Frontline Ltd

NYSE:FRO

Earnings Call Transcript 2018-Q2

[Operator]

Good day and welcome to the Q2 2018 Frontline Limited Earnings Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to CEO, Robert Macleod. Please go ahead.

[Robert Macleod, Chief Executive Officer]

Thank you [indiscernible]. Good morning, and good afternoon. Thank you very much for dialing in. This is Frontline’s earnings call for the second quarter of 2018. I will start by briefly going through the highlights of the quarter. Following that, Inger will run us through the financials.

We will then look at Q2 earnings and I will guide you on Q3. We will then move on to the current tanker markets and outlook. We will focus on while increasingly optimistic on tanker rates going forward. The call will be concluded by taking your questions.

Let’s get started and look at the Company highlights please. We recorded a net loss of $22.9 million or $0.13 per share adjusted for non-cash items in the second quarter. Our results were driven by weak spot markets. Earnings on our older leased vessels were particularly weak.

For the week the spot TCE on ships less than 15 years of age was $13,200 and the ECO made at 17,000. Q3 has booked very first to our cash breakeven levels thus far with 82% of the days at $21700 on the ships under 15 years.

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

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

[Inger Klemp, Chief Financial Officer]

Thanks, Robert and good morning and good afternoon, ladies and gentlemen. Let’s turn to Slide 4 and look at the financial highlights.

Frontline achieved total operating revenues net of voyage expenses of $73 million in the second quarter and reports a loss of $22.9 million equivalent to $0.13 per share. The non-cash items this quarter consisted of a $0.8 million mark-to-market gain on marketable securities and gain on derivatives or $1.5 million and also a gain on the release of accrued dry docking growth of $2.1 million [Indiscernible] at time of the merger with Frontline 2012.

After adjusting them for these non-cash items, we show adjusted EBITDA of $28 million and adjusted net loss of $27.7 million in the second quarter against adjusted net loss of $13.6 million in the first quarter of 2018, this is a decrease of $14 million.

Let’s now look at a bit closer on the numbers in the Slide 5, income statements. The decrease due to results in the quarter of $14 million is mainly explained by a decrease in results on time charter basis of $8.2 million due to decrease in TC rates in the second quarter compared to the first quarter.

We had a decrease in ship operating of $600,000, we had an increase interest expense by $2.4 million mainly due to the relation to the [indiscernible] fleet of three vessels in the first quarter. And finally we had an increase in our expenses of $5.4 million mainly due to new charters on two VLCC in the quarter.

Then let’s us take a look at the balance sheet on Slide 6. Changes to the balance sheet as of end of June from March 31st, primarily related to a decrease in vessels of $74 million due to depreciation in the quarter and increase in newbuildings of $17 million due to yard installments paid in the quarter.

A decrease on the capital leases by $8 million due to the depreciation, net increase and debt was $6.4 million in the quarter due to drawdown of the Hemen facility, ordinary loan repayments, reduction obligations on the capital leases and reduction obligation activities. And finally a reduction expected of $22 million due to losses in the quarter.

As of June 30, Frontline has $4 million in cash and cash equivalents including undrawn amounts under our unsecured loan facilities. Our remaining newbuilding CapEx requirements amounts to $112.5 million relating to these three newbuildings and we have approximately $111 million in debt capacity under our newbuilding credit facility.

We have no near-term debt maturities. The first debt maturity is in November 2019 when our own senior unsecured loan facility of up to $275 million matures. We have drawn $190 million under this facility as currently.

Let’s now take a closer look at the cash breakeven rates and OpEx on Slide 7. We estimate average cash cost breakeven rates for the remainder of 2018 is approximately $22,500 per day for the VLCC, $18,500 per day for the Suezmax tankers and $16,200 per day for the LR2 tankers.

These rates started all-in daily rates that our vessels has earn to cover budgeted operating costs and drydock, estimated interest expense, TC and bareboat hires, installments on loans and G&A expenses.

Every $1000 per day in achieved rates in excess of our cash breakeven rates translates to approximately $19 million in incremental net income per year or $0.11 per share, which shows the high importance of maintaining low cash breakeven rates.

In the upper right-hand graph, we show Frontline’s historical VLCC cash breakeven rates along with average VLCC’s spot earnings in the period 2005 to 2018. Looking back in history, it is under the year 2009 and through 2011 to 2013, where the cash breakeven rates were higher than the average VLCC spot earnings at that time it is also the situation so far in 2018.

Frontline’s current cash breakeven levels are historically low and position us well in the context of existing market conditions and it will help us to generate significant cash flows in improving market conditions.

The operating expenses per day in the second quarter of 2018 were in $8,400 per day for the VLCC, $6,800 per day for the Suezmax tankers and $7,100 per day for the LR2 tankers. We drydock one VLCC in the second quarter and no vessels are scheduled for drydock in the third quarter.

With this, I leave the word to Robert again.

[Robert Macleod, Chief Executive Officer]

Thank you very much, Inger. Let’s turn to Slide 8 please and look at the Q2 performance and guidance for Q3. The spot earnings for the overall fleet in the quarter was $11,700 on the VLCCs. ECO and modern lease obviously did better as mentioned earlier. We expect 78% as $20,000 for Q3. Our Suezmax made $14,100 and 64% of Q3 have been booked at similar numbers. On the Aframax Q2 was weak at 1107 but our Q3 bookings was 67% on at 15.5 is stronger.

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

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

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

Let's move to next Slide and look at how we are preparing for 2020 by investing in Feen Marine Scrubbers. We believe in the economics in relation to installing scrubbers. Especially on the big ships and we will be installing scrubbers on a number of vessels as we have previously announced.

For investing in Feen, we have secure access to scrubbers with high quality systems, reliable delivery timings and at an attractive price. And to be clear, retrofitting represent just as attractive economics as ordering in newbuilding with the scrubber. In many cases it is even more compelling. Frontline investments in Feen looks attractive on a standalone basis and we therefore believe this is a clear strategic moves preparing Frontline goal of 2020.

Let's move to the last Slide and have a look at the summary. As we have seen over the recent years, oil demand continues to be strong. New trade rules have been established, the U.S. export trade is important and more crude oil is moving to Asia resulting an increase ton-miles.

We are seeing record levels on scrubbing, the crude oil tank, oil contango is back, fleet growth is halting and oil inventory growth is expected. There are many encouraging factors present and we only need some of them to continue for the tanker market to turn. But on the flip side, the order book remains substantial and scrubbing activity could slowdown. Trade wars could also destruct global growth and demand could be hit in a higher price environment. Contracting have slowed significantly helped by contracts and other shipping segments, but this could change.

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

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

[Robert Macleod, Chief Executive Officer]

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

[Operator]

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