Frontline Plc (FRO) 2014 Q3 法說會逐字稿

Good morning and good afternoon, ladies and gentlemen. Welcome to our Q3 presentation. The presentation will proceed as follows. Inger will start presenting the Q3 highlights and the main transactions and then the financial review of the quarter.

After that, I will follow up with earnings and market factors, the VLCC and Suezmax fleets, new building prices and time charter rates, Frontline's present situation and then the market outlook. We will then open for questions. Inger, if you could please go ahead and start.

Thanks, Robert and good morning and good afternoon, ladies and gentlemen. I would like you to move to slide four, Highlights and Transactions. Frontline issued 1.1 million new shares under the ATM program in the third quarter. Frontline agreed with Ship Finance in July to terminate the long-term charter for the 1999 built VLCCs Front Opalia, (inaudible) Comanche and the [transformers]. And those charter parties were terminated on November 4, November 12 and November 19 respectively.

In October, Frontline bought $17.8 million of its convertible bonds at a purchase price of 91.6%. Further in October, Frontline entered into a private agreement to exchange $23 million of its convertible bond for an aggregate of 8.3 million shares and a cash payment of $10 million plus accrued interest.

Then moving to slide 5, financial highlights and slide 6, income statement. Frontline reported a net loss of $59.6 million equivalent to a loss per share of $0.60 in the third quarter of 2014. This compares with a net loss of $78.2 million and a loss per share of $0.81 for the preceding quarter.

The net loss attributable to Frontline in the third quarter includes an impairment loss of $41.5 million relating to the release from the collar the Front Commerce, the Front Comanche and Ulriken. It also includes a loss on deconsolidation of the [Windsor Group] in the third quarter of $3.6 million.

Further, a share of results from [associates] relating to Frontline's share of net income in Frontline 2012 in the third quarter of approximately $3 million and also a minority interest of $4.7 million relating to minority interest in [ITCL].

Net income ex these items in the third quarter was $22.3 million compared with $30.2 million loss in the second quarter. The increase in [results] from operation in the third quarter compared to the second quarter is mainly due to an increase in TCE rate in the third quarter compared to the second quarter which led to an increase in results on time charter basis by $17.1 million. The increase in (inaudible) on time charter basis led to an increase of $7.5 million in cash repayments to Ship Finance and the German [KGs].

Net increase in expenses of $3.4 million, this includes an increase in the financial expenses in (inaudible) of $5 million that was related to the deconsolidation of the Windsor Group. It was an increase in ship operating expenses of $1.7 million mainly explained by drydock of two VLCCs in the third quarter and a decrease of the appreciation of $3.6 million.

Now please move to slide 7, income on time charter basis. Frontline's spot VLCC fleet earned $23,900 per day in the third quarter compared with $12,500 per day in the second quarter. The average for the whole fleet inclusive TC out was about $24,600 per day in the third quarter compared with $13,900 per day in the second quarter.

The Suezmax spot fleet around $19,500 per day in the third quarter compared with $12,400 per day in the previous quarter. And the average for the whole Suezmax fleet including TC out was about $18,600 per day in the third quarter.

Moving then to slide 8, ship operating expenses, the average OpEx for the fleet in the third quarter was approximately $10,400 per day compared with approximately $9,000 per day in the second quarter. We had two drydockings in the third quarter compared with one in the second 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 70 in the third quarter compared with 60 days in the second quarter due to more docking. And we have no scheduled drydockings in the fourth quarter of 2014.

Moving then to slide 9, the balance sheet, changes to the balance sheet at September 30 is mainly as follows. The cash have increased by $43 million mainly explained by drawdown of $30 million relating to delivery of the first Suezmax new building in the second quarter which was financed by cash as per end of Q2. The remaining (inaudible) increase in cash from operations.

Restricted cash in (inaudible) decreased by $21 million which relates to deconsolidation of the Windsor entity. Vessels and equipment decreased by $260 million mainly as a consequence of the deconsolidation of four Windsor vessels, the transfer of Ulriken to vessels held for sale and impairment loss relating to Front Comanche, Front Commerce, Front and Ulriken.

All the long-term assets increased by $28 million which is mainly related to the Ulriken transferred to held for sale. Long-term debt decreased by $153 million as a consequence of deconsolidation of Windsor and ordinary repayment of capital leases partly offset by drawdown of $30 million in the quarter. Equity decreased as a consequence of recorded loss in the quarter partly offset by raising on new equity. Otherwise there were small changes to all the balance sheet items this quarter.

Moving then to slide 10, the cash cost breakeven rate. The estimated average cash cost breakeven rates for the remainder of 2014 are $22,900 per day for VLCCs and $18,100 per day for the Suezmaxes. These rates are the daily rates our rentals must earn to cover budgeted operating costs and drydock, estimated interest expense, bareboat hire and corporate overhead costs. But these rates do not include CapEx. With this I leave it over to Robert again.

Thank you very much, Inger. Let's now move on to slide 11, earnings and market factors. In terms of vessel earnings, the third quarter was much better than Q2, but it was by no means a quarter that we are content with.

On the positive side, we did see an improved fleet utilization driven by an increase in ton/miles mainly driven by crude moving from the Atlantic basin to China. According to the International Energy Agency, global oil demand increased by 1.6 million barrels per day compared to the previous quarter. The market remains very fragmented in terms of number of owners.

We then move on to slide 12 please, the VLCC fleet. There are currently about 635 vessels in the VLCC fleet. There were four vessels delivered in the quarter and two vessels were sold for scrap. In other words, Q3 has made little difference to the fleet development which remains fairly balanced.

The fleet growth for 2015 is about 30 ships scheduled to deliver whilst we expect about 45 to hit the water in 2016. Scrapping over the next two years we expect to be around 25 units in total, but we are hopeful to see an increase in this number due to the increasing cost of third and fourth special survey.

Let's move to slide 13 please, the Suezmax fleet. The fleet currently counts 456. There was one Suezmax delivered in the third quarter and there were two sold for scrap, so no real change to the fleet in the quarter. However, increased ton/mile and new volume coming on stream makes this segment increasingly interesting.

Suezmaxes also have the flexibility to dip into the Aframax segment. The fleet growth for next year is very limited with nine vessels scheduled to deliver and we expect at least six to be sold for scrap. In 2016 we expect the number to be about 20 new vessels against about 10 to be sold for scrap.

Moving on to slide 14, Values and Rates. The prices are stable from the last quarter, always depending on the specific yard and the final specification. But we estimate the standard VLCC to be priced at $96 million to $97 million and $65 million to $67 million for Suezmaxes at the moment.

The strength of the US dollar should give some downward pressure on these, but it could get absorbed by forward optimism. The time charter market for VLCCs has firmed and it's now around $35,000 for three years while for Suezmax for a similar period it's around $30,000 per day.

Moving on to slide 16 (sic), Frontline. We currently have 25 VLCCs and 14 Suezmaxes on the water. These numbers include vessels under commercial management.

VLCC Chartering, a chartering partnership formed between Frontline and Tankers International, was set up in early October. This has created a larger fleet with more flexibility for cargo owners. It is also expected to reduce voyage-related expenses and thereby improve the net earnings on our VLCCs. We believe that this setup will be positive for both our customers and the Company going forward.

Our new building program consists of one Suezmax, the Front [Eden], which will be delivered in January 2015. Further new building contracts will not be considered by the Company until we have dealt with the Company's debt and lease obligations. The Company's debt and lease obligations are being worked on and the target is to rebuild Frontline into a leading tanker Company.

Let's move to slide 17 (sic), the Market Outlook. We are currently seeing the highest tanker fleet utilization since 2009. During the last five years, the tanker fleet has been utilized at around between 80% and 85% and it's even been dipping below 80%. During the five years previous to 2009, the delta was higher, 85% to 90%.

There are now signs indicating that we could be heading back to a higher utilization environment and thereby a stronger tanker market going forward. The geography of trading routes has reversed in the last 18 months, the main factor being Atlantic barrel supplying China and this has in turn increased ton/miles for tanker vessels.

This increased ton/mile has increased volatility, which we've seen this year, and we expect the lows or the floor of the market to establish at higher levels than what we've seen in recent years. The lower oil price is also helping our TCE, or vessel earnings, through a fall in (inaudible) prices, which is our biggest cost. Although the risk of falling demand will always be present, the recent fall in oil price has reduced the risk of the market facing reduced demand.

The new ECA regulations will be introduced from January 1, 2015. This explains some of the recent spike in the Suezmax market with high sulfur fuel leaving in Europe and the US. The crude oil market is seeing a strong contango at present. This encourages storage of oil.

For the time being, this is primarily land-based, but availability is scarce meaning we might see storage on tankers especially if the spot market comes off. This is another reason why we expect the market floor to be higher going forward.

A very strong Suezmax market in recent weeks has boosted owners' confidence. The VLCCs are also showing signs of improvement and the market sentiment is turning positive for the balance of the year and into Q1. With that, we are ready for your questions.

(Operator Instructions). Donald McLee, Wells Fargo.

Good morning, guys. It looks like your spot earnings for your Suezmax vessels were a bit lighter than what we were hearing from peers around marketing indications. Could you maybe provide us some details about what you are seeing in the chartering market for those vessels?

Our earnings were slightly below some of our peers. But this is -- from quarter to quarter will differ and the difference is not large.

All right, thanks. And just looking at your ATM, how many shares do you have remaining under that? And I guess with the April maturity coming up, how aggressively should we expect you to issue those shares?

It's not a matter of number of shares, but it is more a limit and the limit is -- remains at $39 million.

Okay, great. That's helpful. And I guess the last question is how should we think about modeling the impact of the Windsor consolidation going forward?

Going forward, the Windsor is deconsolidated from Frontline's account, so you will not see those numbers in Frontline's account going forward.

^

Okay, thank you. That's all my questions.

John Reardon, Merriman Capital.

Good morning and thanks for taking my question. Given that the time charter rates have had a nice recovery, might we see Frontline or say some of your competitors start to fix ships at longer-term charters? Just curious.

With the recent increase here it's something that we will consider and I'm sure others will as well.

As a backup question, last year we had one heck of a rate spike and -- but it had kind of a temporary feel to it. I'm not quite sure what caused it, ships out of position, etc. This time around, I'm not saying rates can't come in a little bit.

I was kind of surprised when [Phlatos] over at Morgan Stanley put out a report with a chart on V rates and all of them above $30,000 for the quarter. Does this have more of a sustainable feel because of these new oil routes from the Atlantic to the North Asia and others? Does it have more of a sense of permanence to you?

As I just said on the last slide, I think this is looking at the longer -- will keep longer and also will have the market -- will have higher lows than what we've seen. So I'm more positive on the market going forward here than what I've been for the last or for the recent years.

Just to correct you, you said higher highs and higher lows, which is exactly what Doug Parker at US Airlines said when they turned profitable before the stock had a wonderful run. So I had a big grin on my face when you said that. Anyway, thank you and have a great holiday season.

Erik Stavseth, Artic Securities.

Hi, guys. Dipping right into two questions, one on the Company and one on the market. The first Company, you said you wanted to rebuild Frontline into a leading tanker Company. Firstly, is that purely on the crude side or will it be ?- would you be considering a mix of product and crude? And also any additional thoughts on how that might go about?

There are, as we say in the press release, there are several alternatives that we are considering and many options exist. I think it's too early to tell what we decide on. So we need to get back to that when we have decided.

All right, thank you. Second question, probably more on the market. We are seeing that the Middle East refineries are hitting their stride with ramp ups and also getting into full production. And I want to get your -- if you have any thoughts on the impact on the crude tanker market. Robert, you are now listed as the CEO of Frontline Management in both Frontline 2012 and Frontline. So I was curious to get your thoughts on that aspect of the industry.

We are speaking here on the Frontline side, so when it comes to the Middle East, the refineries are -- come on stream here this year with [Jbad] and the Red Sea is coming up and it's a very important region in terms of refining capacity.

All right, thank you.

GJ Koomen, Sothic.

Yes, good afternoon from London. You seem quite confident to find a solution for your outstanding bond and lease finance debt. Of course, you have been buying bonds in the market with cash. Could you give us a ballpark -- what is your intention? To first deal with the bond debt and then consequently reduce the lease debt? Or is it your intention to have a combined solution?

And to what level do you think you need to reduce your lease debt in order to have a sustainable Company? And at what level do you think your breakeven cost should be low to have a long-term future and to sustain whatever balance sheet is left over after a restructuring or equity issue?

As I said earlier, we are in the process now of considering different alternatives.

That's a little light because you are buying bonds in the market with cash, so you must have a little more than just we are considering. What is the lease debt level in your view -- to what level does it need to be reduced?

No, we don't have any limits, that sort of the question you are asking. As you are saying, yes, we've been buying back bonds and we have also done equity debt swaps. And that's probably -- we can maybe do that also going forward, but we haven't really decided exactly what to do so it's hard for me to tell you that here now in this conference.

But you can't be buying bonds in the market with cash with having no idea about what you're doing. So you must have some idea. There must be a solution. You must have a backup plan because otherwise you should not be buying bonds in the market with cash.

I think there is a (multiple speakers) here, but we can't comment further on this at the moment.

Okay, but can you comment on what you think a sustainable lease debt level is going forward?

No, we cannot do that either. So we will get back to that when we have something more to tell.

Right, okay. And what -- your view for a long-term cost level on breakeven rates? Where do you need to get it to? Do you have any ideas on that?

As I said, I think we will get back to these items when we have a solution in place.

Okay. In that case I have no more questions. Thank you very much.

[Paul Jay], [Walsher Meadows Investments].

My question is about loading ports in the United States. Are there any that can load VLCCs for export?

It's very limited. We can -- I'll talk to you separately afterwards and go into more detail.

Thank you, Happy Holidays.

[Eric Halverson], [Parish Hill].

For a leading tanker company, what's is a suitable fleet age average?

That's a tricky one to answer, but --.

Okay, I understand, thank you.

I can't give you a direct answer.

Thank you, that was it.

(Operator Instructions). There are no further questions at this time.

Okay, then thank you all for dialing into this call. I would like to thank everyone at Frontline for their excellent efforts.