Frontline Plc (FRO) 2016 Q3 法說會逐字稿

Thank you for dialing in to Frontline's earnings call for the third quarter of 2016. I will start this call by going through the highlights of the quarter. Following that, Inger will run us through the financials, and then we'll look at the Q3 earnings segment by segment, and I will guide you on our Q4 earnings and time charter cover. We will then move on to the current market conditions and the market outlook, as well as looking at Frontline's position for the long term. The call will be concluded by taking your questions.

Let's get started and have a look at the Company highlights from Q3. Earnings in the third quarter were healthy, given the relatively weak market conditions during the quarter. Our results underscore both the benefits of our low cash break-even levels, as well as Frontline's earnings potential.

We achieved a net income of $16.6 million, or $0.106 per share, adjusted for non-cash items. Frontline declared a cash dividend of $0.10 per share for the third quarter. For the first three quarters combined, we're just under $155 million, or $0.99 per share.

On the fleet development side, we took delivery of four newbuildings: one VLCC, two Suezmax, and one LR2. We sold our six MRs earlier in the year. Five of these were delivered in the third quarter and the final MR in November. As we previously announced, we canceled four VLCCs on order at STX and received a full refund less $2 million in total cancellation fees.

On the financing side we have secured $870 million in bank debt financing, following receipt of a $321.6 million commitment in November. With this, Frontline's current newbuilding program is fully funded. Inger, please can you take us through the financials in more detail?

I will. Thanks, Robert, and good morning and good afternoon, ladies and gentlemen.

Moving on to slide 2, the financial highlights: Frontline achieved total operating revenues net of voyage expenses of $113 million in the third quarter, and the EBITDA came in at $53.3 million and net income at $5.5 million, equivalent to earnings per share of $0.03. In the third quarter we recorded certain non-cash charges, and these non-cash charges consisted of a loss on the cancellation and sale on newbuildings and vessels of $2.7 million, a vessel impairment loss of $8.9 million relating to three vessels that we leased from Ship Finance, an impairment loss on shares of $0.3 million, and mark-to-market gain on derivatives of $0.9 million, and a non-controlling interest expense of $0.1 million.

After then adjusting for these non-cash charges, we show EBITDA of approximately $65 million and a net income from operation of $16.6 million in the third quarter, equivalent to $0.106 per share. Frontline declared a dividend of $0.10 per share this quarter, representing approximately full payout of adjusted earnings per share.

Moving to slide 3, income statement: Frontline achieved net income adjusted for certain non-cash charges as I said in the third quarter of $16.6 million against $48.7 million in the second quarter. And the decrease [in adjusted sales for] operation in this quarter of $32 million is mainly explained by a decrease in the sales on time charter basis of $46.5 million due to the lower spot rates achieved in the third quarter compared to the second quarter.

Also, we had a decrease in contingent rental expense by $9.5 million. In the second quarter, we included contingent rental expense of $0.7 million, and in the third quarter we included an income of $8.8 million due to the fact that the actual profit share in the third quarter of $5.4 million was $8.8 million less than the amount accrued in the lease obligations payable when the leases were recorded at fair value at the time of the merger with Frontline 2012.

We also had a decrease in [running] expenses of $1.7 million, primarily due to a decrease in drydocking expenses. Two vessels were drydocked in the second quarter compared with none in this quarter. We also had a decrease in charter hire expenses of $3.7 million, mainly due to the redelivery of two MR tankers and two LR2 tankers this quarter. And we had an increase in other expenses by $0.4 million.

Moving then to slide 4, cash break-even rates and OpEx: We estimate average cash cost break-even rates for the remainder of 2016 of approximately $21,200 per day for VLCC, $17,300 per day for Suezmax, and $15,300 per day for the LR2 tanker. These rates are the all-in daily rates that our owned and leased vessels must earn to cover the budgeted operating cost and drydock cost, the estimated interest expense, bareboat hire, installments on loans, and G&A expenses. In the remainder of 2016, no vessels are scheduled for drydock.

The OpEx per day in the third quarter came in at $9,100 for VLCC, $7,400 for Suezmax tankers, and $7,000 for LR2 tankers. And no vessels were drydocked in the third quarter.

While we have competitive running expenses and admin expenses, the low cash break-even rates are to a large extent explained by the long-term -- long debt amortization profile, and the low interest costs on new and existing debt. We believe these cash break-even rates are highly competitive. For every $1,000 per day the lower cash break-even rate means approximately $16 million to $20 million extra net income per day, or $0.10 to [$0.30] per share, which shows the high importance of maintaining the low cash break-even rates.

Moving now to slide 5, remaining newbuilding CapEx and debt capacity: As of September 30, 2016, the Company's newbuilding program comprised three VLCCs, excluding the four canceled STX vessels; six Suezmax tankers; and seven LR2 tanker newbuildings. The total installments of $208.1 million have been payed in respect of these newbuildings, and the remaining commitments amounted to $760.4 million, which was distributed with $76 million payable in 2016 and $684 million payable in 2017. All 16 vessels are expected to be delivered in 2017.

During the third quarter we completed the financing from China Exim Bank of up to $328 million announced earlier this year. In November we also secured commitment for a second facility with China Exim Bank of up to $322 million, and this facility will be insured by China Export and Credit Insurance Corporation. These facilities will carry an interest rate of LIBOR plus a margin in line with Frontline's existing loan facilities, and have an amortization profile of 15 to 18 years. The Chinese financings will finance all the eight Suezmax newbuildings and the eight LR2 newbuildings.

In addition, we have through the third quarter secured up to $220 million of this financing from ING and Credit Suisse at an interest rate of LIBOR plus a margin of 190 basis points, and a 17 to 18 years amortization profile. These financings will finance [4 times these] newbuildings. We consider the terms achieved highly attractive, enabling us to maintain [our below] cash break-even levels.

Frontline has secured bank financing in the total amount of up to $870 million to partially finance all of the Company's 16 newbuilding contracts, and also the four vessels which were delivered during the third quarter. In addition, we have a senior unsecured loan facility in an amount of $275 million with an affiliate of Hemen Holding Limited.

This slide shows the remaining newbuilding CapEx of $760 million, the drawn debt as per September 30, 2016, for the four vessels delivered in the third quarter, and the undrawn secured bank debt under the different facilities, the assumed draw on the cash, and the undrawn unsecured loan facility. The Company has now fully financed the newbuilding program and has an additional capacity for further growth.

Moving down to slide 6, the balance sheet: Changes to the balance sheet end September 30 from end June 30 are a total decrease in balance sheet value of approximately $25 million. The changes in assets are mainly related to decrease in newbuildings with $52 million, which is still net of $206 million newbuilding installments paid, offset by $255 million due to the delivery of one LR2 tanker, two Suezmax tankers, and one VLCC this quarter. Vessels increased by $43 million due to delivery of one LR2 tanker, the two Suezmax tankers, and the one VLCC, partly offset by sale of five MR tankers and the termination of the Front Vanguard lease.

The other current assets came down with $6 million and cash decreased $9 million. Total liabilities are the same, and equity is down, with approximately $25 million due to dividend paid offset by net income in the quarter. With this, I leave the word to Robert again.

Thank you very much, Inger. Please turn to slide 7 and we look at the Q3 performance and the guidance for Q4. The spot earnings have come down from Q2. The third quarter is often the weakest quarter of the year due to seasonal factors.

This year, several other factors made the market weakness more pronounced. These included supply disruptions, easing refinery margins, less waiting time in ports and places around the world, and inventory drawdowns. These were all factors that led to a slowdown in demand for our ships.

The spot earnings for the quarter were just under $27,000 on the VLCCs, $19,200 on Suezmax, and just over $20,000 on our LR2s. Although down from the previous quarter, we are encouraged by our overall performance given the market conditions.

For Q4 we have locked in 75% of our trading days in the VLCCs at $28,000, and the Suezmaxes are at $19,000 for 55% of the days, and the LR2s are at $16,000 for 60%. All these levels are, of course, well above our cash break-even levels.

Let's move to slide 8, please, and look at the time charter cover. For the balance of 2016, 28% of our fleet is chartered out at relatively attractive rates, as we capture the strength of the tanker market going into 2016. By end 2017, the cover is 18%, and we start the year with 27% coverage.

The net cash effect of our TC relets is about $40 million for the year 2017. This time charter cover reduces our exposure to market weakness by lowering our cash break-even levels for the vessels in our three trading spots. We will continue to pursue TC cover if it is in the interest of the Company's shareholders.

Let's move to the next slide, please, and look at the current market. The market began to recover from a 24-month low and show signs of improvement towards the end of the third quarter, and this trend has continued through November. The winter has traditionally been strong for the tanker markets, and we expect that conditions will remain into the first quarter of next year.

We are beginning to see congestion building at ports in certain areas as import volumes increase. Also, crude oil inventories have been declining, reversing a factor that had a negative effect on the tanker market in the third quarter.

We believe that demand for crude oil remains robust, and import volumes into China, India, and the US continue to grow. The increase in US import volumes has contributed to ton miles, and India's contribution to ton miles is expected to increase as this consumption grows and it diversifies its supply sources.

Both tanker owners and charterers have been focused on the OPEC meeting scheduled for this week. OPEC previously indicated that its members agree to production caps, with the details to be sorted out in this week's meeting. A reduction in the supply of crude oil is potentially negative, but it is unclear whether the OPEC members will be able to come to an agreement.

As of yesterday, discussions with several members seem to be stalling, and just minutes before we started this call there were rumors that Iran would not cut things, so we'll follow the news closely. But we do not believe that the outcome of the meeting will be vital for shipping, as we regard the volumes of oil transported as robust.

As we have pointed out in earlier presentations, demand is the key driver for tanker freight. Global oil demand is strong and is expected to continue to grow firmly going forward. Rising prices could challenge demand, but that would in turn give non-OPEC producers an incentive to increase production. Ultimately, a more balanced oil market may actually prove to be positive for tanker markets.

Please move to slide 10 and we'll have a look at the crude tanker order book. Newbuilding deliveries have accelerated this year, with about 50 VLCCs and 30 Suezmaxes delivering. However, the market has been resilient despite the historically high delivery pace and the other factors discussed earlier.

The same number of VLCCs are expected to deliver next year. For Suezmaxes, the number is increasing to 60, and this is expected in periods to put pressure on the tanker markets.

There has been a dramatic slowdown of ordering in 2016. This is a trend that is forecasted to continue, given the expected contraction in global shipyard capacity and a limited availability of capital to finance new orders. Likewise, scrapping is expected to accelerate, as 43 VLCCs and 31 Suezmaxes are scheduled to undergo third and fourth special surveys next year. With new regulation, like those requiring balanced water treatment systems increasing the cost of the special surveys, the odds are in favor of scrapping picking up going forward.

It is worth mentioning that eight VLCCs have exited the trading seat this year to pursue long-term storage or other projects. So although scrapping is minimal, this is positive for the freight profile.

Also the spread between older tonnage and scrap value has narrowed significantly, providing further justification for scrapping decisions. Any periods of prolonged market weakness will likely cause scrapping to accelerate. This will in turn lead to a more balanced market. With newbuilding deliveries starting to tail off after the first half of next year, and a portion of the global fleet that is becoming increasingly difficult to trade, we see good reason to be optimistic.

Let's move to the final slide. We believe that our performance in the third quarter highlights Frontline's competitive position in the market, as well as our efficient operations. We have a positive long-term outlook on the tanker market, as we expect it to balance as vessels are absorbed into the global fleet and older vessels retire from trading. At the same time, crude oil demand is forecasted to grow.

In the meantime, we believe that periods of market weakness will create attractive opportunities to acquire assets at historically low prices. We are in a unique position to grow our fleet and continue to generate substantial returns to our shareholders in a strong tanker market and healthy return for the more muted markets like we saw in Q3.

Our large commercial scale, low break-even levels, active approach to time chartering, and access to capital are important factors which support our leading position in the tanker market. With that, I would like to conclude this presentation and move to your questions.

(Operator Instructions)

Jon Chappell, Evercore ISI.

Thank you, good afternoon. Robert, start where you left off on the supply side, and especially the two-tier market that's developing. Obviously Frontline through the ship finance has been getting rid of some of the 1990 built tonnage, but you still have a handful of older ships as well.

What are the costs that you're looking at as you look to balance water treatment and also the sulfur regulations in 2020? And will that accelerate the scrapping or at least the removal from the trading fleet of your older tonnage?

It's not good to give you an exact sum, but I can give you an idea. And this is all a part of the calculation which in sum gets me to the conclusion that scrapping is more likely going forward.

We started the year with a spread between the 1998 build ship and scrap value at $12 million. That value is now in relative terms, straight dollar terms, down to about $5 million. Then you add the cost of ballast water, for example, anywhere between $2 million and $3.5 million on a VLCC depending, and then a cost of a special survey could be anything between $2 million and $5 million.

So it's very much down to each and every ship and what the cost actually is, because it's down to how much still is required in the special survey and so forth. But definitely the spreads coming in and I think it will be a catalyst there in terms of scrapping as we go forward.

For ourselves as you say we're getting rid of, or ship finance is getting rid of, a few of the pre-2000. We have a few left but looking at opportunities, and our long-term aim here is to renew the fleet.

Right. And then on that point, you also mentioned in the press release that this market weakness is creating attractive opportunities. Obviously Frontline over its history has been a consolidator of the industry. So two-part question here.

One, as you look to modernizing the fleet and taking advantage of these opportunities, is it more of a focus on buying assets out there on a one-by-one basis? Or do you think there's more company-to-company consolidation that's likely?

And then two as you think about financing either one of those paths, would it be the unsecured debt and adding more leverage to the fleet? Or do you think that you'd want to use equity whether it's shares for ships or straight equity issuances as a way to finance?

On the first part there, we're looking at the opportunities on a ship-to-ship basis. Or one ship deal, two ship deal, that market has been pretty unchanged over the summer. Same goes with fleets.

And we're looking at both full time. The values are at historically low prices. And it's interesting, and it's also interesting on a Company basis, but we've been saying this every quarter here and the conclusion is basically we keep looking and we are confident that we'll find good opportunities that will be right for Frontline.

And to your second question, I guess although we do have capacity for growth in the unsecured loan facility. So that's our focus.

Right. Okay. Thanks Inger, thanks Robert.

Thank you.

Magnus Fyhr, Seaport Global.

Yes thank you. Just two quick questions. First on the time charter market, you been doing a good job in securing some of these ships at attractive rates. Have you seen the sentiment change at all from the oil companies with rates moving up here maybe a little higher than most people had expected?

First of all thanks for the comment. We got the timing right which is nice.

So on the market now, it's actually been quite an exciting couple of weeks, maybe three, four weeks where the rates have definitely come up on the VLCCs. But the periods are relatively short. So where probably now you're looking -- people are looking at six months system as the main target and then you get up to a year.

There's been a couple of two-year deals done but there are not many of them. But rates have come up quite nicely. They're probably up 20% in this, during November.

Can you lock in a 12-month charter and about $30,000 a day?

Yes. And with a good ship you can definitely do that.

Okay. Thank you.

And second question on the LR2 segment performed very well. What's the -- how many of those are trading dirty versus clean right now?

We put -- during November here we've taken two ships dirty, two IS Class Aframaxes LR2s and that's always been the aim, to trade them dirty. When we made that decision two or three weeks ago, the spread between the two markets was almost $30,000 a day.

So we definitely saw the upside, and we will continue to put ships into the dirty market if we feel that is right. And we are set up technically operationally to not only go dirty but also to come back clean, so we will actively work both markets.

Okay. And just refresh my memory here on the cost of bringing them back into clean after you trade them dirty.

I've done quite a few of these. From experience it's anywhere between zero and $1 million. So it's a bad answer to your question, but over time it averages between $300,000 and $400,000 unless you have access to condensate cargos.

Okay. That's it for me. Thank you.

Fotis Giannakoulis, Morgan Stanley.

Hello Robert, hello Inger. Thank you. Robert, I want ask you how much of the increase in traveling activity and the rates over the last few weeks is attributed to the OPEC meeting? And how much is the seasonality because of the cold weather, the colder weather in the northern hemisphere? And also if you can give us an update of what is happening with congestion and what is the average speed that you see out there and how this has changed compared to the previous quarter?

Okay. On the first, then the activity on the time charter is definitely down to the seasonality, the pick up in rates and I think very little if any is down to the OPEC meeting. So that's the first one.

And on the second one, in terms of congestion we're seeing a bit more in China, especially north obviously due to the colder weather and we're also seeing some in Iraq. So it's slowly building. It's like a motorway; when the Q starts it quickly adds up. So we expect this to grow as we go into December.

As for the speed, there's not been that much change. Some we will put down to balance speed. I think we're probably about 11.5, 12 on the balance now, and the late and service speed is unchanged.

I want to ask you also if you can give us an overview of what is happening with the shipbuilding industry? And we have seen secondhand values dropping.

Are there buyers, companies willing to place orders for 2019? And are there yards able to provide attractive enough prices to stimulate additional orders for delivery in future?

I think it hasn't changed that much since we spoke about this last. The activity remains slow. In terms of number of contracts signed, it's a very, very low number here, not seen for many, many years.

So that activity, we don't expect that to pick up anytime soon. There are attractive deals in the secondhand market and generally there are not many buyers our there. So the conclusion we draw from this is that this will help build a positive long-term outlook from tanker market going into 2018 and 2019.

Thank you very much, Robert.

Michael Webber, Wells Fargo.

This is Donald stepping in for Mike. Thanks for taking my question. Just had one follow up. We've seen a sharp pop in Suezmax and Aframax rates in the Med and North Sea. Can you just give a little detail on what's driving that? Is it just the congestion related impact that you spoke to earlier, or is there something else that worked there?

Q3 was down due to for example the main reason was Atlantic production and all the Atlantic production, the West African volume or Nigeria was the main reason. So you had Nigeria come back, and then you had an increase in [stints] both in the Black Sea and the Baltic for Aframaxes.

Suddenly there weren't enough Aframaxes around, so the Suezmaxes were brought in to do the Aframax stints. And at the same time the activity for the Suezmax stints came up. So it's a volume growth that came as a surprise, and that drove the market up very quickly.

Great thank you for the color, Robert. That's it for me.

(Operator Instructions)

Herman Hildan, Clarksons Platou.

Hello Robert and Inger. I have some very short and simple questions. A year from now do you think asset values will be higher than they are today?

I think there's a chance that asset values will start moving second half next year, but I don't think it's going to be a dramatic move. There's no indicator of that. As a guess second half of 2017 is maybe early, but I'm quite sure that in the medium-term to long-term there's certainly more upside in the prices than there is downside.

Okay. So the interesting part anything is the Hemen facility. Is that intended as a buffer on top of the low cash breakeven you have? Or is it intended to at the right time fully applies for fleet growth?

Primarily it's securing capacity for further growth.

Okay. That's all for me.

Erik Stavseth, Arctic Securities.

Hello. Couple of quick ones from me as well. Inger, could you just dissect what the debt drawdown on the two Suezmaxes and the Aframax vessel was in Q3? And also give us your estimated cash breakeven for 2017?

With respect to the allocation of the debt drawdown, we drew down $109 million on the first China Exim facility in the third quarter. That was for the two Suezmaxes and the one LR2 tanker.

And the split there? And the split between those two. Could you give us the split between the Suezmax and the Aframax?

It was approximately $38 million on the Suezmax at approximately $33 million on the LR2 tanker.

Okay.

And then we drew down as you saw from the graph, $54.6 million on the [C], on the ING facility in the third quarter.

Right. And then on the breakevens for 2017? Do you have any early guidance there?

No, I do not have any early guidance. But you should expect them to be pretty much in line with what we have had so far.

All right. That's all for me. Thanks.

(Operator Instructions)

There is currently no question over the phone, sir.

Okay. Then I would like to conclude by thanking you all for calling into this presentation and I would also like to thank everyone at Frontline for their great efforts. Thank you very much.

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