FRNT Frontier Airlines Hldgs (MM)

HIGHLIGHTS

• Frontline 2012 reports net income of $14.5 million and earnings per share of $0.06 for the first quarter of 2014.
• The Company announces a cash dividend of $0.05 per share for the first quarter.
• Four MR product tankers were delivered during the first quarter of 2014.
• Frontline 2012 received $99.3 million in April 2014 in connection with the cancellation of its first newbuilding contract (J0025) at Jinhaiwan and expects to record a gain of $35.9 million in the second quarter.
• Frontline 2012 sold five fuel efficient Capesize newbuildings to Knightsbridge Tankers Limited in April 2014 and subsequently announced the combination of Frontline 2012's remaining fleet of 25 fuel efficient Capesize newbuildings with Knightsbridge's fleet.
• In April 2014 AGHL was listed on the Oslo Stock Exchange and Frontline 2012 sold shares in AGHL for approximately $57 million.

FIRST QUARTER 2014 RESULTS

Frontline 2012 announces net income of $14.5 million and earnings per share of $0.06 for the first quarter compared with net income of $12.5 million and earnings per share of $0.05 in the preceding quarter. Frontline 2012 recorded income from associated company (i.e. Avance Gas Holdings Limited ("AGHL")) of $0.7 million in the first quarter and $8.8 million (including a gain on dilution of $6.5 million following AGHL's private placement in November) in the fourth quarter.

The average daily time charter equivalents ("TCEs") earned in the spot and period market in the first quarter by the Company's VLCCs and Suezmax tankers were $39,500 and $26,500, respectively, compared with $27,300 and $19,200, respectively, in the preceding quarter. The spot earnings for the Company's VLCC and Suezmax tankers were $40,600 and $26,500, respectively, compared with $26,500 and $19,200, respectively, in the preceding quarter. The daily earnings for the Company's MR product tankers were $17,900 compared with $17,600 in the preceding quarter.

The Company estimates average cash breakeven TCE rates for the remainder of 2014 for its VLCCs, Suezmax tankers and MR product tankers of approximately $25,600, $19,000 and $13,900, respectively.

FLEET DEVELOPMENT

The Company took delivery of the MR product tankers, Front Dee, Front Clyde, Front Esk and Front Mersey during the first quarter of 2014.

NEWBUILDING PROGRAM

As of March 31, 2014, the Company's newbuilding program totaled 62 vessels and comprised eight newbuildings sold to AGHL, 16 newbuildings within the crude oil and petroleum product markets and 38 Capesize vessels. Total installments of approximately $342 million have been paid and the remaining installments to be paid amounted to approximately $2,602 million.

Frontline 2012 has eight newbuilding contracts with STX (Dalian) Shipbuilding Co., Ltd. ("STX Dalian") and further six newbuildings with STX Offshore & Shipbuilding (Korea) ("STX 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 Dalian 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 is therefore taking legal measures to protect their position and be compensated for any loss caused by non delivery and is currently engaged in arbitral proceedings with STX Dalian and STX Korea, mainly on the six ships, for which STX Korea are responsible. 

Subsequent to March 31, 2014, the Company has sold five and has agreed to sell another 25 Capesize newbuilding contracts to Knightsbridge and negotiated and concluded two newbuilding contracts plus two options. The Company's newbuilding program excluding newbuildings sold and newbuilding contracts with STX Dalian and STX Korea currently comprises 12 LR2 newbuildings plus two options for LR2 newbuildings. Total installments of approximately $73 million have been paid for these LR2 newbuilding contracts and the remaining installments to be paid amounted to approximately $471 million.

In September 2012, the Company cancelled the first of its five VLCC newbuilding contracts (hull J0025) at Jinhaiwan due to the excessive delay compared to the contractual delivery date and demanded payment from Jinhaiwan and the refund guarantee bank 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 yard initiated arbitration proceedings on this matter. In February 2014, the arbitrator found in favor of the Company and declared that the yard should repay the installments paid together with interest. In April 2014, the Company received $99.3 million in connection with the cancellation of J0025 and expects to record a gain of $35.9 million in the second quarter.

In 2012 and 2013, the Company cancelled all of its five newbuilding contracts at Jinhaiwan ship yard and has received a total refund to date of $243.9 million, of which $89.8 million has been used to repay debt. Total claims not yet received total $75.3 million.

CORPORATE

In March 2014, the Company purchased 1,130,662 of its own shares for $8.6 million and has recorded these shares as treasury shares in the balance sheet. The shares have been acquired further to a Board resolution to buy back up to 49,820,000 shares. 247,969,338 ordinary shares were outstanding as of March 31, 2014, and the weighted average number of shares outstanding for the quarter was 248,950,754.

The Company announces a cash dividend for the first quarter of 2014 of $0.05 per share. The ex-dividend date has been set to June 3, 2014, the record date is June 5 , 2014 and the distribution date is on or about June 19, 2014.

In February 2014, the Company prepaid bank debt in an amount of $112 million related to its ten crude oil tankers, which resulted in more lenient covenants in the loan agreements and reduced cash breakeven TCE rates.

On March 10, 2014, Frontline 2012 and Knightsbridge announced that they and Hemen had agreed for Knightsbridge to acquire five fuel efficient 180,000 DWT Capesize bulk carrier newbuildings from Frontline 2012 and one Capesize bulk carrier built in 2013 from Hemen for a total consideration of $360 million whereof $186 million in shares of Knightsbridge at $10 per share, $150 million in absorption of remaining newbuilding instalments and $24 million in cash. On April 23, 2014, Knightsbridge issued 15.5 million shares to Frontline 2012, 3.1 million shares to Hemen and took delivery of the Capesize bulk carrier from Hemen. The first two of the newbuilding vessels were delivered in May and the remaining newbuilding vessels are expected to be delivered between July and September 2014. Frontline 2012 currently owns approximately 31.6% of the total shares outstanding in Knightsbridge.

On April 24, 2014, Frontline 2012 and Knightsbridge announced they had agreed to combine Frontline 2012's remaining fleet of 25 fuel efficient vessels with Knightsbridge. Under the agreement in principle, the exchange ratio for the acquisition and share issuance will be based on NAV using March 31, 2014 broker values. The Knightsbridge/Frontline 2012 exchange ratio will be 44%/56%. Accordingly, Knightsbridge has agreed to issue 62.0 million shares to Frontline 2012. The closing will be executed in two stages, with 31.0 million shares expected to be issued around September 15, 2014 and 31.0 million shares around March 15, 2015. The transaction is subject to definitive documentation, normal closing conditions and regulatory approvals. The transaction is also subject to consent from Knightsbridge's shareholders to increase its authorized share capital to enable the issuance of the new shares to Frontline 2012.  

In April 2014, AGHL was listed on the Oslo Stock Exchange following its IPO. As part of the IPO, Frontline 2012 sold shares in AGHL for approximately $57 million. Frontline 2012 currently owns 4.1 million shares in AGHL representing approximately 11.6 percent of the total shares outstanding.

THE MARKET

Crude

The market rate for a VLCC trading on a standard 'TD3' voyage between the Arabian Gulf and Japan in the first quarter of 2014 was WS 51, representing a decrease of WS 2 point from the fourth quarter of 2013 and WS16 above the first quarter of 2013. The flat rate decreased by 6.7 percent from 2013 to 2014.

The market rate for a Suezmax trading on a standard 'TD5' voyage between West Africa and Philadelphia in the first quarter of 2014 was WS 79, representing an increase of WS 13 points from the fourth quarter of 2013 and an increase of WS 21 points from the first quarter of 2013. The flat rate decreased by 6 percent from 2013 to 2014.

Bunkers at Fujairah averaged $611/mt in the first quarter of 2014 compared to $615/mt in the fourth quarter of 2013. Bunker prices varied between a high of $627/mt on January 15^th and a low of $599/mt on March 12^th.

The International Energy Agency's ("IEA") May 2014 report stated an OPEC crude production of 30.0 million barrels per day (mb/d) in the first quarter of 2014. This was an increase of 0.2 mb/d compared to the fourth quarter of 2013. 

The IEA estimates that world oil demand averaged 91.3 mb/d in the first quarter of 2014, which is a decrease of 1.1 mb/d compared to the previous quarter. IEA estimates that world oil demand in 2014 will be 92.8 mb/d, representing an increase of 1.5 percent or 1.4 mb/d from 2013.

The VLCC fleet totalled 627 vessels at the end of the first quarter of 2014, four vessels up from the previous quarter. Five VLCCs were delivered during the quarter, one was removed. The order book increased by 12 vessels and counted 94 vessels at the end of the first quarter, which represents 15 percent of the VLCC fleet.

The Suezmax fleet totaled 449 vessels at the end of the first quarter, up three from 446 vessels at the end of the previous quarter. Three vessels were delivered during the quarter whilst none were removed. The order book counted 40 vessels at the end of the fourth quarter, which represents approximately nine percent of the Suezmax fleet.

Product

The market rate for an MR trading on a standard "TC2" voyage between Rotterdam and New York in the first quarter of 2014 was WS 136, representing an increase of WS 44 from the fourth quarter of 2013 and a decrease of WS 17 from the first quarter of 2013. The flat rate decreased by 5.3 percent from 2013 to 2014.

Bunkers in Rotterdam averaged $575/mt in the first quarter of 2014 compared to $582/mt in the fourth quarter of 2013. Bunker prices varied between a high of $595/mt on March 4^th and a low of $560/mt on January 24^th.

The MR product fleet totaled 1,620 vessels at the end of the first quarter of 2014, up from 1,597 vessels at the end of the previous quarter. The order book counted 393 vessels at the end of the fourth quarter, which represents approximately 24 percent of the MR fleet.

The LR2 fleet totaled 220 vessels at the end of the first quarter of 2013, down two from the previous quarter. The order book increased by one to 31 vessels at the end of the first quarter, which represents approximately 14 percent of the LR2 fleet.

STRATEGY AND OUTLOOK

Frontline 2012 was established in 2011 as the Seatankers Group's main investment vehicle in the shipping industry. The Company currently operates a fleet consisting of six VLCCs, four Suezmax tankers and six MR tankers and owns 12 LR2 fuel efficient newbuilding contracts plus two options for LR2 newbuildings when excluding newbuilding contracts sold or agreed sold and newbuilding contracts with STX Dalian and STX Korea.  

The Company's strategic plan has from the very start been to build up a portfolio of fuel efficient newbuilding 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 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 became the third largest, pure play VLGC owner and operator with six operating vessels and eight newbuildings with attractive delivery dates.

Frontline 2012 continued the process of streamlining the Company's activities by selling five fuel efficient Capesize newbuildings to Knightsbridge and subsequently announced the combination of Frontline 2012's remaining fleet of 25 fuel efficient Capesize newbuildings with Knightsbridge's fleet. With a unique fleet of 39 Capesize vessels of which 34 are "Eco design" fuel efficient vessels, Knightsbridge is expected to become the leading U.S. listed Capesize company and with a targeted cash breakeven rate below $15,000 per day, Knightsbridge is in a strong position to benefit from an expected recovery in the dry bulk market. The first two of the fuel efficient newbuildings were delivered in May and were fixed in the spot market at noticeably higher TCE rates than for regular Capesizes.

The next step in the process of streamlining the Company's activities is the crude/product segment and the Board is currently considering the Company's options.

The negative development in the crude and product tanker markets in the second quarter are likely to give a weaker operating result (excluding one time gains and losses) in the second quarter.

FORWARD LOOKING STATEMENTS

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 management's examination of historical operating trends. Although the Board 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 Board of Directors
Frontline 2012 Ltd.
Hamilton, Bermuda
May 26, 2014

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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