Frontline Plc (FRO) 2014 Q4 法說會逐字稿

Good afternoon. Welcome to Frontline's Q4 presentation. This presentation will proceed as follows. Inger will start with the Q4 highlights, the main transactions for the quarter, and a financial review. I will then follow up with earnings and market factors for the quarter; the VLCC and Suezmax fleet developments; new ruling prices; Frontline's present situation; and, finally, the market outlook.

Inger, please go ahead.

Thanks, Robert, and good morning and good afternoon, ladies and gentlemen. Moving to slide 4, highlights and transactions: Frontline agreed with Ship Finance in July 2014 to terminate the long-term charter parties for the three VLCCs Front Opalia, Front Comanche, and Front Commerce. Ship Finance sold the vessels to unrelated third parties.

These charter parties were terminated in November, on the 4th, 12th, and the 19th. In October 2014 Frontline bought $17.8 million of its convertible bonds at a purchase price of 91.6%. And in February 2015, Frontline bought another $33.3 million of its convertible bonds at the purchase price of 99%.

In October and December 2014, Frontline entered into private agreements to exchange $45.5 million of its convertible bonds for an aggregate of 13 million shares at an aggregate cash payment of $19.6 million, plus accrued interest. The remaining outstanding balance on the convertible bond loan is currently $93.4 million, and the Board is confident that Frontline will be able to repay all of its convertible bond loan in April 2014 -- 2016, sorry.

In January 2015, Frontline took delivery of its second and final Suezmax newbuilding, the Front Idun. Frontline has issued 10.9 million new shares under the ATM program during January and February 2015. And in January 2015 Frontline increased the ATM limit from $100 million to $150 million.

Then, moving to slide 5, financial highlights; and slide 6, income statement. Frontline reports a net loss of $13 million, equivalent to a loss per share of $0.12 in the fourth quarter compared with a net loss of $59.6 million and a loss per share of $0.60 for the preceding quarter. The net loss attributable to Frontline in the fourth quarter includes a non-cash gain of $40.3 million arising on the termination of the charter parties of Front Opalia, the Front Comanche, and the Front Commerce.

Further, it includes a non-cash gain of $1.5 million arising on the convertible bond buyback in October; and a non-cash loss of $41.1 million arising on the convertible bond swaps in October and December. And, finally, a share results from associates relating to Frontline's share of the net loss in Frontline 2012 in Q4 of $7.2 million.

If we exclude these one-time items, net loss in the fourth quarter was $6.5 million compared with $22.2 million loss in the third quarter. The increase in this [other operation of $15.8 million] this quarter is mainly related to increase in TCE rate, which led to an increase in results on time charter basis by $5.3 million. Offsetting this is an increase of $8.5 million in cash repayments to Ship Finance and the German KGs. And the positive side of this is the net decrease in expenses of $19 million.

The decrease consists of a decrease in ship operating expenses of $6.2 million explained by no drydockings in the fourth quarter as opposed to two vessels in the third quarter; and, also, a reduction in running expenses. We also had a decrease in net finance expense of $11.2 million, mainly due to fully amortized Windsor expense in the third quarter and reduction in lease interest expense due to lease terminations on the Comanche, Commerce, and Opalia. We had an increase in admin expense of $0.5 million and a decrease in depreciation of $2.1 million.

Moving to slide 7, income on a time charter basis: Frontline's spot lease VLCC fleet earned $27,400 per day this quarter compared with $23,900 per day in the third quarter. The average for the whole fleet, including TC out, was about $27,900 per day compared with $24,600 per day in the third quarter.

The Suezmax spot fleet earned $27,200 per day this quarter compared with $19,500 per day in the third quarter. And the average for the whole Suezmax fleet, including TC out, was about $626,000 per day this quarter compared with $18,600 per day in the third quarter.

Moving down to slide 8, ship operating expenses and off-hire: the average OpEx for the fleet in the fourth quarter was approximately $8,600 per day compared to approximately $10,400 per day in the third quarter. We had no drydockings this quarter compared with two in the third quarter, as you can see from the graph on the upper right-hand side of the slide. As we can see from the graph on the lower right-hand side on the slide, off-hire days were 24 in the fourth quarter compared with 70 days in the third quarter due to zero dockings this quarter. We have one scheduled drydocking in the first quarter of 2015.

Moving, then, to slide 9, the balance sheet: changes to the balance sheet ended December 31, 2014, is mainly as follows. The cash has decreased by $41.5 million. $35.9 million of this relates to bond buybacks and debt equity swaps and $10.5 million relates to cash consideration paid to Ship Finance in connection with termination of the leases on Front Opalia, Comanche, and Commerce.

The remaining movement relates to increase in cash flow from operations. The restricted cash in our vessel increased by $26 million, which relates to the proceeds from the sale of the Ulriken. Vessels and equipment decreased by $17 million due to depreciation in the quarter. Other long-term assets decreased by $35 million, which is mainly related to sale of the Ulriken.

The long-term debt decreased by $133 million as a consequence of bond buybacks and debt equity swaps; decrease in capital lease obligations, partly offset by increase in notes payable to Ship Finance related to the lease terminations on Front Opalia, Commerce, and Comanche. Otherwise, there were small changes to other balance sheet items this quarter.

Moving down to slide 10, the cash cost breakeven rates: the estimated average cost cash cost breakeven rates for the remainder of 2015 are approximately $26,400 per day for lease and $19,400 per day for the Suezmaxes. These rates are the daily rates our vessels must earn to cover the budgeted operating costs and drydock, estimated interest expense, bare boat hire, installment on loans, and corporate overhead costs. The breakeven rates exclude the CapEx.

With this, I leave the word to Robert again.

Thank you very much, Inger. Let's look at slide 11, earnings and market factors. The quarter started off at very low levels, almost as low as we saw in Q2. The markets picked up quickly, though, driven by improved demand.

For the VLCCs it was virtually a nonstop improvement throughout the quarter. The Suezmaxes had a spike similar to the ones seen earlier in the year and then came back down. Overall, our Suezmaxes had a satisfactory quarter, whilst we are not that content with the returns for Frontline's VLCCs.

As can be seen on the graph for both segments, the average earnings versus bases TD3 and TD5 are well above our vessel earnings for the quarter. There are two reasons for this. Firstly, our vessels are fixed forward; so at the start of a quarter, a substantial portion of our vessel days would already have been booked. Secondly, an oil price drop is instantly reflected in the index rates, whilst on ships you burn the existing fuel before you see the effect. In a falling shipping market or rising oil market, you will obviously have the opposite effect.

Let's move to page 12, the VLCC fleet. There are currently 638 vessels in the world fleet, of which around 200 are controlled by the oil companies, whilst the balance is trading spots. There were five vessels delivered in the quarter, one removed -- which, in turn, makes little difference to the fleet developments.

Overall we think the fleet is relatively balanced, and our hope is that further consolidation will take place. The order book is at around 13% of the present fleet. This will outnumber scrapping for the period -- at least if we stay at the current levels at the spot markets -- and a further increase in the order book will cause concern.

Let's move to page 13, which is the Suezmax fleet. This fleet counts 450 ships. There were no changes in the quarter, with two vessels delivered and two vessels scrapped. The segment ended the year on a strong note. And for ships on the water, it remains very interesting. As with the V segment, earnings are driven by increased ton mile, resorting in high utilization -- and we see this continuing to be the case, at least in the medium-term.

At present the order book is not a great concern at around 14% of today's fleet. But going forward, we are more concerned. I will come back to this later in the presentation.

Let's look at page 14, newbuilding prices and TC market. The prices are pretty stable from the last quarter, always depending on the specific yard and the final specification of the vessel. But we estimate the standard VLCC to be priced at around $96 million, $97 million; and $65 million, $67 million for Suezmaxes. The US dollar remains strong. The dry market and offshore is hurting; thus, we feel there could be some downward pressure coming up on newbuilding prices. So this time charter market has enjoyed a steady increase throughout the quarter on the back of an improving spot market.

So then let's look at page 15: Frontline. Frontline currently markets a fleet of 15 Suezmaxes and 25 VLCCs. VLCC Chartering, which is Frontline's corporation with Tankers International, became fully operational early in the quarter and mark as approximately 10% of the world's VLCC fleet. We are very pleased with its performance.

As Inger pointed out earlier, we are confident that we will be in a position to repay our convertible bond loan in April 2015. This is a very important step on the way to reach our ambition of rebuilding Frontline into a leading tanker company.

Let's go to the final slide, which is the market outlook. Q1 has started off very well. It's getting the full benefit of the improved spot market in Q4 and the lower bunker prices. Demand remains high, volatility is back, and the ton-mile remains in owners' favor. Let's look at the factors that contribute to this and what we think the future has in store for us.

The fleet utilization ended the year around 85%, and on paper this is likely to increase in 2015; but it's very difficult to predict. Floating storage was the main theme on VLCCs coming into 2015. Around 40 vessels were confirmed for time charter. We did four of our ships at an average rate of around $44,000 for around 12 months average.

But now the jury is out on how many ships will actually end up storing. The contango in the oil market has narrowed, and the spot markets remains strong -- two important factors making incremental storage less likely. We still think some ships will store, though. Our estimate is 15 to 20 units; and the effect of this will be seen more in Q2 and Q3 rather than Q1. The oil price correction lowers bunker prices, our main costs; the lower oil price is also likely to support oil demand, which in turn is positive for tankers.

We are seeing consolidation in 2014, and we believe there will be more going forward. Having had years of very poor markets, the recent spot strength has boosted owners' confidence, and the market sentiment is positive.

The current order books on Suezmax and VLCCs at around 13%, 14% is relatively will balanced, as I mentioned before. But we are concerned that the -- that it will grow further, especially on Suezmaxes. The poor dry and offshore markets has already led to conversion of orders to tankers, and we fear that this will continue to happen, along with pressure orders being placed. This is a cause for concern.

With that, we are ready for your questions.

(Operator Instructions) Jon Chappell, Evercore.

Inger, a quick question for you -- what's the remainder on the new upsized ATM facility? How much is left there?

It's approximately $50 million -- a bit more.

Okay. And then, Robert, you've been with the organization for a short period of time; I'm sure you are still kind of learning the ropes a little bit, but you mentioned that you are going to reach an important threshold by being able to pay back this convert. This has obviously been a huge overhang in the Company for a couple of years now, so that's great.

And then you want to rebuild the company, so how do you go about rebuilding it with the limited liquidity that exists today? Does something need to be done in coordination with Frontline 2012, or can Frontline Ltd rebuild on its own?

It is something -- we are looking at various options, and it's something that we will come back on. But we cannot be more specific at the moment.

Okay. Two just kind of market-related questions for you -- one on the storage. You mentioned you had four ships that are hired for 12 months. I guess there's some concern that these are being hired potentially for storage, and that are kind of re-letting into the market immediately, so they are not really removing those vessels from the fleet. What are the terms on those? Are you just giving the vessel to the charter for 12 months, and they can do whatever they want? Are there any specifics regarding the amount of time that needs to be used for storage?

No, this is -- it's fixed as a time charter, so the charters are free to trade spots or store. As I said earlier, with the narrow contango here, it's -- I think that it's likely that more will go in the spot market than we thought a month ago.

But at the same time, I think some of the charters were done with storage being booked at the same time as the ships. So of our ships here, we are pretty certain that two are going to go straight in storage, and likely three. But these things could change. So our current estimate is between 15 and 20 of the 40 ships booked.

That's very helpful. And then the final one -- you mentioned the period conversions; obviously there's been a lot of press about that. Can you talk about the timing?

We've seen two examples already where -- you know, Scorpio has converted to sets of drybulk ships, and the actual delivery dates for the converted tankers are 12 months forward from when the original delivery dates were. Is this kind of standard? Do the yards -- even though they have the slot and the steel, do they need to get pipings and coatings? And if something was scheduled for a, call it, December 2015 delivery of as a drybulk ship, is it feasible that it could be delivered in December 2015 as a tanker? Or would it be significantly into the future?

This is very -- it's sort of case-by-case. Some yards will swap deliveries and do all sorts. So it's impossible to give you a clear answer.

Okay. Thanks for your time, Robert. Thanks, Inger.

Herman Hildan, Clarkson Platou Securities.

My first question is on the cash breakeven level, on a general note before rebuilding the Company -- or actually, disregarding that, do you feel like the $26,000 is a -- call it a comfortable level to have a cash breakeven for the current fleet? Or would you work to try to reduce this going forward?

This breakeven rate include, of course, the drydock vouchers that we have for the year. And we will drydock more VLCCs than Suezmaxes this year. That's why the breakeven base for VLCCs are a bit higher than you saw last time.

Whether it's comfortable of not -- I mean, this is obviously, of course, a consequence of mainly the lease structure with Ship Finance. And as you know, the rates are a bit high in that complex. So -- but will it, as usual, bring with respect to the breakeven rates? It's a bit early to tell. I mean, we will get back to that, as Robert said earlier.

Okay. And furthermore you have a few vessels, a couple of Suezmaxes turning 20 years next year, and a few VLCCs turning 16. How do you kind of weigh taking those through drydocking versus, call it, selling them for scrap and renewing the fleets?

That will be considered on a case-by-case basis.

Okay. And then, finally, could you also -- there's been some debate on the speed of the tanker fleet. Could you also give your version of how you view speed as a consequence on the supply side in the tanker market with the lower prices in mind?

I think on the speed issue -- there's a lot of focus on speeding up. We are keeping the lower speeds, but it's -- if we are tight for a late count, you might speed up here on specific boats. And this is always subject to change for any owner.

But I think when it comes to the speed, what has not been focused that much on here recently is the speeding down. Looking at the contango, I think there will be cases here where charterers will want to arrive in April rather than March, for example, because of the contango in the oil price.

So I think you will have some slowdown, and you will also have some charterers that will request you to arrive at discharge port and not just hand you your readiness and weighting for -- and virtually be placed on floating storage whilst on a spot charter. But this is obviously -- nothing is set in stone here. So it's a complex picture on the speed.

Okay. Thank you very much.

Matthias Detjen, Morgan Stanley.

Thank you for the update. I have another question on the market, about secondhand market for the vessels. I was wondering if you could give a little bit more color there -- how price developed? And maybe as well as on some of the liquidity -- how the liquidity is in that market?

If you just take a 15-year-old, for example, you are looking at just over $30 million. And on one-ship deals, I think the liquidity seems to be pretty low at the moment.

Okay. And is that sort of like an option for you to renew the fleet by buying a vessel in the secondhand market? Have you seen any attractive opportunities there, or not really at this point?

No, at the moment we are focusing on other -- rather than new purchase, we are looking at other things. So we'll get in position for that later.

Okay. That was it for me -- thank you.

John Reardon, Merriman Capital.

Good morning, or rather, good afternoon in Oslo. Thank you for the call and taking my question. Inger, does the breakeven rate include the Ship Finance clawback that's, I believe, in effect right now? That's question number one.

Robert, do you expect the traditional spring slowdown in rates? And finally, the last question is: recently a Saudi Arabian company called Bahri did a bond deal to finance a rather large acquisition. And in the bond prospectus, it said that Saudi Aramco was going to give them a rather large and long-term contract. Has that gone into effect? And has that affected Middle East Gulf to North Asia rates?

Hi, John. Let's dart with the first question you had. No, at the cash breakeven rate, they do not include the clawback that Ship Finance has. That is explained by -- the clawback depends upon what we earn, of course. And it's hard for us to know what we are going to earn in the future. So that's why we keep the cash breakeven rates without that clawback.

Okay. Can you tell us what you paid in the last quarter on the clawback?

Yes. It's in the Q4 earnings.

Okay. That's fine.

I included the number there. So yes.

Okay. Thank you.

And then on the spring here, that's what normally happens, but the X factor here that we think will come into play is that in you hear in Q1, the storage ships got fixed; and into Q2 and Q3, they will have loaded and will start their storing. So it could slow down, a fall; it could actually save the quarter if a lot of ships go in storage. So it's very difficult to say.

Okay. And then how about the recent transaction that Bahri did, and in turn got a Saudi Aramco -- it looks like an exclusive -- contract? Has that affected rates coming out of the Middle East, or do you think it might?

This is the deal -- from what we hear, it's been placed on a tender basis, so for 5 to 10 ships in Korea. And it's for delivery. So it's not having any effect for this year, nor next year.

Well, thank you very much.

Nikola Aposeto, Pender.

I have four question for you. The first question is about the equity distribution agreement with Morgan Stanley. How long will it be, and what is the amount of share issued until today? Do you plan to increase again? Because it's the second time that you increased the share agreement, and now it's up to $150 million.

The second question is: after the convertible bond will be paid in April 2015, do you think to issue new debt on the loans? Or do you think to sell a vessel?

The third question is if in 2015 you think to come back in black after many years of in the red about net income? And the last one is about the contango affect. Do you think that -- how long it will be? Thank you.

Let's start with your first question. That was with respect to the equity distribution agreement with Morgan Stanley. And you were asking -- I'm not sure I really understood your question -- you were asking --?

Yes, about the equity distribution agreement, how long it will be? Because for the shareholder, it's very bad, because with an agreement for many years we have many shares on the market. Then it's possible to have how many times you think to reach $150 million of content value?

This is -- I can't give you any number of shares which will be issued within that limit, because that really depends on the market price, of course, the share price.

Yes.

So what I said earlier on the call is that the remaining limit is a bit more than $50 million.

15?

$50 million. And your other question -- did you have more questions with respect to that?

Yes. The second question is after the convertible bond will be paid in April 2015, are you think new debt or new loans or a third vessel for increase the liquidity position?

Well, that remains to be seen. But we will get back to you on these items later. It's a bit early for us to tell anything about that now.

Okay.

And then was the contango -- was your last question?

Yes, contango affect. If you think -- how long it will be?

The contango is very difficult to predict. We were up to almost $7 over a six-month period. Now it's down to -- between $4 and $5, I think, is the latest. And this is very much oil price related. So telling you here the direction of the oil price -- I'm not brave enough to give you a clear answer.

Okay. And the last question is about if in 2015 you are go in the black on your net income? What do you think about the outlook on your net income after 2015?

I can't I don't think we can come with guidance or expectations with respect to, let's say, the income in 2015 -- it's a bit early.

Yes, of course. But you are optimistic or not?

Yes. As Robert said earlier on the call, I guess we are quite optimistic about 2015.

Okay. Thank you very much.

Takke Idina from Salzbo.

Good morning. Thank you very much. Can you please state your cash balance as of now?

Sorry? Our tax balance?

Cash.

Yes, cash balance.

Cash balance. The cash balance you have in the earnings release. But the right now, I don't think we can restate it. You have the numbers for the fourth quarter.

Well, it's a delicate time for the Company. That's why I'm asking for the cash balance.

Yes, no -- I understand that, but I don't think we will give away our numbers within the quarter, in a way.

Got it. Okay. Thank you.

(Operator Instructions) As there are no further questions at this stage, I would like to turn the call to -- we do have again a question from Nikola Aposeto from Pender.

I'm sorry for another question. About the equity distribution agreement with Morgan Stanley, do you have a security landing with Morgan Stanley?

No, we don't.

Okay. Thank you.

(Operator Instructions) As there are no further questions at this stage, I would like to turn the call back to the presenters for any further remarks.

Thank you very much. Thank you all for dialing into this call, and I would like also to thank everyone at Frontline for their excellent efforts. Thank you very much.