FRNT Frontier Airlines Hldgs (MM)

Highlights

• Frontline 2012 reports net income of $23.9 million and earnings per share of $0.11 for the third quarter of 2013. 

• Frontline 2012 reports net income of $57.0 million and earnings per share of $0.26 for the nine months ended September 30, 2013. 

• Frontline 2012 received $50.6 million in August 2013 in connection with the cancellation of its third newbuilding contract at Jinhaiwan and recorded a gain of $27.0 million in the third quarter. 

• The first MR product tanker, Front Arrow, was delivered on September 9, 2013. 

• In September 2013, Frontline 2012 issued 34.1 million new ordinary shares of $2.00 par value at a subscription price of $6.60 generating $225.1 million in gross proceeds. 

• In October 2013, Frontline 2012 became a 37.5 percent shareholder in Avance Gas Holding Ltd. ("AGHL") and then declared a special dividend consisting of 12.5 percent of the capital stock of AGHL to Frontline 2012's shareholders, which was distributed when AGHL was registered on the Norwegian OTC in October.  

• In November 2013, Frontline 2012 entered into an agreement with AGHL whereby AGHL shall acquire eight, fuel efficient 83,000 cbm VLGC newbuildings from Frontline 2012 immediately following their delivery from the yard. AGHL will pay $75.0 million for each newbuilding, of which $17.4 million will be paid upfront and $57.6 million will be paid upon delivery from the yard. 

Introduction

Frontline 2012 Ltd. (the "Company" or "Frontline 2012") is a commodity shipping company incorporated in Bermuda on December 12, 2011, which as of today owns a total of ten crude oil tankers, one MR product tanker and 61 fuel efficient newbuilding contracts within the crude oil, product, liquefied petroleum gas and dry bulk markets.

The Company's sailing fleet is one of the youngest in the industry and currently consists of six very large crude carriers, or VLCCs, four Suezmax tankers and one MR product tanker with an average age of 3.6 years operating in the spot and the period markets.

The largest shareholder is Hemen Holding Ltd. with a shareholding of approximately 46 percent.

Third Quarter and Nine Months 2013 Results

Frontline 2012 announces net income of $23.9 million and earnings per share of $0.11 for the third quarter of 2013 compared with net income of $37.9 million and earnings per share of $0.18 in the preceding quarter. Frontline 2012 recorded a gain of $27.0 million in the third quarter following the receipt of $50.6 million in August 2013 in connection with the cancellation of its third newbuilding contract (J0027) at Jinhaiwan compared with a gain of $30.3 million in the second quarter following the receipt of $94.0 million in April 2013 in connection with the cancellation of its second newbuilding contract (J0026) at Jinhaiwan. The Company recognized a loss of $1.6 million in the third quarter on the mark-to-market revaluation of interest rate swap agreements compared with a gain of $8.5 million in the second quarter.

The average daily time charter equivalents ("TCEs") earned in the spot and period market in the third quarter by the Company's VLCCs and Suezmax tankers were $21,100 and $11,900, respectively, compared with $21,500 and $13,800, respectively, in the preceding quarter. The spot earnings for the Company's VLCC and Suezmax tankers were $17,300 and $11,900, respectively, compared with $17,900 and $13,800, respectively, in the preceding quarter. The earnings for the Company's first MR product tanker, Front Arrow, which was delivered on September 9, 2013 and operated in the period market were $20,700.

Frontline 2012 announces net income of $57.0 million and earnings per share of $0.26 for the nine months ended September 30, 2013 compared with net income of $7.4 million and earnings per share of $0.06 in the nine months ended September 30, 2012. Frontline 2012 recorded gains of $30.3 million and $27.0 million in the nine months ended September 30, 2013 in connection with the cancellation of its second and third newbuilding contracts, respectively, at Jinhaiwan. The Company also recognized a gain of $6.1 million in the nine months ended September 30, 2013 on the mark-to-market revaluation of interest rate swap agreements.

The average daily TCEs earned in the spot and period market in the nine months ended September 30, 2013 by the Company's VLCCs and Suezmax tankers were $20,700 and $12,500, respectively, compared with $28,500 and $16,300, respectively, in the nine months ended September 30, 2012. The spot earnings for the Company's VLCC and Suezmax tankers were $16,700 and $12,500, respectively, compared with $28,600 and $16,300, respectively, in the nine months ended September 30, 2012.

The Company estimates average cash breakeven TCE rates for the remainder of 2013 for its VLCCs, Suezmax tankers and MR product tanker of approximately $14,300, $13,100 and $8,500, respectively. These breakeven rates are based on prepaid bank debt repayments for 2013.  

The Company estimates average cash breakeven TCE rates for 2014 for its VLCCs, Suezmax tankers and MR product tanker of approximately $29,400, $21,800 and $13,000, respectively.

Fleet Development

The Company's first MR product tanker, Front Arrow, was delivered on September 9, 2013. This vessel has been fixed on a short term time charter for 60-90 days and the Company's aim is to employ the balance of these vessels on similar charters upon delivery from the shipyard. There will be a delay of approximately two months in delivery of the vessels from the original delivery schedule.

Newbuilding Program

In August 2013, the Company received $50.6 million in refund in connection with the cancellation of its third newbuilding contract (J0027) at Jinhaiwan.

In August 2013, the Company cancelled the fourth of its five VLCC newbuilding contracts (hull J0028) at Jinhaiwan due to the excessive delay compared to the contractual delivery date and demanded payment from Jinhaiwan in respect of installments paid and accrued interest. This amount includes installments paid by Frontline Ltd. prior to the acquisition by the Company in December 2011, at which time the newbuilding contracts were valued at estimated fair value. The Company has been notified by the yard that it wishes to take the matter to arbitration.

As of September 30, 2013, the Company's newbuilding program totalled 60 vessels and comprised 21 newbuildings within the crude oil and petroleum product markets, 30 Cape size vessels, eight very large gas carriers or VLGCs and one VLCC. Total installments of approximately $365 million have been paid and the remaining installments to be paid amounted to approximately $2,453 million.
Subsequent to September 30, 2013, the Company cancelled its fifth and final VLCC newbuilding contract (hull J0106) at Jinhaiwan due to the excessive delay compared to the contractual delivery date and demanded payment from Jinhaiwan in respect of installments paid and accrued interest. This amount includes installments paid by Frontline Ltd. prior to the acquisition by the Company in December 2011, at which time the newbuilding contracts were valued at estimated fair value. The Company has been notified by the yard that it wishes to take the matter to arbitration.

Subsequent to September 30, 2013, the Company has also negotiated and concluded two newbuilding contracts. The Company's newbuilding program currently comprises 61 newbuildings. The total capital commitment is approximately $2,811 million of which approximately $2,444 million is still to be paid.

Frontline 2012 has eight newbuilding contracts with STX (Dalian) Shipbuilding Co., Ltd. and further six newbuildings with STX Offshore & Shipbuilding (Korea). STX Korea has subsequently subcontracted the latter vessels to STX Dalian. STX Dalian has encountered financial difficulties, and the construction has stopped. The Company is following the situation closely and will make every effort to ensure that STX deliver the newbuildings, which they are contractually committed to. There is however a substantial risk that these newbuildings will not be delivered according to the contracts and Frontline 2012 has therefore taken legal measures to be compensated for any loss caused by non delivery and is currently in an arbitration process with STX, mainly on the six ships, for which STX Korea are responsible

Corporate

In September 2013, the Company issued 34.1 million new ordinary shares of $2.00 par value at a subscription price of $6.60 generating $225.1 million in gross proceeds to be used to finance the investment in AGHL, the current newbuilding program and further expansion.

249,100,000 ordinary shares were outstanding as of September 30, 2013, and the weighted average number of shares outstanding for the quarter was 224,533,333.

On October 2 2013, the Company entered into an agreement with Stolt-Nielsen Limited ("Stolt-Nielsen") and Sungas Holdings Ltd. ("Sungas") whereby Frontline 2012 became a shareholder in AGHL owning 37.5 percent of the company along with Stolt-Nielsen and Sungas.

AGHL registered on the over-the-counter market in Oslo on October 17, 2013. Subsequently Frontline 2012 declared the distribution of a special dividend consisting of 12.5 percent of the capital stock of AGHL to Frontline 2012's shareholders and shareholder loans were converted to equity in AGHL.

In November 2013, Frontline 2012 entered into an agreement with AGHL whereby AGHL shall acquire eight, fuel efficient 83,000 cbm VLGC newbuildings from Frontline 2012 immediately following their delivery from the yard. These newbuildings have been ordered by Frontline 2012 from the Jiangnan Changxing Shipyard in China and have expected deliveries between August 2014 and September 2015. AGHL will pay $75.0 million for each newbuilding, of which $17.4 million will be paid upfront and $57.6 million will be paid upon delivery from the yard. In November 2013, AGHL completed a private placement of 5.9 million new shares at a price of $17.00 per share, generating approximately $100 million in gross proceeds. The proceeds will be used to partly finance the acquisition of the eight VLGC newbuildings from Frontline 2012.

Following the dividend distribution, the conversion of shareholder loans to equity and the private placement in AGHL, the Company owns 22.5 percent of AGHL.

The Market

Crude

The market rate for a VLCC trading on a standard 'TD3' voyage between the Arabian Gulf and Japan in the third quarter of 2013 was WS 36, representing a decrease of WS 1 point from the second quarter of 2013 and the same level as the third quarter of 2012. The flat rate increased by 9.1 percent from 2012 to 2013.

The market rate for a Suezmax trading on a standard 'TD5' voyage between West Africa and Philadelphia in the third quarter of 2013 was WS 56, representing an increase of WS 2 points from the second quarter of 2013 and a decrease of WS 4 points from the third quarter of 2012. The flat rate increased by 9.3 percent from 2012 to 2013.

Bunkers at Fujairah averaged $600/mt in the third quarter of 2013 compared to $614/mt in the second quarter of 2013. Bunker prices varied between a high of $617/mt on August 29^th and a low of $585/mt on July 3^rd.

The International Energy Agency's ("IEA") October 2013 report stated an OPEC crude production, including Iraq, of 30.5 million barrels per day (mb/d) in the third quarter of 2013. This was a decrease of 0.3 mb/d compared to the second quarter of 2013. 

The IEA estimates that world oil demand averaged 91.7 mb/d in the third quarter of 2013, which is an increase of 1.2 mb/d compared to the previous quarter. IEA estimates that world oil demand in 2013 will be 91.0 mb/d, representing an increase of 1.0 percent or 1.0 mb/d from 2012.

The VLCC fleet totalled 623 vessels at the end of the third quarter of 2013, unchanged from the previous quarter. Five VLCCs were delivered during the quarter, five were removed. The order book counted 56 vessels at the end of the third quarter which represents nine percent of the VLCC fleet. According to Fearnleys, the single hull fleet is down to one vessel.

The Suezmax fleet totaled 447 vessels at the end of the third quarter, up from 444 vessels at the end of the previous quarter. Five vessels were delivered during the third quarter whilst two were removed. The order book counted 41 vessels at the end of the third quarter which represents approximately nine percent of the Suezmax fleet. According to Fearnley's, the single hull fleet stands unchanged at five vessels.

Product

The market rate for an MR trading on Standard "TC2" voyage between Rotterdam and New York in the second quarter of 2013 was WS 94, representing a decrease of WS 34 from the second quarter of 2013 and a decrease of WS 21 from the third quarter of 2012. The flat rate increased by 9 percent from 2012 to 2013.

Bunkers in Rotterdam averaged $585/mt in the third quarter of 2013 compared to $618/mt in the second quarter of 2013. Bunker prices varied between a high of $615/mt on April 2nd and a low of $578/mt on June 28th.

The MR fleet totaled 1,488 vessels at the end of the third quarter of 2013, down from 1,491 vessels at the end of the previous quarter. The order book counted 303 vessels at the end of the third quarter, which represents approximately 20 percent of the MR fleet.

The LR2 fleet totaled 212 vessels at the end of the third quarter of 2013, unchanged from the previous quarter. The order book counted 30 vessels at the end of the third quarter, which represents approximately 14 percent of the LR2 fleet.

LPG

According to Clarksons the monthly average VLGC time charter hire was $1,659,620 in the third quarter of 2013 compared to $1,155,460 in the second quarter.

The VLGC fleet (60,000+ Cbm) totaled 155 vessels at the end of the third quarter of 2013, an increase of two vessels from the previous quarter. The order book counted 36 vessels at the end of the third quarter, an increase of 13 vessels from the previous quarter, representing 23 percent of the VLGC fleet according to Platou.

Drybulk

According to the Baltic Exchange the average Capesize spot earnings in the third quarter of 2013 was $18,968/day compared to $6,214/day in the second quarter.

According to Chinese official data iron ore imports to China increased from 200 million tons in the second quarter to 217 million tons in the third quarter of 2013. The coal imports increased from 69 million tons to 70 million tons in the same period.

According to Fearnley's the Capesize fleet (150-200'dwt) totaled 1,041 vessels at the end of the third quarter of 2013, an increase of five vessels from the previous quarter. The revised order book counted 103 vessels at the end of the third quarter, compared with 95 vessels the previous quarter, representing 9.9 percent of the Capesize fleet.

Strategy and Outlook

Frontline 2012 was established in 2011 as the Seatankers Group's main investment vehicle in the shipping industry. The Company operates a fleet consisting of six VLCCs, four Suezmax tankers and one MR tanker and owns 61 fuel efficient newbuilding contracts where the major part will be delivered in 2014 and 2015.

The Company's strategic plan has from the very start been to build up a portfolio of fuel efficient newbuidling contracts with historically low contracting cost in different shipping segments and at a later stage streamline the activities by creating pure plays in different shipping segments through consolidation, divestments and spin offs.

The Board has now initiated the process of streamlining the Company by investing in AGHL and selling its eight VLGC newbuildings to AGHL in November 2013. Following the acquisition, AGHL becomes the third largest, pure play VLGC owner and operator with six operating vessels and eight newbuildings with attractive delivery dates. The aim is to complete an initial public offering of AGHL's shares in the US or Norway. Frontline 2012's intention is to make further distributions of AGHL shares. 

Frontline 2012 targets a New York listing within the third quarter of 2014 and has started this process.

The balance sheet has been substantially strengthened from the receipt of $51 million from Jinhaiwan and the divestment of the eight VLGC vessels. This opens for further growth and cash dividends. The Board targets to introduce a regular cash dividend from the next quarter, which will be balanced with the level of ordering activity. The recent positive development in the tanker market, with VLCC rates currently above $40,000 per day, is likely to give improved operating results in the fourth quarter.

This press release contains forward looking statements. These statements are based upon various assumptions, many of which are based, in turn, upon further assumptions, including Frontline Ltd's management's examination of historical operating trends. Although Frontline Ltd believes that these assumptions were reasonable when made, because assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond its control, Frontline 2012 cannot give assurance that it will achieve or accomplish these expectations, beliefs or intentions.

Important factors that, in the Company's view, could cause actual results to differ materially from those discussed in this press release include the strength of world economies and currencies, general market conditions including fluctuations in charter hire rates and vessel values, changes in demand in the tanker market as a result of changes in OPEC's petroleum production levels and world wide oil consumption and storage, changes in the Company's operating expenses including bunker prices, dry-docking and insurance costs, 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 or political events, and other important factors described from time to time in the reports filed by the Company with the United States Securities and Exchange Commission.

The full report is available for download in the link enclosed.

The Board of Directors
Frontline 2012 Ltd.
Hamilton, Bermuda
November 28, 2013

Questions should be directed to:
 Jens Martin Jensen: Chief Executive Officer, Frontline Management AS
    +47 23 11 40 99
 Inger M. Klemp: Chief Financial Officer, Frontline Management AS
    +47 23 11 40 76

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