FRO Frontline Plc

 

 

FRONTLINE LTD. REPORTS RESULTS FOR THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 2017

Frontline Ltd. (the "Company" or "Frontline"), today reported unaudited results for the three and six months ended June 30, 2017:

Highlights

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Reports a net loss attributable to the Company of $19.4 million, or $0.11 per share, for the second quarter of 2017, primarily due to $7.8 million in dry docking expenses and a $12.2 million loss on the termination of two charters.

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Reports a net loss attributable to the Company adjusted for certain non-cash items of $14.2 million, or $0.08 per share, for the second quarter of 2017.

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Reports net income attributable to the Company of $7.6 million, or $0.04 per share, and net income attributable to the Company adjusted for certain non-cash items of $13.6 million, or $0.08 per share, for the six months ended June 30, 2017.

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Signed two senior secured term loan facilities of up to $110.5 million provided by ING Bank and $110.5 million provided by Credit Suisse, to partially finance four recent resales and newbuilding contracts.

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Terminated three long term charters: for the 1998-built Suezmax tanker Front Brabant and the 2000-built VLCC Front Scilla in the second quarter and the 1997-built Suezmax Front Ardenne in the third quarter ahead of the vessels' scheduled drydockings.

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Took delivery of three Suezmax and two LR2/Aframax newbuildings.

Robert Hvide Macleod, Chief Executive Officer of Frontline Management AS commented:

"The market has been decidedly weak since the start of the second quarter of 2017, which is primarily the result of the increase in the size of the global crude oil tanker fleet.  While the weak market naturally affects our earnings in the short term, the company's strategy is not altered.  We continue to take proactive steps to increase the earnings potential of our fleet through the ongoing renewal of our fleet and by pursuing an opportunistic approach in the resale and newbuilding markets. Over the last several quarters, we have divested older, less economical VLCCs and Suezmax tankers and have remained focused on acquiring high-quality, modern VLCCs at attractive prices, lowering the average age for our fleet from 8.1 years to 5.7 years.

The upcoming quarters may present challenges as vessel supply continues to increase, but we are confident in our ability to continue to execute our strategy with the goal of returning value to shareholders. Given how both the ship values and spot market conditions have developed over the summer, we believe we are better positioned having not done any substantial acquisitions in the first half of the year. We expect attractive opportunities to emerge as a result of the weak market and will remain opportunistic going forward."

Inger M. Klemp, Chief Financial Officer of Frontline Management AS, added:

"The financing of our current newbuilding program is complete, following the signing of our senior secured loan facilities with ING and Credit Suisse.  The terms of the financing support Frontline's low cash break-even levels.  We are pleased that we continue to be able to access financing on attractive terms, and we believe this is directly related to the financial strength of our platform as well as our strong relationships within the lending community."

 

 

 

 

 

The average daily time charter equivalents ("TCE") earned by Frontline in the quarter ended June 30, 2017, the prior quarter and 2016 are shown below, along with guidance for the third quarter in 2017 and the estimated average daily break-even ("BE") rates for the remainder of 2017:

 

 

 

The estimated average daily break-even rates for the remainder of 2017 are the daily TCE rates the vessels must earn in order to cover operating expenses including dry dock, finance costs and general and administrative expenses.

 

The Fleet

As of June 30, 2017, the Company's fleet consisted of 57 vessels, with an aggregate capacity of approximately 10 million DWT. The Company's fleet consisted of:

 

(i)	38 vessels owned by the Company (eight VLCCs, 15 Suezmax tankers, 15 LR2 tankers);

(ii)	10 vessels that are under capital leases (9 VLCCs and one Suezmax tanker);

(iii)

one VLCC that is recorded as an investment in finance lease;

(iv)	two VLCCs where the cost/revenue is split 50/50 with a unrelated third party;

(v)	one MR product tanker that is chartered-in on a short term time charter with a remaining duration of less than six months; and

(vi)	five vessels that are under the Company's commercial management (two Suezmax tankers and three Aframax oil tankers)

 

Furthermore, the Company has 10 newbuildings under construction: six VLCCs, one Suezmax tanker and three LR2 tankers with an aggregate carrying capacity of 2.3 million DWT.

As of June 30, 2017, the Company had entered into the following time charter-out contracts for seven vessels:

(i)	one Suezmax built in 2010 at a rate of $33,500 per day, expiry Q4 2017;

(ii)	five LR2 tankers at an average rate of $27,600, expiry Q1 2018; and

(iii)

one Suezmax tanker built in 2010 with a base rate of $30,000 per day for the first year and $27,000 per day for the second year with a profit share arrangement, expiry Q1 2018. The agreement is index-linked.

In May 2017, the Company agreed with Ship Finance International Ltd. ("Ship Finance") to terminate the long term charters for the 2000-built VLCC Front Scilla and the 1998-built Suezmax tanker Front Brabant upon the sale and delivery of the vessels by Ship Finance to unrelated third parties. The charters with Ship Finance terminated in the second quarter. The Company recorded a loss on termination of $12.2 million in the second quarter.

In July 2017, the Company agreed with Ship Finance to terminate the long term charter for the 1997-built Suezmax tanker Front Ardenne upon the sale and delivery of the vessel by Ship Finance to an unrelated third party. The charter with Ship Finance terminated in August. The Company expects to record a loss on termination of $5.8 million in the third quarter.

Newbuilding Program

As of June 30, 2017, the Company's newbuilding program was comprised of six VLCCs, one Suezmax tanker and three LR2 tankers. As of June 30, 2017, total instalments of $159.0 million had been paid or accrued and the remaining commitments amounted to $557.4 million, of which $417.7 million is due in 2017, $86.3 million is due in 2018 and $53.4 million is due in 2019.

 

 

In April 2017, the Company ordered two VLCC newbuildings to be built at Hyundai Samho Heavy Industries. The vessels are due for delivery in December 2018 and April 2019. The Company's options for two additional sister vessels have lapsed.

In April 2017, the Company took delivery of the Suezmax newbuilding Front Crystal and the LR2 newbuilding Front Sirius. In May 2017, the Company took delivery of the Suezmax newbuilding Front Coral. In June 2017, the Company took delivery of the Suezmax newbuilding Front Cosmos and the LR2 newbuilding Front Castor.

 

Financing Update

In June 2017, the Company signed a senior secured term loan facility in an amount of up to $110.5 million with Credit Suisse. The facility matures in 2023, carries an interest rate of LIBOR plus a margin of 190 basis points and has an amortization profile of 18 years. The facility will be used to partially finance two of our recent VLCC resales and newbuilding contracts.

In June 2017, the Company signed a senior secured term loan facility in an amount of up to $110.5 million with ING Bank. The facility matures in 2023, carries an interest rate of LIBOR plus a margin of 190 basis points and has an amortization profile of 18 years. The facility will be used to partially finance two of our recent VLCC resales and newbuilding contracts.

Frontline has committed bank financing in place to partially finance all of the Company's 10 resales and newbuilding contracts.

Corporate Update

In the second quarter, the Company sold 3.2 million shares in DHT Holdings, Inc. ("DHT") for proceeds of $13.8 million and a gain of $0.5 million and received dividends of $0.5 million.  This follows the sale of 1.7 million shares in DHT for proceeds of $7.9 million and a gain of $0.8 million and receipt of dividends of $0.9 million in the first quarter of 2017.

Pursuant to the Company's stated dividend policy, and due to the net loss attributable to the Company in the second quarter, the Board has decided to pay no dividend for the second quarter.

We had 169,809,324 ordinary shares outstanding as of June 30, 2017, and the weighted average number of shares outstanding for the quarter was 169,809,324.

Second Quarter 2017 Results

The Company reports a net loss attributable to the Company of $19.4 million, or $0.11 per share, for the second quarter of 2017 compared with net income attributable to the Company of $27.0 million, or $0.16 per share in the first quarter. The loss was primarily due to $7.8 million in dry docking expenses during the quarter and a $12.2 million loss on termination of two long-term charters. The net loss attributable to the Company adjusted for certain non-cash items was $14.2 million, or $0.08 per share, for the second quarter of 2017 compared to net income of $27.9 million or $0.16 per share in the first quarter. These non-cash items consisted of a loss on the termination of the long term charters of Front Scilla and Front Brabant, net of termination payment due, of $2.1 million, and a loss on derivatives of $3.1 million. Net income attributable to the Company in the first quarter of 2017 included a gain on termination of the long term charter of Front Century with Ship Finance of $20.6 million, a vessel impairment loss of $21.2 million on four vessels leased from Ship Finance, and a loss on derivatives of $0.2 million.

 

 

 

Total ship operating expenses of $37.6 million in the second quarter were $6.9 million higher than in the previous quarter due to the dry docking of four vessels (one vessel was dry docked in the first quarter) and the delivery of five new vessels in the second quarter.

Contingent rental income in the second quarter relates to the charter party contracts with Ship Finance and is due to the fact that the actual profit share in the second quarter was $8.7 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.

The Company generated net income attributable to the Company of $7.6 million, or $0.04 per share, for the six month ended June 30, 2017 compared with net income attributable to the Company of $93.2 million, or $0.60 per share for the six months ended June 30, 2016. The net income attributable to the Company adjusted for certain non-cash items was $13.6 million, or $0.08 per share, for the six months ended June 30, 2017 compared with net income attributable to the Company of $137.9 million, or $0.88 per share in the six months ended June 30, 2016. These non-cash items consisted of a vessel impairment loss of $21.2 million on four vessels leased from Ship Finance, a loss on derivatives of $3.3 million, a loss on the termination of the long term charters of Front Scilla and Front Brabant, net of termination payment due, of $2.1 million, offset by a gain on the termination of the long term charter of Front Century of $20.6 million. Net income attributable to the Company in the six months ended June 30, 2016 included a vessel impairment loss of $25.5 million related to the sale of six MR tankers and the termination of the long term charter for Front Vanguard, an impairment loss on shares of $6.9 million, and a loss on derivatives of $12.3 million.

As of August 2017, the Company estimates that the average daily cash breakeven rates for the remainder of 2017 will be approximately $21,600, $17,500 and $15,700 for its owned and leased VLCCs, Suezmax tankers and LR2 tankers, respectively.  The Company believes these rates are highly competitive.

A reconciliation of net income attributable to the Company to net income attributable to the Company adjusted for certain non-cash items for the quarter and six months ended June 30, 2017 is as follows:

 

 

 

The calculation of net income attributable to the Company adjusted for certain non-cash items per share in each period has been calculated using the same number of shares as used in the GAAP earnings per share calculations.

This press release describes net income attributable to the Company adjusted for certain non-cash items and related per share amounts, which are not measures prepared in accordance with US GAAP ("non-GAAP"). We believe the non-GAAP financial measures presented in this press release provides investors with a means of evaluating and understanding how the Company's management evaluates the Company's operating performance. These non-GAAP financial measures should not be considered in isolation from, as substitutes for, nor superior to financial measures prepared in accordance with GAAP.

 

Strategy and Market Outlook

The growth in crude tanker tonne-mile demand suggests that the current tanker market is not suffering from weak demand growth, but rather from excess supply growth which has occurred over the last 18 months.  Despite current market weakness which is forecast to continue in the near-term, the Company continues to believe that the market will begin to improve in 2018 as the pace of deliveries of newbuilding vessels slows and vessels are retired from the global fleet. There are nearly 110 VLCCs built in 2000 or earlier that continue to operate.  This is roughly equal to the current VLCC order book.  At some point in time these older vessels will permanently exit the fleet. We believe that increased scrapping is inevitable in the near term, driven by the weak spot market and the increased scrap value of tankers, which is up by approximately 50 percent year on year.

Frontline has been continuously renewing and growing its operating fleet, most recently with the delivery of five newbuilding vessels in the second quarter and the termination of leases for three older vessels. Since the start of 2016, Frontline has grown its fleet on water by approximately 2.1 million DWT and in the process lowered the average age for our fleet from 8.1 years to 5.7 years. This has also had the effect of reducing our average daily vessel operating expenses and cash breakeven rates, which we expect will continue to decrease with further deliveries of newbuildings and resales, and also increasing the earnings potential of our fleet.

The Company is thus uniquely positioned to generate substantial returns to its shareholders in a strong tanker market and healthy returns in a more muted market. The Company has a long track record of doing so, and it seeks to carry on that tradition as it increases its leadership role in the market.

Presentation materials and a webcast of the conference call may be accessed on the Company's website, www.frontline.bm, under the 'Webcast' link.

 

 

A replay of the conference call will be available for seven days following the live call. The following numbers may be used to access the telephonic replay:

Participant information required: Full name & company

Forward-Looking Statements

Matters discussed in this press release may constitute forward-looking statements. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts. Words, such as, but not limited to "believe," "anticipate," "intends," "estimate," "forecast," "project," "plan," "potential," "may," "should," "expect," "pending" and similar expressions identify forward-looking statements. The forward-looking statements in this press release are based upon various assumptions, many of which are based, in turn, upon further assumptions. Although Frontline believes that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond the control of Frontline, Frontline cannot assure you that they will achieve or accomplish these expectations, beliefs or projections. The information set forth herein speaks only as of the date hereof, and Frontline disclaims any intention or obligation to update any forward-looking statements as a result of developments occurring after the date of this communication.

 

The Board of Directors

Frontline Ltd.

Hamilton, Bermuda

August 29, 2017

Questions should be directed to:

Robert Hvide Macleod: Chief Executive Officer, Frontline Management AS

+47 23 11 40 84

Inger M. Klemp: Chief Financial Officer, Frontline Management AS

+47 23 11 40 76