Frontline Plc (FRO) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2016 Frontline Ltd. earnings conference call. For your information, today's call is being recorded.

At this time I would like to turn the conference over to Mr. Robert Macleod, CEO. Please go ahead, sir.

Thank you very much. Good morning and good afternoon. Thank you all for dialing in to Frontline's earnings call for the second quarter of 2016. It was another good quarter for Frontline, with strong spot earnings.

I will start this call going through the highlights of the quarter. Following that, Inger will run us through the financials. We'll then look at Q2 earnings, sector by sector, and I will guide you on our Q3 earnings. Moving on, we'll look at our time charter cover and the crude tanker order book. We will then look at the current market conditions, and the market outlook, as well as Frontline's positioning for the long-term. The call will be concluded by taking your questions.

Let's get started and look at Company highlights from Q2. Earnings in the second quarter were strong. We achieved net income of $48.7 million, adjusted for non-cash items. Frontline declares a cash dividend of $0.20 per share for the second quarter.

On the fleet development side, we have purchased two VLCC resales at an aggregate price of $168 million. We have also taken delivery of six LR2 newbuildings so far this year; two of them in Q2. We sold off six MRs, and deliveries are taking place shortly. We also terminated a long-term charter of the 1998-built VLCC Front Vanguard, and she was delivered to her new owners in Q2.

We have four VLCCs on order at STX; and the uncertainty whether they will be delivered has increased, given STX's financial condition. We remain in discussions with STX and we have refund guarantees in place from first-class banks.

Inger, please, can you take us through the recent financing secured?

Thanks, Robert, and good morning and good afternoon, ladies and gentlemen. In the second quarter, we completed the financing from China Exim Bank of $328 million which we announced in the first quarter. We also secured commitment for a second loan facility with China Exim Bank of $325 million. This facility will be insured by Sinosure, and expect to be in the final stages of obtaining approval from Sinosure. The cost on these financings will be LIBOR plus 180 to 190 basis points, and they will have a 15- to 18-year loan profile.

These financings will cover all the eight Suezmax newbuildings, and the eight LR2 newbuildings that we have. In addition, we have, through the quarter, secured $220 million of debt financing from ING Bank and Credit Suisse at a cost of LIBOR plus 190 basis points. Each financing has 17- to 18-years loan profile and they will cover four VLCC newbuildings.

Frontline has secured bank financing of up to $548 million, and is in what's expected to be the final stages of obtaining approval for further bank financing of $325 million. This financings will then part finance 20 of the Company's newbuilding contracts. The Company has not yet secured bank financing for the vessels under construction at STX, as it is unclear whether they will he delivered.

All these financings, together with the existing financing we have, enabled us then to maintain the very low cash breakeven rates that we have.

Moving down to slide 3, financial highlights -- sorry, slide 2, financial highlights. Frontline achieved total operating revenues, net of voyage expenses, of $160 million in the second quarter. EBITDA came in at $72 million. And net income came in at $14 million, equivalent to earnings per share of $0.09.

In the second quarter we have recorded certain non-cash charges. These non-cash charges were a vessel impairment loss of $25.5 million relating to the agreed sale of the six MR tankers, and also the termination of the long-term charter for Front Vanguard. Further, an impairment loss on shares of $4.6 million, and a mark-to-market loss on derivatives of $4.2 million; finally, a minority interest of $200,000.

After adjusting for these non-cash charges, we show EBITDA of $98 million, and a net income from operations of close to $49 million in the second quarter, equivalent to $0.31 per share.

Frontline declares a dividend of $0.20 per share this quarter, representing approximately 65% of adjusted earnings per share, and reserves approximately $0.11 of the adjusted earnings to provide flexibility for accretive investment opportunities going forward.

The Company continues to believe that there will be accretive investment opportunities in the near- to medium-term, as asset values seem disconnected from the forward earnings power of vessels on the water. We further believe that this disconnect is based upon access to capital.

We remain, however, committed to returning value to our shareholders, and have always done so in the form of cash dividend, either now or later. And we wouldn't expect that change. We believe reserving part of the dividend now to provide flexibility for accretive investment opportunities will increase the cash dividend later, and enhance the value returned to our shareholders.

Moving down to slide 3, income statements. As just mentioned, Frontline achieved net income, adjusted for certain non-cash charges, in this quarter of $48.7 million against $89.4 million in the first quarter. The decrease in results from operation in the second quarter of $40.7 million is explained by, first of all, a decrease in result on time charter basis of almost $32 million due to the lower spot rates achieved in the second quarter compared to the first quarter; then, secondly, an increase in contingent rental expense by $4.1 million.

The first quarter included contingent rental income of $3.4 million; and the second quarter, an expense of $700,000, due to the fact that the actual profit share arising in the second quarter of $14 million was $700,000 more than the amount accrued in the lease obligations, payable when the lease has been recorded at fair value at the time of the merger with Frontline in 2012.

Then we also had an increase in running expenses this quarter of $3 million, primarily due to an increase in drydocking expenses. This quarter, two vessels were drydocked compared with one vessel in the previous quarter.

We also had an increase in charter hire expenses of $6.4 million due to [the dictatia] vessels that was coming in as chartered-in vessels which will affect this quarter.

Offsetting these, we had a decrease in depreciation of $2.5 million primarily due to that Front Commodore that was to be delivered as a capital lease, and chartered-in instead. And also we had a decrease in other expenses by $2.2 million.

Moving down to slide 4, impact for the low cash breakeven rate -- low cash breakeven levels. We estimate that the average cash cost breakeven rate for the remainder of 2016 will be approximately $21,200 for the VLCCs; $17,300 a day for the Suezmaxes; $15,300 per day for the LR2 tankers; and $13,700 per day for the MR tankers. These rates are the all-in daily rates that our owned and leased vessels must earn to cover their budgeted operating costs and drydock estimated interest expense, bareboat hire, installments on loans, and G&A expenses. In the remainder of 2016, no vessels are scheduled for drydock.

While we have competitive running expenses and admin expenses, below cash breakeven rates are primarily explained by the long profile depth and the low interest costs on new and existing debt.

We believe these cash breakeven rates are highly competitive. For every $1,000 per day lower cash breakeven rate means approximately $16 million to $20 million extra net income per year; or $0.10 to $0.13 per share, which shows the high importance of maintaining low cash breakeven rates.

Then moving to slide 5, balance sheet. The changes to the balance sheet, end June 30 from end March 31, are a total decrease in balance sheet value of approximately $32 million.

The changes in assets are mainly related to increase newbuildings, with close to $84 million. That is the net of $176.6 million newbuilding installments paid, which is offset by $93 million due to delivery of two LR2 vessels in this quarter.

The vessels increased by $29 million. That is due to delivery of the two LR2 vessels this quarter, as I mentioned, partly offset by the termination of the Front Vanguard lease. Other current assets came down by $8 million, and cash decreased by $137 million. Total liabilities are down $13 million, and equity with $46 million due to dividend paid of [sabanet] income in the quarter.

With this, I leave the word to Robert again.

Thanks very much, Inger. Please turn to slide 6. The spot earnings have come down from Q1, which was a very strong quarter, especially on the VLCCs. In the second quarter, our spot earnings were $48,100 on VLCCs; $28,600 on the Suezmaxes; $22,300 LR2; and $16,000 per day on our MRs. Although down from the previous quarter, we are encouraged by our performance in the quarter.

Towards the end of the second quarter, the tanker market experienced strong downward pressure on rates, and this has continued as we are now well into the third quarter. This was caused by oil supply disruptions in the Atlantic Basin and less waiting in ports and places around the world. Although we expect the rate environment to improve from current levels, the second half of 2016 will certainly be weaker than the first half of the year.

For the third quarter we have locked in 76% of our VLCC days at $30,000. On the Suezmaxes, we have done 81% at $19,000. And although we had relatively few trading days in the quarter on the LR2s, due to the number of vessels in time charter, the number is about $22,000 and 79% is covered. On the MRs, we have done 88% at around $15,000.

Let's move to our time charter cover, please, on slide 7. For the balance of 2016, 28% of our fleet is chartered out. We captured the recent strength of the tanker market and locked in forward earnings. The timing was good, as time charter rates have softened significantly since then. Our TC cover reduces our exposure to market weakness by reducing our cash breakeven levels for the vessels in our fleet trading spots.

For the balance of 2016, the breakeven is below $19,000 on VLCCs and just under $13,000 on Suezmaxes. On the LR2s, we have locked in five ships on time charter, leaving our spot trading LR2s with a cash breakeven below $6,000 per day.

Our time charter coverage falls to about 13% in 2017. We will continue to capture market strength and secure forward cash flow through time charters if we believe it is in the interest of the Company's shareholders.

To give you an example, the net cash effect of our TC outs is $28 million for the second half of 2016, and $40 million in 2017.

Please move to slide 8, the crude tanker order book. Newbuilding deliveries are accelerating, particularly in the second half of 2016 and into 2017, as can be seen from this slide. Almost 100 VLCCs are on paper still to be delivered over the next two years, and this is expected to put pressure on the tanker markets. There is uncertainty on a number of these orders, however; our order at STX being one, and some slippage is also expected.

There has been a noteworthy absence of new orders placed in 2016. And we expect that constraints in debt financing will continue to restrict newbuilding orders. This gives reasons to believe in a stronger market, further out in the cycle. Shipyards are also under pressure to restructure, and the reduction of capacity at several yards is expected.

Periods of market weakness like the one we are currently experiencing may also encourage scrapping of all the tonnage, a factor which has been virtually absent for the last two years.

Let's move to the current market, please. The market is currently at a 24-month low. There have been recently significant disruptions in crude oil supply from the Atlantic Basin. And this has led import markets like India and China sourcing more crude from the Middle East rather than the Atlantic.

This had a negative impact on ton mile demand, and also coincided with a sharp decrease in waiting time at ports and places around the world. Consequently, the tanker market experienced downward pressure on rates in May, and this trend has continued as we are now well into the third quarter. The third quarter is also maintenance season, meaning less crude demand from refineries.

Several of the factors that have recently impacted the crude oil tanker market should return to normal conditions over the coming months. Some production has been restored, and there are also signs that oil supply from the Atlantic may begin to normalize. China and India are both expected to increase imports from the Atlantic, and in particular from West Africa once the production is back onstream. Once this occurs, the recent [native] trend in ton mile demand should begin to reverse, and the market become more balanced.

Let's moved to the last slide, please. Frontline remains focused on maintaining our competitive breakeven levels and strong balance sheet. Combined with our large scale and strong shareholder base, we believe that we are well-positioned in the tanker markets. We have a very strong commercial team, and our aim is to continue to create value for our shareholders.

With that, I would like to conclude the presentation and move to your questions.

(Operator Instructions). Jon Chappell, Evercore ISI.

Thank you. Good afternoon. Robert, first question for you is just a little bit of a clarification on the dividend policy. I think you were pretty clear, both in your comments and -- or in Inger's comments and the press release that you see opportunities and you are retaining some capital for that. But this, call it, two-thirds payout ratio -- is that kind of the right number to think about going forward, as the market remains, in your terms, somewhat challenged through the second half of the year? Or could we see a return to the full payout if there is a seasonal uptick in the fourth quarter?

Historically, we had a full payout, and we've had to [report] the sale. For the reasons that we've stated, and Inger just went through, we've changed it. That our policy remains unchanged going forward.

Okay. And is there any minimum? Just we have seen how weak the third quarter has been, in the circumstance where there's no earnings in the third quarter, or even a small operating loss -- would there be some $0.02, $0.03 type minimum, or just stick to whatever the earnings is?

We look at the earnings. If we go to a minus, then we will not pay out.

Okay. Sounds good. Two other quick ones -- is there any drop-dead date on the STX as far as the refund guarantees are considered? Is it the end of this year? When will you know for sure whether those VLCCs are completely off the table, or removed, moving forward?

It's a work in process. We'll be working it all through the summer here. And it's a process that -- I think by the time we have our next call, we will have it -- it will be clarified. But it is taking time here, so I can't give you a time frame.

Okay. Let's hope so. And then the final thing is, if I do the numbers on the new facilities that you've put together, and assuming they all come together, you have about $873 million of pledge financing for $964 million of capital commitments. So you're basically almost there. And if you look at the terms that you've received on these new facilities -- 180 to 190 basis points -- compare that to what you are paying to Hemen, which is 625 basis points. Is there any thought of potentially refinancing, or not even using that facility; using what you have today, and then any excess cash that you're generating, rather than taking on expensive debt?

I think this is two different things, in a way. The bank that we have established is, let's say, not the same as what you can, in a way, draw under the facility that Hemen has provided. That's probably more important for let's say the equity part of an investment which will come from the Hemen facility.

Right. Okay. I understand. Thank you, Inger. Thanks, Robert.

Michael Webber, Wells Fargo.

Robert, just a couple of questions on asset values and rates, and I'll turn it over. But during the summer, you all acquired two Vs that would look like pretty attractive prices that carried two options that you guys have let expire. The acquisition is at $84 million and the option is at $85 million. Since then, we've seen a couple a couple prints at, I believe, $84.5 million. So what in the options role seems to make sense, even if they are just a touch above where the market is?

But I'm just curious, where do you think the drop in asset values is for say even kind of a [prompt or] resale VLCC -- how close to a bottom are we? And if those options were at parity with the pricing that you guys got earlier in the summer, would you have looked to acquire those, as well? Just curious as to how you think about things down here.

Over the summer here, there's been very little activity. And things have not changed much since I commented on this last time. Maybe it's down $1 million; maybe is down $2 million. But it's very -- I would call it flat. And I think we are close to a bottom. As you said, we did the two at $84 million, and we had options we chose not to take. But are sitting here monitoring it, and I think that there will be some interesting options going forward.

Okay. Without putting words in your mouth, do you think it's fair to say that that's all for asset value this cycle has? It still has an 8 handle on it, or do you think we could move down into the high 70s?

For the good quality, or the good spec, I think you are in the -- you are around the levels I just indicated: low- to mid-80s, depending on the spec. But a good spec would be around that.

That's helpful. And just one more -- and you get some derivation of this just about every call. But especially this time of year, we are seeing a degree of seasonal weakness accentuated by some of the details from the recent cycle. But just curious, as we start moving into Q4, how you see the back end of the year shaping up in terms of whether or not we could see some degree of a Thanksgiving Day effect and/or a seasonal bump, or whether we see the inventory drawdown process just take a bit longer this year. So swing away at that, if you will.

Looking at the overall -- the overall market has come down; it's come down lower than we expected it to this year, and there are several factors, like I went through earlier. And I think it's sort of a perfect storm in order of an effective running tanker fleet. [OPEC] has been in favor of the fleet running effectively -- less waiting, less Atlantic crude, more Middle Eastern crude, ton mile down.

I think one or more of these factors will turn around. So it would not surprise me; I'm pretty confident here that we will improve from the levels that we're at now -- that I'm confident on. But going through into Q4, I don't think we'll have as strong Q -- as strong last year. But I think the seasonal uptick, I wouldn't be surprised if we don't see that.

Fair enough. And along those lines, what do you think about the 30% charter coverage heading into 2017? Is it fair to assume that number is going to remain relatively static at least until we get further into Q4, or even in early Q1?

That market, we're -- as I said earlier, we're very pleased we took the cover. The market has come off a lot. So the window to lock into good rates is behind us. And in the next spike, it will come back. And we will keep monitoring that and take cover if we feel it's right. But the market is certainly not there at the moment.

Great. Okay. Very helpful. Thanks, guys.

Fotis Giannakoulis, Morgan Stanley.

I want to follow up on Jon's question about the STX newbuildings. Is this delay simply a delay of the shipyards, or it is inability of the shipyards to deliver the vessel? I understand that you have ordered the vessels at a slightly higher price than the current market. If STX were to reduce the price, would you accept this as an arrangement? Or is your pursuit to cancel these vessels, given the delays and the failures under the newbuilding contract?

STX, as far as receivership, given the financial situation -- so we don't think renegotiation is in the cards. It will be a matter of canceling them.

And I understand that STX has a few other newbuilding vessels in the Aframax and Suezmax sector, and this seems to be for while they had then ordered well before your vessels. Do you expect that these vessels will also be canceled and taken out of the order book? In the broader scheme, how many vessels -- how many VLCCs do you expect that they won't be delivered from the vessels that they are in the current order book?

At, STX we're the only ones with these on order. I think the total tanker book is in the high 30s somewhere. And these contracts will be different for each owner, so I can only comment on our own orders, of course.

The one I'm talking about canceling, there will be some looking to cancel at other yards, given the pricing, and there will be some shrinkage as well. But I think the order book will -- the actual delivered will look different from what I was presenting earlier. But the fact is, the order book is still substantial.

Thank you, Robert. One last about the market. You identified the weakness of the market, citing the difficulty -- the lack of supply and the disruptions in West African production. If you can try to analyze the different factors that have affected the market, apart from West Africa and disruption; for example, the lack of trading activity and the flat oil curve, or the higher fuel expenses. How would you allocate the weakness of the charter market to the several factors?

I think it's -- the [look is a simple]. I don't necessarily agree with your statement of the lack of supply. I think what's happening is that the supply has come down in the Atlantic Basin, and then it's been covered by the Middle East instead. So, overall, the volumes are there. We were down worldwide in Q2 to $96 million a day. But here for the second half of 2016, it looks like we are at $97 million a day. So I think it's more of a question of where it's being shipped from.

We've have a high ton mile, and that's come off. And that's the factor; it's not the supply itself. That would be much more worrying if the supply had fallen down from $96 million, but it's actually coming up from Q2.

So I expect the Atlantic to get some of the production -- Nigeria being one example -- to get some of the production back. And then you will have places like India who moved from Nigeria supply on parts, and replacing Nigeria by Middle East. It's a huge difference, if you look at the -- one VLCC can probably deliver four cargoes from the Middle East in the same time span as one cargo from Nigeria.

And a part of the ton mile impact, can you also comment about how active traders are? If you have seen also any decline in trading activity, given where the spreads are, between the time spreads and also the regional spreads?

In terms of trading, I haven't seen any difference in activity. There's maybe less talk about storage, but that's not really trading. Trading -- i.e., the capturing of arbitrage -- I haven't seen much change. So it seems very active to me.

And regarding the delays at the several ports, has there been any change compared to the previous quarters?

That is together with Atlantic production. That is the big factor. Basra, Iraq, come down from up to 20 days here in the winter, down to 67 days here in the summer. So there's a combination of factors. The weather -- they have not had good weather over the summer. They seem to have organized themselves better. They've had less maintenance of the berths.

But this will change, I think. The weather come later in the season, then you will have periods where that will affect it. They will have to take some berths down to maintenance again. So here we are talking -- I think what we are seeing now in Iraq is as good as it's going to get, in terms of logistics in the short- to medium-term. The volumes remain high to the area, and they're flat. So it's easier for them to organize, rather than organizing in a period where the volumes are growing month by month, like we've had last year and the year before.

China is another one in terms of the delays. They've had months here with less imports. And less imports means it's easier to arrange logistics in ports like Qingdao, so that's had an impact. So I think it's a very, very important factor, and now it is running very smoothly. But that doesn't mean it is going to run smoothly as we move along here. Because there's no different -- or no change on the supply side, and demand is still strong. So I think we've got reason to believe that delays will come back in, and that the tanker fleet will not be run as efficiently further down the road as it is today.

Thank you very much, Robert. Thank you, Inger.

(Operator Instructions). Jonathan Staubo, Fearnley Securities.

When you're talking about accretive investment opportunities, have you identified any vessels or fleets or anything, at this point?

We're constantly looking at it, Jonathan. So there are 20 out there, and we are constantly looking, but I will not be too specific.

All right. Thanks. And then a little bit on the market outlook. You are talking about the second half being overall softer than what we saw in the first half of this year. Could you provide any commentary on your expectations for 2017?

Predicting -- putting a number on that will be guesswork. I would much rather talk about the overall market, as I've done on the presentation and in my previous comments on other questions. That's -- overall, you get my view, and I identified the factors, right? So when it comes to the second half of the year, it will be weaker. We have locked in $30,000 on about three-fourths of the trading days on the VLCCs in Q3. For the first half of the year, we made almost $60,000 on the VLCCs.

Brilliant. Thanks. That's it for me.

Magnus Fyhr, Seaport Global.

You guys have done a very good job in fixing some of these ships into -- ahead of the weaker market. Can you talk a little bit about what kind of appetite you're seeing from the oil companies now to go long on time charters? I know that probably rates are below what you would expect to charter, but maybe you can shed some light on that. Thanks.

Overall, the charter market has been relatively quiet, and that goes for oil majors; it goes for traders, and so forth. It is inactive; I think people have -- it's come off a lot here, the last few months, and probably people waiting for it to stabilize. And there are a lot of books out there with ships re-delivering. So I would expect it's become more active further out in the year. But we might also need some more positive signs in the spot market, but when it becomes active again I think it will become very active.

And you would expect that maybe into the new year?

It can happen in Q4. Normally it happens and Q3. But over August/September is normally a very active period, so let's see September. But there will probably be some action in Q4.

Okay. Thank you.

Erik Stavseth, Arctic Securities.

Just a quick question on your SFL fleet. You did talk earlier this year about reducing your exposure, and you did take out one vessel in the quarter. Where do you sort of seem that fleet heading? And at what pace do you see, as you are sort of building down the fleet?

On the SFL fleet, there's been a wish from us in the Group here to get exposure down on the pre-2000 ships. So we sold a few last year, and we delivered a Front Vanguard in Q2. So we believe these are sales candidates, so we are looking to get them out. I think it's getting increasingly difficult to trade the older ships. So, ideally, we trade 2000-plus only when we get into 2017. But there's not much liquidity in the market, but overall we believe it's the right thing to do to and renew the fleet.

Our customers are constantly looking to charter modern ships rather than the older ones. And now in Europe, we are taking the 15-plus ships west from the Middle East, and trading them in Europe back is -- we find challenging.

So overall, going forward, the fleet -- or the customers are preferring that to the newer tonnage, and we have to follow that. And it's also a sign that the tonnage, as we go further out in the cycle here, this could help the overall markets.

Right. But don't you say the liquidity of the market is preventing you from sort of doing a rapid build-down of that fleet?

Yes, we've done two-thirds of the pre-2000s in the last 12 months. So we've actually done half, so we're on our way. But there's not much liquidity, no. But that could be -- you get a contango back in the (inaudible) and storage makes sense. Then, suddenly, it is back, and it will be active again.

Okay. Thanks.

(Operator Instructions). As we have no further questions, I would like to turn the call back over to Mr. Robert Macleod for any additional or closing remarks.

Thank you all for calling in to this presentation. I would also like to take the opportunity to thank everyone at Frontline for their great efforts. Thank you all very much.

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