Frontline Plc (FRO) 2018 Q2 法說會逐字稿

Good day, and welcome to the Q2 2018 Frontline Ltd. Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to CEO, Robert Macleod. Please go ahead, sir.

Thank you, Aimosa. Good morning, and good afternoon. Thank you very much for dialing in. This is Frontline's earnings call for the second quarter of 2018. I will start by briefly going through the highlights of the quarter. Following that, Inger will run us through the financials. We'll then look at Q2 earnings, and I will guide you on Q3. We will then move on to the current tanker market and outlook, where we will focus on why we are increasingly optimistic on tanker rates going forward. The call will be concluded by taking your questions.

Let's get started and look at the company highlights, please. We recorded a net loss of $22.9 million or $0.13 per share adjusted for noncash items in the second quarter. Our results were driven by a weak spot market. Earnings on our older VLCCs were particularly weak. From these, the spot TCE on ships of less than 15 years of age was $13,200 and ECOs made $17,000.

Q3 is booked very close to our cash breakeven levels thus far with 82% of the days at $21,700 on the ships under 15 years.

We terminated long-term charters for 3 2002-built VLCCs recently in a continued effort to divest of less efficient tonnage. We also invested in Feen Marine, a leading scrubber manufacturer, and we hold a 20% stake in the company. I will touch more on this later in the call.

With that, I will hand the call over to Inger to take us through the financials, please.

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

Let's then turn to Slide 4 and look at the financial highlights. Frontline achieved total operating revenues, net of voyage expenses, of $73 million in the second quarter and reports a loss of $22.9 million, equivalent to $0.13 per share.

The noncash items this quarter consisted of a $0.8 million mark-to-market gain on marketable securities, a gain on derivatives of $1.9 million, and also a gain on the release of accrued dry docking cost of $2.1 million, which were accrued at the time of the merger with Frontline 2012.

After adjusting then for these noncash items, we show adjusted EBITDA of $28 million and adjusted net loss of $27.7 million in the second quarter against adjusted net loss of $13.6 million in the first quarter of 2018. This is a decrease of $14 million.

Let's then look at -- a bit closer on the numbers and move to Slide 5, income statement. The decrease which resulted in the quarter of $14 million is mainly explained by a decrease in result on a time charter basis of $8.2 million due to the decrease in the TCE rates in the second quarter compared to the first quarter. We had a decrease in ship operating expenses of $600,000. We had an increase in interest expense by $2.4 million, mainly due to the drawdown on debt in relation to the delivery of 3 vessels in the first quarter. And finally, we had an increase in other expenses of [$554 million], mainly due to new charters on 2 VLCCs in the quarter.

Then let's take a look at the balance sheet, on Slide 6. Changes to the balance sheet as of end June from March 31, primarily relate to a decrease in vessels of [$34 million] due to depreciation in the quarter, an increase in newbuildings of $17 million due to yard installments paid in the quarter, a decrease in vessels under capital leases by $8 million due to depreciation. Net increase in debt with $6.4 million in the quarter due to drawdown of the Hemen facility, ordinary loan repayments, reduction in obligations on the capital leases and reduction in other current liabilities. And finally a reduction in equity of $22 million due to losses in the quarter.

As of June 30, Frontline had $204 million in cash and cash equivalents, including undrawn amounts under our unsecured loan facility. Our remaining newbuilding CapEx requirements amount to $112.5 million, relating to the 2 VLCC newbuildings, and we have approximately $111 million in debt capacity under our newbuilding credit facilities. We have no near-term debt maturities. The first debt maturity is in November 2019 when our senior unsecured loan facility of up to $275 million matures. We have drawn $190 million under this facility currently.

Let's then take a closer look at cash breakeven rates and OpEx on Slide 7. We estimate average cash cost breakeven rates for the remainder of 2018 to be approximately $22,500 per day for VLCC, $18,500 per day for the Suezmax tankers and $16,200 per day for the LR2 tankers. These rates [are all-in] daily rates our vessel has to earn to cover budgeted operating costs and dry dock, estimated interest expenses, 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. This has -- this is also the situation so far in 2018. 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 improving market conditions.

The operating expenses per day in the first quarter -- in the second quarter 2018 were $8,400 per day for VLCCs, $6,800 for the Suezmax tankers and $7,100 for the LR2 tankers. We dry docked 1 VLCC in the second quarter, and no vessels are scheduled for dry dock in the third quarter.

With this, I leave the word to Robert, again.

Thank you very much, Inger. Let's turn to Slide 8, please, and look at the Q2 performance and guidance for Q3. The spot earnings for the overall fleet in the quarter was $11,700 on VLCCs. ECO and modern lease obviously did better, as mentioned earlier. We have booked 78% at $20,000 for Q3. Our Suezmaxes made $14,100 and 64% of Q3 has been booked at similar numbers. On the Aframax, Q2 was weak at $11,700, but our Q3 bookings with 57% done at $15,500 is stronger.

Let's go to Slide 9 and look at the VLCC fleet growth. The global crude oil tanker fleet grew substantially in 2017 and was expected to grow by 8.3% in 2018. At the start of the year, there were 57 VLCCs scheduled for delivery in '18. 24 have been delivered so far, and it's also likely that some deliveries would be delayed into 2019.

Scrapping has increased considerably in 2018. According to reports, 25 VLCCs have been scrapped so far, and an additional 14 have been sold for scrapping. This has changed the fleet growth outlook completely, and it now actually looks like we are heading towards negative growth in 2018. Fleet growth was heavily against us in 2016 and 2017, and this change is a very important factor.

Let's move on to Slide 10, and have a look at the oil inventory cycle. There is a clear historic link between oil inventories and freight levels. In periods where inventory builds, freight increases as tanks are filled. 2015, when we enjoyed strong freight rates, is a very good example of this. As we went into 2016, this changed, inventory draws started and the freight market came off slowly. 2017 showed significant fleet growth and inventory draws and we entered a bearish freight market that has not yet recovered. But we expect this now to change as the headwinds are turning to tailwinds.

Let's move to the next slide and look at how we are preparing for 2020 by investing in Feen Marine Scrubbers. We believe in the economics in relation to installing scrubbers, especially on the big ships, and we will be installing scrubbers on a number of vessels as we have previously announced. By investing in Feen, we secure access to scrubbers with high-quality systems, reliable delivery timings and at an attractive price. And to be clear, retrofitting represents just as attractive economics as ordering a newbuilding with a scrubber. In many cases, it is even more compelling. Frontline's investment in Feen looks attractive on a stand-alone basis, and we, therefore, believe this is a good strategic move preparing Frontline for 2020.

Let's move to the last slide, and have a look at the summary. As we've seen over recent years, oil demand continues to be strong. New trade routes have been established, the U.S. export trade is important and more crude oil is moving to Asia resulting in increased ton-miles. We are seeing record levels of scrapping. The crude oil tank -- oil contango is back, fleet growth is halting, and oil inventory growth is expected. There are many encouraging factors present, and we only need some of them to continue for the tanker market to turn.

But on the flip side, the order book remains substantial and scrapping activity could slow down. Trade wars could also disrupt global growth, and demand could be hit in a higher price environment. Contracting has slowed significantly, helped by contracts in other shipping segments, but this could change.

So to conclude, the 2017 headwinds we explained in detail on our Q1 call are now turning in our favor. 2017 was also the first year in 5 years where we did not see a seasonal rate increase going in towards Q4. We expect to see the rate increase this year. Despite the current weak market, we believe there are important changes underway and we are, therefore, more optimistic going forward.

And operator, with that, I would like to move on to questions, please.

(Operator Instructions) It appears there are no questions at this time. I'd like to turn the conference back to you for any additional or closing remarks.

Okay. Thank you very much. That's it for us. So our press release and our presentation must have been extremely clear and covering. So thank you very much for -- everyone for dialing in. I would also like to thank everyone at Frontline for their great efforts. Thanks, again.

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