Management's Discussion and Analysis of Financial Condition and Results of Operations for the Six Months Ended June 30, 2017
General
Results of Operations
Amounts included in the following discussion are derived from our unaudited condensed consolidated financial statements for the
six
months ended
June 30, 2017
and
June 30, 2016
.
Total operating revenues and voyage expenses and commissions
|
|
|
|
|
|
(in thousands of $)
|
2017
|
|
2016
|
|
Time charter revenues
|
64,619
|
|
136,320
|
|
Voyage charter revenues
|
252,314
|
|
268,265
|
|
Finance lease interest income
|
933
|
|
1,154
|
|
Other income
|
9,409
|
|
13,120
|
|
Total operating revenues
|
327,275
|
|
418,859
|
|
|
|
|
Voyage expenses and commissions
|
115,339
|
|
67,514
|
|
Time charter revenues decreased in the
six
months ended
June 30, 2017
as compared to the
six
months ended
June 30, 2016
primarily due to:
|
|
•
|
a decrease of $36.7 million due to the delivery of four VLCC tankers, three Suezmax tankers and three LR2/Aframax tankers onto voyage charters between April 2016 and June 2017.
|
|
|
•
|
a decrease of $17.6 million due to the redelivery of three chartered-in LR2/Aframax tankers in December 2016 and two chartered-in MR tankers in October 2016 and June 2017.
|
|
|
•
|
a decrease of $17.2 million due to the termination of the leases on three VLCC tankers in July 2016, March 2017 and June 2017; and one Suezmax tanker in May 2017.
|
|
|
•
|
a decrease of $17.0 million due to a decrease in market rates.
|
These factors were partially offset by:
|
|
•
|
an increase of $12.8 million due to the delivery of one VLCC, three LR2/Aframax and three Suezmax newbuildings between April 2016 and June 2017.
|
|
|
•
|
an increase of $3.3 million due to transfers from voyage charter to time charter on one VLCC tanker in November 2016.
|
|
|
•
|
an increase of $0.7 million due to the delivery of one MR tanker onto time charter in October 2016.
|
Voyage charter revenues decreased in the
six
months ended
June 30, 2017
as compared to the
six
months ended
June 30, 2016
primarily due to:
|
|
•
|
a decrease of $42.6 million due to a decrease in market rates.
|
|
|
•
|
a decrease of $29.7 million due to the disposal of six MR tankers in August, September and December 2016.
|
|
|
•
|
a decrease of $15.2 million due to the delivery of two VLCC tanker and one Suezmax onto time charter in November 2016 and February 2017.
|
|
|
•
|
a decrease of $25.7 million due to the redelivery of three chartered-in MR tankers, two VLCC tankers and two Suezmax tankers.
|
|
|
•
|
a decrease of $9.0 million due to offhire days on five VLCC tankers in relation to dry dockings in the six months ending June 30, 2017.
|
These factors were partially offset by:
|
|
•
|
an increase of $45.4 million due to the delivery of two VLCCs, six LR2/Aframax and five Suezmax newbuildings between January 2016 and June 2017.
|
|
|
•
|
an increase of $15.2 million due to the delivery of three VLCC tankers onto voyage charter between May 2016 and February 2017.
|
|
|
•
|
an increase of $13.7 million due to the delivery of two Suezmax tankers onto voyage charters from time charter in April 2016 and July 2016.
|
|
|
•
|
an increase of $9.8 million due to one VLCC tanker chartered-in in November 2016.
|
|
|
•
|
an increase of $18.8 million due to the delivery of four LR2/Aframax tankers onto voyage charters between June 2016 and September 2016.
|
|
|
•
|
an increase of $3.5 million due to the delivery of two MR tankers onto voyage charters in July and October 2016.
|
The finance lease interest income in the
six
months ended
June 30, 2017
relates to the investment in finance lease, which was acquired upon the merger with Frontline 2012 Ltd ("the Merger").
Other income in the six month period ended June 30, 2017 primarily comprises the income earned from the commercial management of related party and third party vessels and newbuilding supervision fees derived from related parties and third parties. The decrease in the
six
months ended
June 30, 2017
as compared to the
six
months ended
June 30, 2016
was primarily due to a loss of $1.0 million booked on a commercial management profit share arrangement in the six months ended June 30, 2017 compared to a gain of $1.6 million recorded in the six months ended June 30, 2016.
Voyage expenses and commissions increased in the
six
months ended
June 30, 2017
as compared to the
six
months ended
June 30, 2016
primarily due to:
|
|
•
|
an increase of $31.3 million due to the delivery of ten LR2/Aframax, seven Suezmax and two VLCC newbuildings between January 2016 and June 2017.
|
|
|
•
|
an increase of $9.7 million primarily due to an increase in bunker prices.
|
|
|
•
|
an increase of $9.0 million due to the delivery of three VLCC tankers onto voyage charters between May 2016 to February 2017.
|
|
|
•
|
an increase of $5.3 million due to the delivery of two chartered-in MR tankers and one chartered-in VLCC between July 2016 and November 2016.
|
|
|
•
|
an increase of $7.8 million due to the delivery of four Suezmax tankers on voyage charters between April 2016 to August 2016.
|
These factors were partially offset by:
|
|
•
|
a decrease of $7.7 million due to the disposal of six MR tankers, three VLCC tankers and one Suezmax tanker from October 2016 to June 2017.
|
|
|
•
|
a decrease of $2.2 million due to the delivery of one VLCC tanker and one LR2/Aframax onto time charter in November 2016 and February 2017.
|
|
|
•
|
a decrease of $4.8 million due to the redelivery of three chartered-in MR tankers and two Suezmax tankers and one VLCC tanker.
|
Other operating gains (losses)
|
|
|
|
|
|
(in thousands of $)
|
2017
|
|
2016
|
|
Gain on termination of vessel leases
|
8,327
|
|
—
|
|
In March 2017, the lease with Ship Finance for the 1998-built VLCC
Front Century
was terminated. The Company recorded a gain on this lease termination of $20.6 million in the first quarter of 2017.
In May and June 2017, the lease with Ship Finance for the Suezmax
Front Brabant
and the VLCC
Front Scilla
were terminated. The Company recorded a loss on the
Front Brabant
lease termination of $4.9 million, and a loss on the
Front Scilla
lease termination of $7.3 million in the second quarter of 2017.
Contingent rental income
|
|
|
|
|
|
(in thousands of $)
|
2017
|
|
2016
|
|
Contingent rental income
|
(12,456
|
)
|
(2,654
|
)
|
Contingent rental income in the
six
months ended
June 30, 2017
relates to the thirteen charter party contracts with Ship Finance and is due to the fact that the actual profit share payable in the second quarter of nil was $8.7 million less than the amount accrued in the lease obligation payable when the leases were recorded at fair value at the time of the Merger. In the six months ended June 30, 2016 the actual profit share payable of $38.6 million was $2.7 million less than the amount accrued in the lease obligation payable when the leases were recorded at fair value at the time of the Merger. The increase in contingent rental income is due to a decrease in the amount payable to Ship Finance as a result of the decrease in market rates from 2016 to 2017.
Ship operating expenses
|
|
|
|
|
|
(in thousands of $)
|
2017
|
|
2016
|
|
Ship operating expenses
|
68,176
|
|
61,945
|
|
Ship operating expenses are the direct costs associated with running a vessel and include crew costs, vessel supplies, repairs and maintenance, dry docking expenses, lubricating oils and insurance.
Ship operating expenses increased in the
six
months ended
June 30, 2017
as compared to the
six
months ended
June 30, 2016
primarily due to:
|
|
•
|
an increase of $15.9 million due to the delivery of two VLCC, 11 LR2/Aframax and seven Suezmax newbuildings between January 2016 and June 2017.
|
|
|
•
|
an increase of $3.3 million in dry docking expenses due to five vessels docking in the period ended June 30, 2017 compared with three vessels in the period ended June 30, 2016.
|
These factors were partially offset by:
|
|
•
|
a decrease of $7.5 million due to six MR tankers sold in the third and fourth quarter of 2016,
|
|
|
•
|
a decrease of $2.6 million due to the termination of the leases on three VLCCs in the fourth quarter of 2016, the first quarter and second quarter of 2017 and one Suezmax tanker in the second quarter of 2017.
|
|
|
•
|
a decrease of approximately $2.0 million due to an increase in supplier rebates.
|
Charter hire expenses
|
|
|
|
|
|
(in thousands of $)
|
2017
|
|
2016
|
|
Charter hire expenses
|
14,611
|
|
34,552
|
|
Charter hire expense decreased in the
six
months ended
June 30, 2017
as compared with the
six
months ended
June 30, 2016
primarily due to:
|
|
•
|
a decrease of $16.9 million relating to three LR2/Aframax tankers and three MR tankers re-delivered between June 2016 and June 2017.
|
|
|
•
|
a decrease of $5.1 million relating to two Suezmax tankers, three MR tankers and two VLCC tankers being delivered from January 2016 to November 2016.
|
Impairment loss on vessels
|
|
|
|
|
|
(in thousands of $)
|
2017
|
|
2016
|
|
Impairment loss on vessels
|
21,247
|
|
25,480
|
|
In May 2016, the Company agreed with Ship Finance to terminate the long term charter for the 1998-built VLCC
Front Vanguard
. The charter was terminated in July 2016. The Company agreed a compensation payment to Ship Finance of $0.4 million for the termination of the charter and recorded an impairment loss of $7.3 million in the three months ended June 30, 2016.
In June 2016, the Company entered into an agreement to sell its six MR tankers for an aggregate sale price of $172.5 million to an unaffiliated third party. Five of these vessels were delivered by the Company in August, September and October 2016. The Company recorded an impairment loss in the three months ended June 30, 2016 of $18.2 million in respect of these vessels, which were recorded as held for sale in the balance sheet at June 30, 2016 in respect of these vessels.
In November 2016, the company agreed with Ship Finance to terminate the long term charter for the 1998-built VLCC
Front Century
. The charter terminated in March 2017. The company agreed to make a compensation payment to Ship Finance of approximately $4.4 million for the termination of the charter and recorded an impairment loss of $32.8 million in the year ended December 31, 2016.
In the year ended December 31, 2016, the Company recorded an impairment loss of $3.4 million in respect of two vessels leased in from Ship Finance.
In March 2017, the company recorded an impairment loss for $21.2 million in relation to two Suezmax tankers (
Front Ardenne
and
Front Brabant
) and two VLCC tankers (
Front Scilla
and
Front Circassia
).
Administrative expenses
|
|
|
|
|
|
(in thousands of $)
|
2017
|
|
2016
|
|
Administrative expenses
|
19,167
|
|
18,887
|
|
Administrative expenses increased in the
six
months ended
June 30, 2017
as compared to the
six
months ended
June 30, 2016
primarily due to an increase in legal fees in relation to legal advice in the potential acquisition of DHT Holdings Inc. ("DHT").
Depreciation
|
|
|
|
|
|
(in thousands of $)
|
2017
|
|
2016
|
|
Depreciation
|
70,139
|
|
73,321
|
|
Depreciation expense decreased in the
six
months ended
June 30, 2017
as compared to the
six
months ended
June 30, 2016
primarily due to:
|
|
•
|
a decrease of $3.6 million due to the disposal of six MR tankers between August and November 2016.
|
|
|
•
|
a decrease of $6.7 million due to the termination of leases for three VLCC tankers in July 2016, March and June 2017 and the termination for a lease of one Suezmax tanker in May 2017.
|
|
|
•
|
a decrease of $4.4 million due to impairment losses on one VLCC and two Suezmax tankers in December 2016 and March 2017.
|
|
|
•
|
a decrease of $0.2 million due to the financial year 2016 being a leap year and therefore a reduction in depreciation compared to 2017.
|
These factors were offset by:
|
|
•
|
an increase of $9.8 million due to the delivery of two VLCC newbuildings, seven Suezmax newbuildings and five LR2/Aframax newbuildings between June 2016 and June 2017.
|
|
|
•
|
an increase of $2.0 million due to the delivery of six LR2/Aframax newbuilding during the six months ended June 30, 2016.
|
Interest income
|
|
|
|
|
|
(in thousands of $)
|
2017
|
|
2016
|
|
Interest income
|
268
|
|
183
|
|
Interest income in the
six
months ended
June 30, 2017
and the
six
months ended
June 30, 2016
relates solely to interest received on bank deposits.
Interest expense
|
|
|
|
|
|
(in thousands of $)
|
2017
|
|
2016
|
|
Interest expense
|
(31,000
|
)
|
(27,773
|
)
|
Interest expense increased in the
six
months ended
June 30, 2017
as compared to the
six
months ended
June 30, 2016
primarily due to:
|
|
•
|
an increase of $7.0 million as a result of additional borrowings between July 2016 and June 2017.
|
|
|
•
|
an increase of $1.1 million due to lower newbuilding interest capitalization as a result of the delivery of vessels since the second quarter of 2016.
|
|
|
•
|
an increase of $0.3 million in amortization of deferred charges were written off in relation to two Suezmax tankers in Q1 2017.
|
These factors are partially offset by:
|
|
•
|
a decrease of $1.5 million due to a decrease in loan interest on the six MR tankers which were disposed of between August and November 2016.
|
|
|
•
|
a decrease of $2.3 million in finance lease interest expense due to a disposal of three VLCC and one Suezmax capitalized leased tankers.
|
|
|
•
|
a decrease of $1.4 million in loan interest expense and finance lease interest expense due to reductions in loan obligations as a result of ongoing repayments.
|
Gain on sale of securities
|
|
|
|
|
|
(in thousands of $)
|
2017
|
|
2016
|
|
Gain on sale of securities
|
1,246
|
|
—
|
|
In the first quarter the Company sold 1.7 million shares in DHT for proceeds of $7.9 million, recognizing a gain of $0.8 million in the first quarter.
In the second quarter the Company sold a further 3.2 million shares in DHT for proceeds of $13.8 million recognizing a gain of $0.5 million in the second quarter.
Impairment loss on securities
|
|
|
|
|
|
(in thousands of $)
|
2017
|
|
2016
|
|
Impairment loss on securities
|
—
|
|
(6,914
|
)
|
The impairment loss on shares in the six months ended June 30, 2016 relates to the mark to market losses on the Golden Ocean and Avance Gas shares held by the Company. An impairment loss was recorded as it was determined that the losses were other than temporary in view of the prospects for both the dry bulk and LPG sectors.
Mark to market loss on derivatives
|
|
|
|
|
|
(in thousands of $)
|
2017
|
|
2016
|
|
Mark to market loss on derivatives
|
(3,285
|
)
|
(12,260
|
)
|
The mark to market loss on derivatives in the
six
months ended
June 30, 2017
and the
six
months ended
June 30, 2016
primarily relates to interest rate swap agreements.
Other non-operating items
|
|
|
|
|
|
(in thousands of $)
|
2017
|
|
2016
|
|
Other non-operating items
|
1,065
|
|
311
|
|
Other non-operating items primarily comprise bank charges and the amortization of deferred gains.
Net (income) loss attributable to non-controlling interest
|
|
|
|
|
|
(in thousands of $)
|
2017
|
|
2016
|
|
Net (income) loss attributable to non-controlling interest
|
(209
|
)
|
(222
|
)
|
Net income attributable to non-controlling interest in the
six
months ended
June 30, 2017
and June 30, 2016 is attributable to the non-controlling interests in the results of Seateam and ITCL.
Critical Accounting Policies and Estimates
Impairment Assessment of Goodwill
We allocate the cost of acquired companies to the identifiable tangible and intangible assets and liabilities acquired, with the remaining amount being classified as goodwill. Our future operating performance will be affected by the potential impairment charges related to goodwill. Goodwill is not amortized, but reviewed for impairment annually, or more frequently if impairment indicators arise. Impairment of goodwill in excess of amounts allocable to identifiable assets and liabilities is determined using a two-step approach, initially based on a comparison of the fair value of the reporting unit to the book value of its net assets; if the fair value of the reporting unit is lower than the book value of its net assets, then the second step compares the implied fair value of the Company's goodwill with its carrying value to measure the amount of the impairment. The Company has one reporting unit for the purpose of assessing potential goodwill impairment and has selected September 30 as its annual goodwill impairment testing date. The process of evaluating the potential impairment of goodwill and intangible assets is highly subjective and requires significant judgment at many points during the analysis.
Our test for potential goodwill impairment is a two-step approach. We estimate the fair value of the Company based on its market capitalization plus a control premium and compare this to the carrying value of its net assets. Control premium assumptions require judgment and actual results may differ from assumed or estimated amounts. If the carrying value of the Company's net assets exceeds its estimated fair value, the second step of the goodwill impairment analysis requires us to measure the amount of the impairment loss. An impairment loss is calculated by comparing the implied fair value of the goodwill to its carrying amount. The implied fair value of goodwill is calculated in the same manner as the goodwill recognized in the business combination was calculated. That is, the Company assigns the fair value of a reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.
At June 30, 2017, the Company's market capitalization was $973 million compared to its carrying value of $1,459 million. The Company reviewed merger transactions in North America over $25 million in the nine months to September 30, 2016, global deals between public companies of more that $100 million in the last three years and global marine transport sector transactions of more than $100 million in the last five years and observed average control premiums (based on the one month average share price before the bid) of approximately 40%, 32% and 39%, respectively. Based on a range of 32% to 40% and the average control premium of 39% for global marine transport sector deals, the Company believes that a control premium of 50%, resulting in a fair value equal to carrying value as of June 30, 2017, is in excess of the control premium the Company would expect. The Company concluded that it was required to complete the second step of the goodwill impairment analysis. Under the second step of the goodwill impairment analysis the Company has calculated the implied fair value of Goodwill using the observable range of control premiums (32% to 40%), to assess whether any impairment is likely at any point in that range. Using 32% as the lowest point in the range, the fair value of the Company would be $1,284 million. The Company estimates that the fair value of the underlying assets and liabilities amounts to approximately $982 million, which gives an implied fair value of goodwill of $302 million. This is in excess of the carrying value and as such no impairment is required. The fair values of the underlying assets and liabilities of the company, including intangibles, were calculated in a manner consistent with the fair values calculated at the time of the merger with Frontline 2012 Ltd.
If our stock price declines, or if our control premium declines, without an equal decline in the fair value of underlying assets and liabilities the second step of our goodwill impairment analysis may fail. Control premium assumptions require judgment and actual results may differ from assumed or estimated amounts. A control premium of 27% would result in the implied fair value of goodwill equaling its carrying value. For every 1% decrease in the control premium below that level the implied fair value of goodwill would fall by $9.7 million. Events or circumstances may occur that could negatively impact our stock price, including changes in our anticipated revenues and profits and our ability to execute on our strategies. In addition, our control premium could decline due to changes in economic conditions in the shipping industry or more generally in the financial markets. An impairment could have a material effect on our consolidated balance sheet and results of operations.
Liquidity and Capital Resources
We operate in a capital intensive industry and have historically financed our purchase of tankers and other capital expenditures through a combination of cash generated from operations, equity capital and borrowings from commercial banks. Our ability to generate adequate cash flows on a short and medium term basis depends substantially on the trading performance of our vessels in the market. Historically, market rates for charters of our vessels have been volatile. Periodic adjustments to the supply of and demand for oil and product tankers causes the industry to be cyclical in nature. We expect continued volatility in market rates for our vessels in the foreseeable future with a consequent effect on our short and medium term liquidity.
Our funding and treasury activities are conducted within corporate policies to increase investment returns while maintaining appropriate liquidity for our requirements. Cash and cash equivalents are held primarily in U.S. Dollars with some balances held in British Pounds, Euros, Norwegian Kroner and Singapore Dollars.
Our short-term liquidity requirements relate to payment of operating costs (including drydocking), funding working capital requirements, repayment of debt financing, payment of newbuilding instalments, lease payments for our chartered-in fleet, contingent rental expense and maintaining cash reserves against fluctuations in operating cash flows. Sources of short-term liquidity include cash balances, short-term investments and receipts from our customers. Revenues from time charters are generally received monthly or fortnightly in advance while revenues from voyage charters are received upon completion of the voyage.
As of June 30, 2017, and December 31, 2016, we had cash and cash equivalents of $128.4 million, and $202.4 million, respectively. As of June 30, 2017, and December 31, 2016, we had restricted cash balances of $1.0 million, and $0.7 million, respectively. Restricted cash does not include cash balances of $66.3 million (December 2016: $49.6 million), which are required to be maintained by the financial covenants in our loan facilities, or cash balances of $20.0 million (December 2016: $26.0 million), which have been built up in Frontline Shipping Limited as security for its obligations under the charters with Ship Finance, as these amounts are included in "Cash and cash equivalents".
Our medium and long-term liquidity requirements include payment of newbuilding instalments, funding the equity portion of investments in new or replacement vessels and repayment of bank loans. Additional sources of funding for our medium and long-term liquidity requirements include new loans, refinancing of existing arrangements, equity issues, public and private debt offerings, vessel sales, sale and leaseback arrangements and asset sales.
As of June 30, 2017, the remaining commitments for our 10 newbuilding contracts 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 June 2016, the Company signed a $275.0 million senior unsecured facility agreement with GHL Finance Limited, an affiliate of Hemen, the Company's largest shareholder. The facility will be used to partially finance the Company's current newbuilding program, partially finance potential acquisitions of newbuildings or vessels on the water and for general corporate purposes. In May 2017, the Company drew down $50.0 million from this facility. $225.0 million is available and undrawn as at June 30, 2017.
In July 2016, the Company signed a senior secured term loan facility in an amount of up to $109.2 million with ING Bank. The facility matures on June 30, 2021, carries an interest rate of LIBOR plus a margin of 190 basis points and has an amortization profile of 17 years. In June 2017 the Company drew down $54.6 million in relation to one VLCC newbuilding delivered in the period. The facility is fully drawn down as of June 30, 2017.
In August 2016, the Company signed a senior secured term loan facility in an amount of up to $328.4 million with China Exim Bank. The Company drew down $165.9 million in the six months ended June 30, 2017 from this facility in connection with three LR2/Aframax tankers and two Suezmax tanker newbuildings, which were delivered in the period. The facility has been fully utilised as at June 30, 2017.
In February 2017, the Company signed a senior secured term loan facility in an amount of up to $321.6 million. The facility is provided by China Exim Bank and insured by China Export and Credit Insurance Corporation. The facility matures in 2033, carries an interest rate of LIBOR plus a margin in line with Frontline’s existing loan facilities and has an amortization profile of 15 years. The Company drew down $149.6 million in the six months ended June 30, 2017 from this facility in connection with one LR2/Aframax tankers and three Suezmax tanker newbuildings, which were delivered in the period. As at June 30, 2017 $153.7 million remains available and undrawn.
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. As at June 30, 2017 the full balance remains available and undrawn.
In June 2017, the Company signed a senior secured term loan facility in an amount of up to $110.5 million with ING. 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. As at June 30, 2017 the full balance remains available and undrawn.
Frontline has committed bank financing in place to partially finance all of the Company’s 10 resales and newbuilding contracts.
Cash Flows
The following summarizes our cash flows from operating, investing and financing activities for the six months ended June 30, 2017.
Net cash provided by operating activities
Net cash provided by operating activities in the six months ended June 30, 2017 was $109.4 million compared with $203.8 million in the six months ended June 30, 2016. Our reliance on the spot market contributes to fluctuations in cash flows from operating activities as a result of its exposure to highly cyclical tanker rates. Any increase or decrease in the average time charter equivalent, or TCE rates earned by our vessels in periods subsequent to June 30, 2017, compared with the actual TCE rates achieved during the six months ended June 30, 2017, will have a positive or negative comparative impact, respectively, on the amount of cash provided by operating activities. We estimate that average daily total cash cost break even TCE rates for the remainder of 2017 will be approximately $21,600, $17,500 and $15,700 for our owned and leased VLCCs, Suezmax tankers, and LR2/Aframax tankers, respectively. These are the daily rates our vessels must earn to cover budgeted operating costs, estimated interest expenses and scheduled loan principal repayments, bareboat hire and corporate overhead costs in 2017. These rates do not take into account capital expenditures and contingent rental expense.
Net cash used in investing activities
Net cash used in investing activities of $474.0 million in the six months ended June 30, 2017 comprised mainly of additions to newbuildings of $454.0 million, in respect of 18 newbuilding contracts, ten of which were delivered during the period. Furthermore $46.1 million related to the purchase of 10.9 million shares in DHT Holdings Inc. (“DHT”). This amount was partially offset by $21.7 million of proceeds received from the sale of 4.9 million of share held in DHT and finance lease payments received of $4.8 million in respect of the investment in finance lease.
Net cash provided by financing activities
Net cash provided by financing activities in the six months ended June 30, 2017 of $290.5 million was primarily a result of loan drawdowns of $420.1 million.
This was partially offset by;
|
|
•
|
dividend payments of $51.4 million,
|
|
|
•
|
debt repayments of $36.4 million,
|
|
|
•
|
capital lease repayments of $25.8 million,
|
|
|
•
|
lease termination fees of $14.2 million,
|
|
|
•
|
and loan arrangement fees paid of $1.8 million.
|
Debt restrictions
The Company's loan agreements contain loan-to-value clauses, which could require the Company to post additional collateral or prepay a portion of the outstanding borrowings should the value of the vessels securing borrowings under each of such agreements decrease below required levels. In addition, the loan agreements contains certain financial covenants, including the requirement to maintain a certain level of free cash, positive working capital and a value adjusted equity covenant. Restricted cash does not include cash balances of $66.3 million (December 2016: $49.6 million), which are required to be maintained by the financial covenants in our loan facilities, as these amounts are included in "Cash and cash equivalents". Failure to comply with any of the covenants in the loan agreements could result in a default, which would permit the lender to accelerate the maturity of the debt and to foreclose upon any collateral securing the debt. Under those circumstances, the Company might not have sufficient funds or other resources to satisfy its obligations.
We believe that cash on hand and borrowings under our current and expected credit facilities will be sufficient to fund our requirements for, at least, the twelve months from the date of this interim report.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The Company is exposed to the impact of interest rate changes primarily through its floating-rate borrowings that require the Company to make interest payments based on LIBOR. Significant increases in interest rates could adversely affect operating margins, results of operations and ability to service debt. The Company uses interest rate swaps to reduce its exposure to market risk from changes in interest rates. The principal objective of these contracts is to minimize the risks and costs associated with its floating-rate debt. The Company is exposed to the risk of credit loss in the event of non-performance by the counterparty to the interest rate swap agreements.
As of June 30, 2017, $1,326.4 million of the Company's outstanding debt was at variable interest rates and the outstanding debt, net of the amount subject to interest rate swap agreements, was $1,126.9 million. Based on this, a one percentage point increase in annual LIBOR interest rates would increase its annual interest expense by approximately $11.3 million, excluding the effects of capitalization of interest.
Currency Risk
The majority of the Company's transactions, assets and liabilities are denominated in U.S. dollars, its functional currency. Certain of its subsidiaries report in Norwegian Kroner, Singapore Dollars or British Pounds and risks of two kinds arise as a result: a transaction risk, that is, the risk that currency fluctuations will have an effect on the value of cash flows; and a translation risk, which is the impact of currency fluctuations in the translation of foreign operations and foreign assets and liabilities into U.S. dollars in the consolidated financial statements.
Inflation
Inflation has only a moderate effect on the Company's expenses given current economic conditions. In the event that significant global inflationary pressures appear, these pressures would increase operating, voyage, general and administrative, and financing costs.
Interest Rate Swap Agreements
In February 2013, Frontline 2012 entered into six interest rate swaps with Nordea Bank whereby the floating interest rate on an original principal amount of $260 million of the then anticipated debt on 12 MR product tanker newbuildings was switched to fixed rate. These newbuildings were subsequently financed from the $466.5 million term loan facility. In February 2016, the Company entered into an interest rate swap with DNB whereby the floating interest on notional debt of $150.0 million was switched to fixed rate. The fair value of these swaps at June 30, 2017 was a receivable of
$1.6 million ( December 2016: receivable of $4.4 million). Credit risk exists to the extent that the counterparty is unable to perform under the contracts, but this risk is considered remote as the counterparty is a bank, which participates in the loan facility to which the interest rate swaps are related. The Company recorded a loss on these interest swaps of $3.3 million in the six months ended June 30, 2017 (six months ended June 30, 2016: loss of $13.8 million).
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Matters discussed in this report and the documents incorporated by reference may constitute forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides safe harbor protections for forward-looking statements, which 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.
Frontline Ltd. and its subsidiaries, or the Company, desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this cautionary statement in connection with this safe harbor legislation. This report and any other written or oral statements made by us or on our behalf may include forward-looking statements, which reflect our current views with respect to future events and financial performance, and are not intended to give any assurance as to future results. When used in this documents, the words "believe," "anticipate," "intend," "estimate," "forecast," "project," "plan," "potential," "will," "may," "should," "expect" and similar expressions, terms or phrases may identify forward-looking statements.
The forward-looking statements in this report are based upon various assumptions, including without limitation, management's examination of historical operating trends, data contained in our records and data available from third parties. Although we believe 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 our control, we cannot assure you that we will achieve or accomplish these expectations, beliefs or projections. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
In addition to these important factors and matters discussed elsewhere herein and in the documents incorporated by reference herein, important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements include the strength of world economies, fluctuations in currencies and interest rates, general market conditions, including fluctuations in charter hire rates and vessel values, changes in the supply and demand for vessels comparable to ours, changes in world wide oil production and consumption and storage, changes in the Company's operating expenses, including bunker prices, drydocking and insurance costs, the market for the Company's vessels, availability of financing and refinancing, our ability to obtain financing and comply with the restrictions and other covenants in our financing arrangements, availability of skilled workers and the related labor costs, compliance with governmental, tax, environmental and safety regulation, any non-compliance with the U.S. Foreign Corrupt Practices Act of 1977 (FCPA) or other applicable regulations relating to bribery, general economic conditions and conditions in the oil industry, effects of new products and new technology in our industry, the failure of counter parties to fully perform their contracts with us, our dependence on key personnel, adequacy of insurance coverage, our ability to obtain indemnities from customers, changes in laws, treaties or regulations, the volatility of the price of our ordinary shares; our incorporation under the laws of Bermuda and the different rights to relief that may be available compared to other countries, including the United States, changes in governmental rules and regulations or actions taken by regulatory authorities, potential liability from pending or future litigation, general domestic and international political conditions, potential disruption of shipping routes due to accidents, political events or acts by terrorists, and other important factors described from time to time in the reports filed by the Company with the Securities and Exchange Commission or Commission.
We caution readers of this report not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward looking statements are not guarantees of our future performance, and actual results and future developments may vary materially from those projected in the forward looking statements. Please see our Risk Factors in Item 3 of the Company's Annual Report on Form 20-F for the year ended December 31, 2016, filed with the Commission on March 16, 2017 for a more complete discussion of these and other risks and uncertainties.
FRONTLINE LTD.
INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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|
|
|
Page
|
|
|
Condensed Consolidated Statements of Operations for the six months ended June 30, 2017 and June 30, 2016 (unaudited)
|
|
Condensed Consolidated Statements of Comprehensive Income for the six months ended June 30, 2017 and June 30, 2016 (unaudited)
|
|
Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 (unaudited)
|
|
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and June 30, 2016 (unaudited)
|
|
Condensed Consolidated Statements of Changes in Equity for the six months ended June 30, 2017 and June 30, 2016 (unaudited)
|
|
Notes to the Unaudited Condensed Financial Statements
|
|
Frontline Ltd.
Condensed Consolidated Statements of Operations for the six months ended
June 30, 2017
and
June 30, 2016
(in thousands of $, except per share data)
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Operating revenues
|
|
|
|
Time charter revenues
|
64,619
|
|
136,320
|
|
|
Voyage charter revenues
|
252,314
|
|
268,265
|
|
|
Finance lease interest income
|
933
|
|
1,154
|
|
|
Other income
|
9,409
|
|
13,120
|
|
|
Total operating revenues
|
327,275
|
|
418,859
|
|
Other operating gains (losses)
|
8,327
|
|
—
|
|
|
Voyages expenses and commissions
|
115,339
|
|
67,514
|
|
|
Contingent rental income
|
(12,456
|
)
|
(2,654
|
)
|
|
Ship operating expenses
|
68,176
|
|
61,945
|
|
|
Charter hire expense
|
14,611
|
|
34,552
|
|
|
Impairment loss on vessels
|
21,247
|
|
25,480
|
|
|
Administrative expenses
|
19,167
|
|
18,887
|
|
|
Depreciation
|
70,139
|
|
73,321
|
|
|
Total operating expenses
|
296,223
|
|
279,045
|
|
Net operating income
|
39,379
|
|
139,814
|
|
Other income (expenses)
|
|
|
|
Interest income
|
268
|
|
183
|
|
|
Interest expenses
|
(31,000
|
)
|
(27,773
|
)
|
|
Gain on sale of securities.
|
1,246
|
|
—
|
|
|
Foreign currency exchange gain (loss)
|
270
|
|
183
|
|
|
Impairment loss on securities
|
—
|
|
(6,914
|
)
|
|
Loss on derivatives
|
(3,285
|
)
|
(12,260
|
)
|
|
Other non-operating items
|
1,065
|
|
311
|
|
|
Net other expenses
|
(31,436
|
)
|
(46,270
|
)
|
Net income before income taxes and non-controlling interest
|
7,943
|
|
93,544
|
|
|
Income tax expense
|
(93
|
)
|
(104
|
)
|
Net income
|
7,850
|
|
93,440
|
|
Net (income) loss attributable to non-controlling interest
|
(209
|
)
|
(222
|
)
|
Net income attributable to the Company
|
7,641
|
|
93,218
|
|
|
|
|
Basic and diluted earnings per share attributable to the Company from continuing operations ($)
|
0.04
|
|
0.60
|
|
Basic and diluted earning attributable to the Company ($)
|
0.04
|
|
0.60
|
|
Cash dividends per share declared, as restated for reverse business acquisition and reverse share split ($)
|
0.15
|
|
0.75
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Frontline Ltd.
Condensed Consolidated Statements of Comprehensive Income for the six months ended
June 30, 2017
and
June 30, 2016
(in thousands of $)
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Comprehensive income
|
|
|
|
Net income
|
7,850
|
|
93,440
|
|
|
Unrealized loss from marketable securities
|
1,718
|
|
(7,194
|
)
|
|
Unrealized losses from marketable securities reclassified to statement of operations
|
—
|
|
6,914
|
|
|
Foreign currency translation income (loss)
|
98
|
|
(369
|
)
|
|
Other comprehensive loss
|
1,816
|
|
(649
|
)
|
|
Comprehensive income
|
9,666
|
|
92,791
|
|
|
|
|
Comprehensive income attributable to non-controlling interest
|
209
|
|
222
|
|
Comprehensive income attributable to the Company
|
9,457
|
|
92,569
|
|
|
9,666
|
|
92,791
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Frontline Ltd.
Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016
(in thousands of $)
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
ASSETS
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
128,411
|
|
202,402
|
|
|
Restricted cash
|
1,026
|
|
677
|
|
|
Marketable securities
|
35,753
|
|
8,428
|
|
|
Trade accounts receivable, net
|
37,957
|
|
49,079
|
|
|
Related party receivables
|
12,835
|
|
5,095
|
|
|
Other receivables
|
18,058
|
|
19,416
|
|
|
Inventories
|
45,293
|
|
37,702
|
|
|
Voyages in progress
|
31,569
|
|
45,338
|
|
|
Prepaid expenses and accrued income
|
7,701
|
|
5,741
|
|
|
Investment in finance lease
|
9,977
|
|
9,745
|
|
|
Other current assets
|
3
|
|
3
|
|
Total current assets
|
328,583
|
|
383,626
|
|
Long term assets
|
|
|
|
Newbuildings
|
162,221
|
|
308,324
|
|
|
Vessels and equipment, net
|
2,042,112
|
|
1,477,395
|
|
|
Vessels and equipment under capital lease, net
|
435,346
|
|
536,433
|
|
|
Investment in finance lease
|
25,910
|
|
30,908
|
|
|
Goodwill
|
225,273
|
|
225,273
|
|
|
Other long term assets
|
1,627
|
|
4,358
|
|
Total assets
|
3,221,072
|
|
2,966,317
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
Current liabilities
|
|
|
|
Short-term debt and current portion of long-term debt
|
89,770
|
|
67,365
|
|
|
Current portion of obligations under capital leases
|
44,406
|
|
56,505
|
|
|
Related party payables
|
13,029
|
|
18,103
|
|
|
Trade accounts payable
|
7,747
|
|
4,325
|
|
|
Accrued expenses
|
33,750
|
|
26,159
|
|
|
Other current liabilities
|
8,744
|
|
10,292
|
|
Total current liabilities
|
197,446
|
|
182,749
|
|
|
Long-term debt
|
1,275,034
|
|
914,592
|
|
|
Obligations under capital leases
|
285,926
|
|
366,095
|
|
|
Other long-term liabilities
|
3,213
|
|
3,112
|
|
Total liabilities
|
1,761,619
|
|
1,466,548
|
|
Commitments and contingencies
|
|
|
Equity
|
|
|
|
Share capital (169,809,324 shares, par value $1.00)
|
169,809
|
|
169,809
|
|
|
Additional paid in capital
|
196,722
|
|
195,304
|
|
|
Contributed surplus
|
1,090,376
|
|
1,099,680
|
|
|
Accumulated other comprehensive loss
|
2,555
|
|
739
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
—
|
|
34,069
|
|
Total equity attributable to the Company
|
1,459,462
|
|
1,499,601
|
|
|
Non-controlling interest
|
(9
|
)
|
168
|
|
Total equity
|
1,459,453
|
|
1,499,769
|
|
Total liabilities and equity
|
3,221,072
|
|
2,966,317
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Frontline Ltd.
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2017
and
June 30, 2016
(in thousands of $)
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
Net cash provided by operating activities
|
109,436
|
|
203,814
|
|
|
|
|
|
|
Change in restricted cash
|
(348
|
)
|
(5,137
|
)
|
|
Additions to newbuildings, vessels and equipment
|
(454,031
|
)
|
(337,952
|
)
|
|
Purchase of DHT shares
|
(46,100
|
)
|
—
|
|
|
Finance lease payments received
|
4,766
|
|
4,579
|
|
|
Proceeds from sale of DHT shares
|
21,739
|
|
—
|
|
Net cash used in investing activities
|
(473,974
|
)
|
(338,510
|
)
|
|
|
|
|
|
Proceeds from issuance of long term debt
|
420,138
|
|
192,363
|
|
|
Repayment of long-term debt
|
(36,357
|
)
|
(29,612
|
)
|
|
Repayment of capital leases
|
(25,798
|
)
|
(40,997
|
)
|
|
Debt fees paid
|
(1,818
|
)
|
(4,204
|
)
|
|
Dividends paid
|
(51,400
|
)
|
(117,744
|
)
|
|
Payment of fractional shares on reverse share split
|
—
|
|
(17
|
)
|
|
Lease termination payments
|
(14,218
|
)
|
—
|
|
Net cash (used in) provided by financing activities
|
290,547
|
|
(211
|
)
|
|
|
|
Net change in cash and cash equivalents
|
(73,991
|
)
|
(134,907
|
)
|
Cash and cash equivalents at start of period
|
202,402
|
|
264,524
|
|
Cash and cash equivalents at end of period
|
128,411
|
|
129,617
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Frontline Ltd.
Condensed Consolidated Statements of Changes in Equity for the
six
months ended
June 30, 2017
and
June 30, 2016
(in thousands of $, except number of shares)
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Number of shares outstanding
|
|
|
|
Balance at beginning of the period
|
169,809,324
|
|
781,937,649
|
|
|
Effect of reverse share split
|
—
|
|
(625,551,143
|
)
|
|
Balance at end of the period
|
169,809,324
|
|
156,386,506
|
|
|
|
|
Share capital
|
|
|
|
Balance at beginning of the period
|
169,809
|
|
781,938
|
|
|
Effect of reverse share split
|
—
|
|
(625,551
|
)
|
|
Balance at end of the period
|
169,809
|
|
156,387
|
|
|
|
|
|
Additional paid in capital
|
|
|
|
Balance at beginning of the period
|
195,304
|
|
109,386
|
|
|
Stock option expense
|
1,418
|
|
—
|
|
|
Payment for fractional shares on reverse share split
|
—
|
|
(17
|
)
|
|
Balance at end of the period
|
196,722
|
|
109,369
|
|
|
|
|
Contributed surplus
|
|
|
|
Balance at beginning of the period
|
1,099,680
|
|
474,129
|
|
|
Cash dividend
|
(9,304
|
)
|
—
|
|
|
Effect of reverse share split
|
—
|
|
625,551
|
|
|
Balance at end of the period
|
1,090,376
|
|
1,099,680
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
|
Balance at beginning of the period
|
739
|
|
(383
|
)
|
|
Other comprehensive income (loss)
|
1,816
|
|
(649
|
)
|
|
Balance at end of the period
|
2,555
|
|
(1,032
|
)
|
|
|
|
Retained earnings
|
|
|
|
Balance at beginning of the period
|
34,069
|
|
81,212
|
|
|
Net income
|
7,641
|
|
93,218
|
|
|
Cash dividend
|
(41,710
|
)
|
(117,347
|
)
|
|
Balance at end of the period
|
—
|
|
57,083
|
|
|
|
|
|
Total equity attributable to the Company
|
1,459,462
|
|
1,421,487
|
|
|
|
|
Non-controlling interest
|
|
|
|
Balance at beginning of the period
|
168
|
|
61
|
|
|
Net income (loss)
|
209
|
|
222
|
|
|
Dividend paid to non-controlling interest
|
(386
|
)
|
(397
|
)
|
|
Balance at end of the period
|
(9
|
)
|
(114
|
)
|
|
|
|
Total equity
|
1,459,453
|
|
1,421,373
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Frontline Ltd.