Frontline Plc (FRO) 2018 Q1 法說會逐字稿

Good day, and welcome to the Q1 2018 Frontline Ltd. Earnings Conference Call. Today's conference is being recorded.

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

Thank you very much. Good morning and good afternoon. Thank you for dialing in. This is Frontline's Earnings Call for the First Quarter of 2018.

I will start the call by briefly going through the highlights of the quarter. Following that, Inger will run us through the financials. We'll then look at Q1 earnings and I will guide you on our Q2 earnings. We will then move on to the current tanker market and the outlook. The call will be concluded by taking your questions.

Okay. Let's get started and look at the company highlights. We recorded a net loss of $13.6 million or $0.08 per share adjusted for noncash items in the first quarter. Our results were driven by a weak spot market. Earnings on our older leased vessels were particularly weak, but our modern tonnage delivered satisfactory results given the market conditions.

During the quarter, we took delivery of 2 newbuilding VLCCs and 1 LR2. Frontline now has 2 VLCCs remaining in our order book, both delivering next year. Our own fleet has increased from 4 million to 8.3 million deadweight tons since 2014, and the average age is down from 6.5 to around 3.5 years.

With that, I will hand the call to Inger to take us through the financials in detail.

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

Let's then turn to Slide 4 and look at the financial highlights. As Robert mentioned, Frontline achieved further a result of $13.6 million in the first quarter, equivalent to $0.08 per share. Total operating revenues, net of voyage expenses, were $81 million in the first quarter. Noncash items this quarter consisted of a $5.8 million loss on termination of the lease of Front Circassia. A $300,000 -- million -- together a $300,000 mark-to-market loss on marketable securities, a gain on derivative of $5.1 million and a gain on sale of shares of $1 million. After adjusting for these noncash items, we show adjusted EBITDA of $14 million and adjusted net loss of $13.6 million in the first quarter against adjusted net income of $5 million in the fourth quarter 2017, which is a decrease of $18.6 million.

Let's then look a bit closer on the numbers and move to Slide 5, income statement. The decrease in result in the quarter of $18.6 million is mainly explained by, first of all, a decrease in result on contractor basis of $17.8 million due to the decrease in contractor rates in the first quarter compared to the fourth quarter. Further, a decrease in depreciation of $4.6 million, mainly related to the decrease due to the impairments on the vessels under capital lease, which were -- which was set nice in the fourth quarter of 2017, which was partly then offset by an increase from the delivery of 3 newbuildings in the first quarter.

Further, a decrease -- sorry, increase in ship operating expenses of $1.3 million, mainly due to the delivery of the 3 new vessels in the quarter for the non-vessels in the fourth quarter. Then had an increase in interest expense by $1.6 million due to drawdown of debt in relation to the delivery of the 3 vessels in the first quarter and also an increase in operating expenses by $2.5 million.

Then let's take a look at the balance sheet on Slide 6. Changes to the balance sheet as of March 31, 2018, compared with December 31, '17, primarily relate to an increase in vessels of 2.9 -- $209 million due to the delivery of the 3 new vessels in the quarter, partly offset by depreciation in the quarter. Then a decrease in newbuildings of $46 million due to the delivery of 3 new vessels in the quarter and a decrease in vessels under capital lease by $26 million due to the termination of the lease on Front Circassia and also depreciation expense in the quarter.

Further, we had a drawdown of debt of $192 million related to the delivery of the 3 new vessels in the quarter and also a drawdown on the Hemen facility. We also had ordinary loan repayments of $26 million and a reduction in obligations under capital leases with $31 million due to $20 million in relation to Front Circassia termination, then regular repayment of $3.2 million and $6.7 million reduction due to amortization of profit share expense in the lease.

As of December -- sorry, as of March 31, Frontline has $249 million in cash and cash equivalents, including the undrawn amounts under our unsecured loan facility, marketable securities and minimum cash requirements. Our remaining newbuilding CapEx requirements amount to $131 million, and that is related to the 2 VLCC newbuildings that we have remaining. We have approximately $111 million in debt capacity under our newbuilding credit facility. We have no near-term debt maturities. The first maturity is in November 2019 when our senior unsecured loan facility of up to $275 million matures. We have drawn down $140 million under this facility.

Let's then take a closer look at cash breakeven rates and OpEx on Slide 7. We estimate that the average cash cost breakeven rates for 2018 is $22,700 per day for the VLCC, $18,500 per day for the Suezmax tankers and $16,300 per day for the LR2 tankers. These rates are the all-in daily rates that our vessels must earn to cover budgeted operating costs and dry dock, estimated interest expense, tc and bareboat hire, installments on loans and G&A expenses. Every $1,000 per day in achieved rate in excess of our cash breakeven rate translates to approximately $19 million in incremental net income per year or $0.11 per share, which shows the high importance of maintaining low cash breakeven rates.

In the upper right-hand graph, we show some planned historical VLCC cash breakeven rates, along with average VLCC spot earnings in the period 2005 to 2018.

Looking back in history, it is only the years 2009 and 2011 to '13 where the cash breakeven rates were higher than the average VLCC spot earnings at that time. Frontline's current cash breakeven levels are historically low and position us well in the context of existing market conditions and will help us to generate significant cash flows in improved market conditions.

The operating expenses per day in the first quarter of 2018 were $8,100 per day for the VLCCs, $7,200 per day for the Suezmax tankers and $6,800 per day for the LR2 tankers. And no vessels are scheduled for dry dock in the second quarter of 2018.

With this, I leave the word to Robert again.

Makes sense. Thank you very much, Inger.

Let's go to Slide 8 and we'll have a look at the Q1 performance and guide on Q2. The spot earnings for the quarter were $14,900 on the VLCCs. We made 18,000 on our VLCCs younger than 15 years, excluding the 2 newbuildings delivered in the quarter. Our Suezmax has made $15,400, satisfactory, I would say, given the market conditions, and the number was $14,800 on our LR2s. For Q2, we have locked in 78% of our VLCC trading days at $11,600. On the Suezmaxes, we have done 70% at $14,500. And for the LR2s, the number is about $12,400 and 72% is covered.

Let's move on to Slide 9, please, and we'll look at the present tanker market. The past 2 years have seen significant growth in the global crude oil tanker fleet. And the growth has continued in 2018 and is set to continue going forward. Thankfully, the number of crude oil tankers, in terms of newbuildings, was lower in the first quarter of '18 than in the prior quarter. And we expect newbuilding ordering to slow down. Scrapping has increased in '18. According to broker reports, 22 VLCCs have been scrapped so far this year, which is double the amount of scrapping we saw in '16 and '17 combined. Consistently high scrap prices, combined with a very weak freight market, have compelled owners of older tonnage to dispose of their vessels at a near-record pace. The surge in scrapping is a positive factor that will help reduce net fleet growth, but it will take some time before the market rebalances.

We believe that we are approaching the end of a crude inventory cycle and that inventories will begin to stabilize. There is a historic relationship between crude oil inventory levels and freight rates. Rates rise as inventories build and decline as inventories are consumed. There are also signs that OPEC could ramp up production, which would clearly benefit tanker markets.

In summary, the headwinds we have been experiencing are inventory draws, OPEC cuts, less congestion and high fleet growth. The tanker market has not yet reached an inflection point. The market remains soft, but the headwinds could turn to tailwinds further out.

Let's move to the summary slide, please. As we've seen over recent years, oil demand remains steadily strong, and new trade routes are also evolving with the U.S. exports being the main change. We also feel there's a stronger sentiment building amongst owners after several weak quarters. As described in the previous slide, there are several factors pointing towards a stronger market, but the reality remains that the present spot market remains weak and risks are still there. The order book is substantial, has grown further recently and could, of course, continue to build. The oil inventories are full. And despite slowdown in draws, the reality is that there is room for further stock draws. The recent hike in oil price could dampen demand, especially if the price continues to firm. Several fundamental factors are in favor of a strong tanker market, but the fleet needs to rebalance from the present supply. Until then, Frontline remains sharply focused on maintaining our cost-efficient operations and low breakeven levels.

With that, we'd like to move to the questions, please.

(Operator Instructions) We will now take our first question from Jon Chappell from Evercore.

Robert or Inger, can you explain a little bit the new arrangement with Ship Finance on the 8 leased vessels only needing -- only paying them now what the spot market covers? How long is that for and did you have to give up anything in return for that arrangement?

Jon, it's not a new arrangement. It actually is the current agreement, which we put in place in the summer of 2015. So this is only as of -- when we announced that in the summer of 2015, we said that it was a nonrecourse entity. It's a subsidiary of Frontline, but we don't have any charter guarantee in place on behalf of our subsidiary, from Frontline Ltd. side. So it means that if the account that this essentially has, Frontline Shipping Ltd, if that account is depleted, if it's no more cash into that account any longer, the ability for that chartering entity to pay the full charter hire, will eventually be decreasing. And it will not be in a position to pay the full charter hire payment when the cash buffer is spent. So that has been the situation the whole time. But we have never come into a situation before now. Thus, we are getting closer to, let's say, that there is no cash buffer in the account any longer.

Okay. I understand. So then how does -- if this withstands for a few quarters, say, where there's no cash left in the account and you need to pay the spot rate as opposed to the base rate, is there some type of makeup agreement to Ship Finance or do they just forfeit those quarterly payments?

It's -- there will be a kind of a debt that will accrue. I mean, that's the chartering entity, Frontline Shipping Ltd, will accrue then debt to Ship Finance, which will be, let's say, within that nonrecourse box as I referred to. So...

Okay. Okay. I understand. And then also -- I mean, you've mentioned that almost $250 million of liquidity, yet you drew another $50 million on the Hemen facility, which is pretty expensive relative to your other facilities. Why did you draw that in the second quarter -- or in the first quarter if you had enough cash on hand to meet your capital commitments, no debt repayments this year and the liquidity position that you're in?

Although we -- we drew on that facility because we -- in the first quarter, we had quite some -- a lot of net CapEx to pay. We had 3 newbuilding deliveries in the first quarter. So that's the main reason why we drew on that facility. It's no other, let's say, alternative. We don't have any bank debt which we can use for the net CapEx element of delivery.

Got it. Okay. And then finally, just one for you, Robert. You mentioned that we're not quite there on the inflection point yet. But clearly, there's been a lot of excitement about potential reversal of the OPEC cuts, maybe 1 million barrels a day. Can you just kind of walk us through the puts and takes of that? And what I mean is, if OPEC's increasing production, let's just say, by 1 million barrels a day because it's making up for Venezuelan oil that off the market and potentially, Iranian oil that can no longer go to Europe. Does that move the inflection point forward? Is it a net neutral event? How does that kind of change the ton mile dynamic?

No. I think described -- as you're describing it now with the situation in Iran is that that comes down half million in the Venezuelan, then it will be a neutral. So I think it's important here to look at the picture overall and looking at it with -- and yes, there is excitement now, but we're still waiting for the fundamental move. But I think as I said, the headwinds experience, especially in '17, but also in Q1, those headwinds, I think it will, at some point, become tailwinds. So I think OPEC on its own is one, but combined with a stop in inventory draws and so forth, then things could start moving. But it is too early to say that it is actually happening.

(Operator Instructions) We will now take our next question from Magnus Fyhr from Seaport Global.

Just a follow-up question there on the OPEC production. I mean, there's been some noise here I guess in the last week. I don't know if you've seen the pickup in the spot market. I mean, they've been very depressed, below cash breakeven. But what's been going on here in the last week as far as spot rates because it seems like there's been a little bit of a pickup?

I think that -- it's been picking up over the last couple of weeks. We've seen -- the Aframaxes on the continent move. We've seen the Suezmaxes tighten in the Black Sea and the Mediterranean. We've also seen a bit of improvement here on the VLCCs. So I'd say in terms of movement, the Aframaxes have clearly been the ones that have been coming up most. The Black Sea's been seeing rates go from $5,000, $6,000 to $20,000-plus in a matter of days, but that's not -- that is quite normal I'd have to say. Well, not normal, we haven't seen it for a while now, but it's good to see that the volatility is back.

But these markets move up and down a lot. So on the Vs, we've seen it come up a little bit, but so that's bumped the prices. And I would say it's too early, definitely too early to say that the Vs are showing strength. It's still in the teens. And the other ships are single digits. So -- but -- yes, positions are looking a little bit thinner. So it's a -- some optimism. But again, we have to be cautious there, too. And our view for now is that some positive factors might be coming up, but we have to wait before we confirm that things are actually getting better.

Okay. And I guess with OPEC meeting on June -- late June, I guess that wouldn't be impacting the market until maybe late summer. And I guess with the seasonality, should we kind of expect something maybe late third, early fourth quarter?

Yes. I think those volumes coming back, that will take a bit of time unless, also as we have seen in the past, that the ramp-up comes earlier than what's been said. But I think what -- the first catalyst I'm seeing in terms of market improvement, and which could be what we're seeing now, but I highlight it only could be is that the inventories are -- we're stopping the draw and that that's stabilizing and we're seeing some volumes come back. But it's a -- let's see what happens over the summer here. But I agree with you, we're going to be into Q3 before we see the real effect of any change in OPEC.

All right. And not getting ahead of ourselves here, your current fleet, you've got a couple of older vessels here, you've got 2 newbuildings left. I mean, do you feel like -- I mean, I've seen newbuilding prices move up here. Do you think there are opportunities in the secondhand market to acquire more vessels? Or do you feel comfortable with the fleet that you have today?

I think with -- we're always open to grow especially on the VLCC segment. So we are inspecting ships frequently. We are not considering ordering newbuildings at the -- I think there's more than enough newbuildings on order here. But we will monitor very closely resell opportunities for ships delivering next year, we will -- and as I say, we are looking at secondhand as well. But again, their liquidity remains relatively low on the secondhand, but the weakness of the market here. And the longer this goes on, the more opportunities. So we are more attentive to that than ever before.

All right. Great. And just lastly on scrapping. I know on the last conference call, you had some -- you've thrown some numbers out there. What are you thinking about scrapping now as far as potential more candidates? I think there's been mid-20s scrap so far this year. But what do you see out there over the next couple of months?

No. The comment from last quarter was a -- well, I think surprised a few when I said that 40 to 50 would be scrapped. And I'm more confident in that now than I was then. So it looks like we're on target for that. And if that becomes a reality, then we're going to be looking at a 2018 where the fleet growth in the VLCCs is plus/minus 0. But to be honest, that is exactly what we need here to get this fleet to rebalance. And it will take time because we've had fleet growth that's a -- that with a 100 ships here in '16 and '17 combined, and virtually very old, there are '12, '13 going out. So it's obvious now where -- why we are where we are, but rebalancing and then things will hopefully get better.

We will now take our next question from Fotis Giannakoulis from Morgan Stanley.

You mentioned about the increase in oil flows from OPEC, increase in production. I want to ask you whether these last few days that this caution has emerged. If you have seen any increase in floating storage. It seemed that last week numbers were a little bit higher than a month ago. But I'm wondering if you think that the -- this increase in OPEC production or even the commentary about increasing the OPEC production can drive at least floating storage inventories higher or even overall inventories higher and increase further the oil flows.

I mean, when it comes to storage, I'm pretty confident when I say that we're at a low point in terms of numbers or ships being held on storage, which is more -- a more blending -- and that sort of storage rather than the contango, of course. I think we're a bottom point there. We've not seen any increase over the last few weeks, but what we have seen is a -- or what we've had is questions relating to it which is the first time in a long time. But obviously, a question is one thing and it actually happening is something else.

I want to ask about what other sources of liquidity. You have obviously this kind of $35 million remaining from the Hemen revolver. What other sources of liquidity do you have in case that a -- the impact of an OPEC return takes a little bit longer?

Also currently, we don't have any other, let's say, alternatives than that.

Would you -- what would you consider -- would you consider sale and leasebacks or asset sales? Can you discuss with your lenders potentially easing some of the debt repayments temporarily if you have to?

I think that (inaudible) for the status, we are looking into financing, acquisition possibilities going forward. It will be a mix of different financing or, let's say, instruments, which will be put in place. So that is not a concern we have.

We will now take our next question from Espen Fjermestad from Fearnley.

I just had a question on the 2 VLs that you chartered in at 21 with options for a third year. I mean, it looks quite attractive and I really struggle to see how the owners are doing meaningful money on that. So, be curious to hear what kind of liquidity there in -- there is in the market for such deals.

Obviously, we've been looking for -- we always look for. So we find it attractive as well. We get -- we got both ships delivered in the Middle East, i.e., we got them in the load area, so we have flexibility on the redelivery. So we're happy with the deal, and we will keep looking for similar and take it on if we think it makes sense.

(Operator Instructions) We will now take our next question from George Burmann from IFS, Raymond James.

I have a couple of quick questions on the differences currently experienced between the West Texas, U.S. crude and Brent crude. It seems to me that there could be a lot of arbitrage opportunities. Are you seeing any additional quoting or requests for transportation in that area?

The export volume. Yes, you're very absolutely right on the spread there. But obviously we trade the freight and not the oil. But we are seeing more volume moving out and there are more and more questions. But there's no sort of fundamental change.

Okay. So you haven't seen any major pickup of exports from the U.S. I understand there is some limitations as to how much can be exported. But it seems to me this morning the difference between U.S. and Brent is about $11, that this is getting almost ridiculous.

Yes. No, it's -- it certainly is high. But the last move, it's steadily increasing. But nothing -- out of what we've seen, seemed steadily changed.

We will now take our next question from Mike Weber from Wells Fargo Securities.

This is Greg on for Mike. Just going off the storage point from earlier. I'm thinking about IMO 2020 and the potential need for storage of high sulfur fuel. How do you see that materializing for VLCC? Do you think that's a real event?

At the moment, it's very, very difficult obviously to answer that with a definite answer. But it is a potential. They could -- it will be a surplus product versus what it is today. So it could happen, and we are exploring this and other opportunities for the -- the older ships in our fleet.

Got you. Got you. Do you see that happening in like the first few quarters following 2020? Or do you think it could be -- and end up dragging out for later into the year?

I think it's -- we'll see. It depends on (inaudible) if contango comes in, obviously, on this product it's very, very unlikely. But I think from the summer of '19 onwards but it's difficult to time. But that's my guess -- if it happens.

There appears to be no further questions. (Operator Instructions) As there are no further questions, I'd like to turn the conference back to yourself for any additional or closing remarks.

Okay. Thank you very much. I would like to thank everyone at Frontline for their great efforts. And thanks to -- thank you very much to all of you who called in. All the best.

This concludes today's call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.