 30 double hull VLCCs and 16 double hull Suezmaxes.

With this, I will go to Jens, again.

Thank you, Inger. Now we are on slide 13 -- Market Factors. I know it sounds strange to say when the average earnings for VLCCs only was around $15,000 to $16,000 a day for the whole of 2013. But the market during the second half of the year was a lot tighter than the results tell. And we finally saw that tightness in the market pave the way for a rate hike. By the end of November it was too late to save the quarter and the year overall, but it was a positive sign and a good start for 2014.

Ton mile has continued to increase and we expect this trend to continue. However, as I mentioned before, increasing ballast speeds by 2 knots is the same as a fleet increase of about 10%. So this is a very fine market balance.

We are now on slide 14, the VLCC fleet. The VLCC fleet looked a lot more interesting six months ago with a fairly balanced order book. However, approximately 50 VLCCs have been ordered since last summer, and especially during the last three months the order book is increasing again and scrapping has slowed down.

Suezmax fleet -- a very limited order book in the Suezmax segment. It's really only around 20 vessels at the real order book. However, and unfortunately, we expect this number to increase again if all the ongoing discussions taking place with the various shipyards are correct.

Now at slide number 16, newbuilding prices and rates -- newbuilding prices are increasing and recent orders for VLCCs suggest a price in the region of $97 million. We estimate newbuilding prices for Suezmaxes to be in the region of $67 million. Recent but limited timeshare activity with VLCCs, short term, is around $23,000 a day, which is a bit up and around $18,000 a day for Suezmaxes.

Now we are on slide 17 -- outlook. There's no doubt we have seen more activity in both the VLCC and Suezmax segments; i.e., there is more cover liftings and also increased ton mile situation. All positive developments, seen from a freight perspective. The negative factors we have seen is increased ballast speeds, which has increased the fleet supply and also the high newbuilding activity which we have seen lately.

Unfortunately, the slowdown in the LNG markets and, to some extent, on the offshore markets will likely lead to some of the major Korean shipyards will release [reserved] building space for 2016 and the VLCC order book could easily hit 100 ships by this summer.

The spot market is very volatile and it requires discipline to maintain margin at healthy levels. This is all ship owners' responsibility. Some are doing a better job than others. Frontline, ourselves, as mentioned before, we are now down to our core fleet with a minimum number of dry dockings this year. Our spot exposure has suddenly turned from a liability to a potential upside. We are continuing to monitor the situation, which is obviously very margin related. And we are looking for opportunities to both improve our financial situation and also outlook and position going forward.

I think with that we are ready for your questions. Thank you.

Thank you. (Operator Instructions). Justin Yagerman, Deutsche Bank.

So I wanted to ask a question to kind of try to encompass everything that's going on right now around breakeven rates, the current spot market and then your capital needs going forward.

So even though the spot market improved somewhat -- actually improved materially in Q4, I noticed that spot rates that you guys quoted in the press release are still below cash breakeven levels. I know some of that is timing, but basically what I'm trying to get to is, are you confident enough in these higher rates being sustainable that you are just willing to sit back and let that drive improved cash flow? Or are you still making plans to alleviate some of the debt burden through nonmarket means?

I think if I start with the rate question first -- of course we have seen the [market] increasing during the middle of the fourth quarter and definitely into this first quarter. So the market is in a profitable territory. Right now, if you look at breakeven rates and of course we all hope that the [margin] will be sustainable at this level. We expect some volatile months ahead, but I think our perception is that 2014 will be better than 2013, if I can say that.

I think regarding improving our cash position -- this is, of course, something we are monitoring on a daily basis and it's of course market related.

Right. When you note that the TD3 or any of those benchmark rates, is the level or the rate that you are able to procure pretty close to that? Or is there some discount based on the age of the fleet, that sort of thing?

I think the VLCC market is more than the TD3; it's a very triangulated market. And of course interesting trades -- East/West and back and forth. So I think the market has started well into 2014. And I think we could see the decent level rates this year.

Okay. Then my last one just around the equity issuances, you've obviously been pretty active in January. I wanted to get a little bit of color on the process -- your thought process for the timing of those transactions; when you choose to tap the market.

And then I wanted to also ask, is there any potential I guess you can call it technical hurdles or anything like that, if you wanted to increase the ATM even more than the $100 million that you have already increased it to?

With respect to the timing, it's good of course to have a program up and going -- which means that you can test the market when you think there is a window to do that. But with respect to technical issues going forward, I don't think there is because of course you [can] agree to increase the amount going forward as well. But for the time being we are happy with the amount that is already up and going in a way.

Great. Thanks for your time.

Herman Hildan, RS Platou Markets.

Good afternoon, guys. In your report you write about the improved financial position and more call it more bullish write-up that creates opportunities, going forward. What do you mean by opportunities? Is that in terms of fleet growth?

In general we would say that it creates more options, of course. It's a general situation that everything is of course better when the market has improved and the financial situation is better for the Company.

Okay. So you are not thinking about -- or you don't think let's call it necessarily a stronger balance sheet and higher rates will result in growing the Frontline fleet?

It could do that. And I think it's better to operate in a profitable market than what we have been through the last two years. So we will not be excluding anything.

And kind of just out of curiosity, has there been any internal negotiations with Frontline 12 to see if you can buy back the ship's (inaudible) that you initially sold to them for example as a swap between, the equity that you own in Frontline and the assets?

That discussion has not taken place yet.

Okay. Thank you very much.

Michael Webber, Wells Fargo.

Good afternoon, guys. How are you?

Fine, thank you.

Just a couple of quick questions around the follow-on and the convert and I guess the kind of the theme that Herman was kind of getting at.

Just in terms of the cash you are bringing on through that expanded -- I'm sorry, that ATM program; how are you prioritizing that cash in terms of termination payments for ship finance versus aggregating cash to look at that convert that comes due? How do you guys think about that?

Well I think it is a bit strange question. I don't think we are in a situation to prioritize anything at the moment. We are servicing our debt obligations to all our creditors, which is Ship Finance and also another owner of four vessels and also then of course the convertible bondholders. So we pay whatever we should pay; that's what we do.

Right. It was more just aggregating for maturity, which kind of leads me to my next question. You do have that convert out there and you've also got the charter and some ship finance, which are two big drains on cash. Herman kind of got at a point of potentially acquiring assets or bringing assets back over from Frontline 2012. Is handling the maturity of the convert something you need to take care of prior to any material systemic change in the current form of Frontline? Or could you do that in tandem or (inaudible)? How do you -- it's obviously the biggest long-term variable.

I think we have spent a lot of time in reducing the fleet over the last 12 months, which we have come to a certain point now where we are at the core fleet we want to have.

And secondly, to improve our Company's situation financially of course we would have to look at both expansion but also maintaining what we have at present. So not exclude anything. I Think this is, of course, very market related and what is happening in the spot market. We are having various scenarios that we're looking at.

Okay. And then just to kind of get back to my earlier question around the ATM. So that full ATM, when you guys have to do $100 million, the thought process there is purely around, I guess, incremental cash if you wanted to fill the newbuilds' orders and/or termination payments. There's no thought process there behind building a liquidity position to handle the maturity of that convert?

I think this is a bit too early because the convert is not maturing until more than a year from now.

It's an awfully big convert, though.

Pardon?

It's a big convert. A year is four quarters, and your breakeven levels are right at where rates are, so it's not a question that is particularly out of line.

No doubt, we will have to work hard the next 365 days. So that's good.

(inaudible) It's very market related in this situation. So we have to see, yes.

Fair enough. Well, I appreciate the time, guys. Thank you.

Eirik Haavaldsen, Pareto Securities.

Hi. Jens, you mentioned the speed in the fleet. Have you seen anything, or are you speeding up right now? As rates stay (inaudible) 55 and above, where is that leaving the speed in the market in general?

I think you have seen the ballast speed going up. And of course I must admit we are also speeding up some of our own ships to spread out the fleet coming into let's say a month or -- so we don't have too many ships in the first 10 days or the middle of 10 days. So we're of course using the speed ourselves also, but I would say the general trend is of course in a market like this, the ballast speed has been going up.

Also the extensive reports of congestion in China -- nothing really new, but further delays. Is that also contributing extensively to this recent market strength?

Yes. That has been positive -- there has been some [SBM] problem in Korea which has helped. There has been some delays loading in Brazil. So, no, there are, of course, all those things that have positively added some tightness to the market. Yes.

Also when you mentioned 100 newbuilds in the order book by this summer, is that all for 2016, do you think? Or is it then going to be into 2017, as well?

A few of the VLCC orders has been into 2017, but I think still, you will see some of the Korean yachts are surprising all of us and come out with quite another (inaudible) capacity in 2016. So I would say the majority has been in place for end 2015, and you will see more 2016 deliveries being ordered.

So you think there are plenty of slots available for 2016, still?

I think so.

Yes. And then, finally, anything new with (inaudible)? They have a bunch of Suezmaxes deliverable before yours. Do you expect them to come?

(inaudible) but we are having a discussion with the shipyard now and we hope to come to some sort of solution. I know there are a few other ships coming before us -- I'm not aware what they are doing with those. But we are having a discussion with the yard now.

[Relle Sanders], Nordea Markets.

I just had a couple of questions regarding your debt position. First of all, with regard to your lease liabilities -- they came down from $118 million this quarter. Is that all related to Golden Victory and from Champion?

Not all. It was also ordinary repayment on the leases in the quarter. But most of it relates to Golden Victory and from Champion.

Okay, so most of it, yes. And then also if I look at just the long-term debt that you have, and then net out the ITCL share of the debt, it seems like long-term debt has gone up from $70 million. Is that correct, or am I missing something?

The amount that you are referring to there seems to be equal to the amount that was put on a note to Ship Finance because when you did this, the terminations of the leases are from Champion and Golden Victory.

We paid partly cash on them. The remaining termination payment was put on a note which we are paying down on an equal basis, as we did with the lease on the vessels anyway. So I guess that's probably what you are referring to.

Yes. Is it classified as long-term debt, then in your balance sheet, I guess?

Yes. It is long-term, yes.

Then, yes. That was it for me. Thank you.

Randy Laufman, Odeon Capital.

First of all, I just want to clarify, when you talk about your breakeven rates, I want to clarify whether that is inclusive of kind of the cash or the rate reduction and cash three provision that Ship Finance put in a couple of years ago? And maybe if you could just update us on where those rate reductions stand; how long that lasts for?

And then, secondly, I was just going to ask about the new note that you were referring to on the last caller to Ship Finance that's part of debt. And whether that has any security or guarantees or if that's an unsecured obligation of the parent?

First, on the breakeven rates -- they do not include the cash [sweeps] to Ship Finance. So the 6.5% -- that $6,500 per day reduction in rates, are not included there.

With respect to the notes to Ship Finance, it's unsecured.

It's unsecured; so it would be [peri pursue] with the convert?

Yes. That is correct.

Okay. Just to clarify, going back to the rate reduction, you said $6,500 is not factored into those breakeven rates?

(inaudible) breakeven right now.

So does that mean that the actual cash flow that you are going to get is $6,500 better then whatever the difference is of those rates? Or does that mean that you have to give back more cash?

This means that this other rate that we have to pay according to the reduced rate that we have to Ship Finance today, which is $6,500 per day reduced compared to normal in a way.

If we earn more than that, more than these rates we do have to pay cash [sweeps] to Ship Finance. Then that will be in addition to what you see there in the breakeven rate. From the first of January 2016 the rates will be increased by $6,500 per day, again, to Ship Finance. So they are back again to normal rates.

So that's January 2016, when that rate reduction hits?

Yes, that's correct.

Okay. Thanks for my call.

[Catherine Ron], Shipping Watch.

Good afternoon. My question is regarding something you said last summer about the need to enter a restructuring phase of the company if the situation would be better. How is this situation now?

Well, I was about to say, thank God the situation is better, but I guess that is not the reply you are looking for.

No, and of course, our situation which we have stated here is of course very market related. The spot market rate has improved. Our breakeven levels have established themselves around these levels now and we have of course been able to provide extra cash to the company by the ATM share. So I think we have done what we said we would do over the last six months. And this is of course a process. We will see how the market develops and what we will do, going forward.

Okay. So do you still see it as a risk that you need to enter a restructuring phase?

I wouldn't say it's a risk, but it is always there.

All right. But do you have any date or any goal you need to -- to what you need to work to be more safe?

No. I think we take the day as it comes.

Okay. Great. Also, can I have one more question?

Yes, sorry.

You said I think maybe half a year ago that the industry needed to scrap more vessels and that the industry might need to establish a fund for this purpose. Have you had any comments on that from some of your -- from partners from the industry?

A lot of comments, but nobody listen to me, unfortunately; so that didn't come off. We've scrapped a few ships ourselves, but that was the end of that party. So I will try to come up with a better idea next time.

Great. And last question -- can I ask you about Frontline 2012?

Maybe you can give me a call, separately, and I will try to reply to that.

Great. I'll do that.

Thank you.

John Reardon, Merriman Capital.

Could you talk about China? There's been a lot of talk periodically about Chinese oil demand backing off. And as far as I can see, it doesn't seem to be real -- the talk that there is going to be a decline in demand of oil out of China.

No, I think you are right. This is not declining, it has been continually improving, year-by-year. And the prediction so far for 2014 that you will also see an increase in oil demand and you will see a diversified source of crude coming into China, which will create a probably further ton mile what we have seen last year. I think the Chinese positive story is still there.

Okay. Thank you.

(Operator Instructions). We have no further questions at this time.

I would like to say thank you to everybody for dialing in and listening to our presentation. I would like to thank everybody in the Company for their work and efforts during a difficult 2013. Hopefully 2014 will be better. Thank you.

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