Jens Martin Jensen - Chief Executive Officer of Frontline Management AS Inger M. Klemp - Chief Financial Officer and Chief Financial Officer of Frontline Management AS

Jonathan B. Chappell - Evercore Partners Inc., Research Division Fotis Giannakoulis - Morgan Stanley, Research Division Joshua Katzeff - Deutsche Bank AG, Research Division Eirik Haavaldsen - Pareto Securities AS, Research Division John Reardon Michael Webber - Wells Fargo Securities, LLC, Research Division Gregory Lewis - Crédit Suisse AG, Research Division David E. Beard - Iberia Capital Partners, Research Division

Good day, and welcome to Q1 2013 Frontline Limited Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Jens Martin Jensen. Please go ahead, sir.

Thank you. Good morning, good afternoon and welcome to our Q1 presentation. We've unfortunately had a little technical glitch, so you will have to change the slides on your own individual computers. Anyway, we'll go through our usual program for the presentation with Inger going through the Q1 highlights and main transactions, financial review of the quarter and an update our small new building program. After that, I will follow up with some market comments and some comments on the present market situation. If you could start, Inger. Thank you. Inger M. Klemp: Yes. Thanks, Jens. And good morning, and good afternoon, ladies and gentlemen. Moving then to Slide 4, Highlights and Transactions. In the first quarter, Frontline has continued to terminate and redeliver older and non-core vessels. The charter party for the single hull Titan Aries was terminated in January 2013 and a gain of $7.6 million was recognized in the first quarter of 2013. Also, the charter party for the Suezmax tanker Front Pride was terminated in February 2013 and we made a net compensation payment to Ship Finance of $2.1 million for the early termination of the charter party. In January, Frontline paid $6 million for 1,143,000 shares in a private placement by Frontline 2012. And also, the last item here is at a Special General Meeting held on May 8, 2013, our shareholders approved a decrease in the par value of our ordinary shares from $2.50 to $1 per share and that was effective May 14, 2013. Then moving to Slide 5, Financial Highlights. This quarter, Frontline reports a net loss of $18.8 million, equivalent to a loss per share of $0.24. This compares with a net loss of $16.6 million and a loss per share of $0.21 for the preceding quarter. Loss includes a gain of $7.6 million on the termination of the charter party for the single hull VLCC Titan Aries, a deferred gain of $1.8 million relating to the sale and leaseback of the VLCC double hull Eagle, and the gain on the dilution of ownership in Frontline 2012 of $5.2 million. Then moving to Slide 6, Income Statement. Net loss, excluding gains, in the first quarter of 2013 is about $32 million, which is $3 million worse than in the fourth quarter of 2012. And this decrease can mainly be explained by, first of all, that income on time charter basis was about $22 million worse this quarter than it was in the fourth quarter, and that is due to the -- a decrease in TCE per day this quarter. Contingent rental expense decreased $12.3 million this quarter compared with the fourth quarter and that, again, is due to the decrease in time charter earnings per day in this quarter. Ship operating expenses decreased by $2.3 million compared with the preceding quarter due to both the decrease in running cost and also a decrease in drydocking cost. Charter hire expenses decreased by $2.4 million compared with the preceding quarter, primarily as a result of redelivery of vessels, which is Gulf Eyadah. Depreciation decreased by $2 million due to redelivery of vessels. And otherwise, minor changes to other items this quarter. Now moving to Slide 7, Income on time charter basis. Frontline double hull VLCC fleet earned $14,600 per day in the first quarter, and this compares with an $18,500 per day in the fourth quarter for 2012. The average for the whole VLCC fleet was about $17,000 per day in this quarter, compared with $19,300 per day in the previous quarter. The Suezmax fleet, they earned $14,500 per day in this quarter compared with $14,000 in the previous quarter. The OBOs earned a $13,300 per day in this quarter compared with $35,100 per day in the previous quarter as a consequence of the lease terminations made. Time charter, the TCE numbers this quarter was disappointing with respect to the VLCC segment and satisfactory in the Suezmax segment compared to both peers and market. Moving down to Slide 8, Ship operating expenses and Off-hire. We had average OpEx for the fleet of approximately $9,900 per day in the first quarter compared to approximately $9,700 per day in the previous quarter. We drydocked 1 VLCC in the first quarter, same as in the fourth quarter, as you can see from the graph on the upper right-hand side of the slide. As you can see from the graph on the lower right hand side of the slide, off-hire days were 157 days in the first quarter compared with 42 days in the fourth quarter 2012. So although we drydocked only 1 vessel in the first quarter, we commenced drydocking for 3 more vessels in the first quarter and the total number of hire days related to docking was 134 days. We expect to drydock 2 VLCC vessels and 1 Suezmax in the second quarter of 2013, in addition, to complete the drydocks for the VLCC drydocked in the first quarter. Then moving to Slide 9, Balance Sheet. The total balance sheet end March 31, is approximately $100 million less than it was at the end of December 31, 2012. The restricted cash has decreased by $17 million due to a net outflow after cease of charter hire and interest and principals paid on the Windsor and Golden State bonds during the first quarter. Other current assets decreased by $40.5 million, mainly due to decrease in voyages in progress and inventories. Newbuildings increased by $700,000 due to capitalized interest in Newbuildings division fees. Vessels and equipment decreased by $4.7 million, which relates to depreciation. Vessel and equipment on a capital lease decreased by $24.7 million, related to depreciation and the termination of the lease on Front Pride. Total debt decreased by $5.7 million relating to loan repayments. And then the capital lease obligation decreased by $18 million of which, $5.1 million relates to termination of Front Pride. Other current liabilities decreased by $63 million, of which $52 million relates to the reduction in related party balances, which is the payment on cash sweep to Ship Finance. Moving then to Slide 10, Cash Cost Breakeven. We estimated average cash cost breakeven rates for 2013 -- for the remainder of 2013, are approximately $25,500 per day for VLCCs and $18,500 per day for Suezmaxes. These rates are the daily rates that our vessel must earn to cover budgeted operating cost, estimated interest expense, bareboat hire and corporate overhead cost. Breakeven base exclude vessels on short-term time chartered-in, CapEx and ITCL levels. Moving down to Slide 11, Newbuilding Overview. After end of March 2013, Frontline's newbuilding program comprise of 2 Suezmax tankers and the company was committed to make newbuilding installments of approximately $88 million with expected payments of $58 million in 2013 and $37.7 million in 2014. Then moving to Slide 12 and 13, Frontline Fleet. [indiscernible] currently in the Frontline fleet, 48 vessels, including vessels on commercial management and ITCL vessels, this component by 32 double hull VLCCs and 16 double hull [indiscernible] 2013 and 3% on average in 2014. The average net TC rate for the total fleet is about $39,900 per day in 2013 and $40,400 per day in 2014. And with this, I'll give the floor to Jens again.

Thank you, Inger. We are now on Slide 14. Basically what was built up, rate wise, during the last quarter of 2012 was destroyed in early January as seemingly a few owners, whom pressed the panic button and the rates in the quarter was greatly down to around operating cost levels. From a relative basis, the Suezmax market and activity held up. If you look at Slide 15, the VLCC fleet, we are now in the last year for the last number of VLCCs to be delivered. Positively, so far, only a very few VLCC orders has been placed, and that's only related to Chinese owners at Chinese shipyards. Despite very dismal earnings, very few VLCCs are being scrapped. Slide 16, our overview of the Suezmax fleet. Also in the Suezmax segment, we ended last year of a huge order book. However, again, despite a relative bad market for Suezmaxes, very few ships has been sold for scrap. The pace of scrapping for both VLCCs and Suezmaxes must improve, otherwise the fleet will continue to be imbalanced. Slide 17, Newbuilding, prices and time charter market. We estimate the newbuilding prices for a good specification VLCC to be in the region of $85 million and $55 million for Suezmax tanker depending on the actual shipyard. Newbuilding prices seems to have bottomed out. Time charter rates. On paper the 3-year VLCC time charter rate is around $25,000 per day, and we estimate the rate for 3-year time charter on Suezmaxes to be in the region of $20,000 per day. There's very limited time charter activity at present. Slide 18, outlook. Generally, the market is tough. We have seen the spot market close to operating cost levels and secondhand ship values have continued to fall. That toxic combination is starting to take its toll, and ships are now being arrested by financing banks. We are seeing improvement in the spot market now with an increased activity of cargoes from the Persian Gulf as the main driver. As I mentioned earlier, we are in the last year with large newbuilding deliveries but scrapping must pick up. Frontline, we have continued our strategy of selling older vessels on the fleet and redelivering chartered-in tonnage. As Inger mentioned, our VLCC earnings so far has been weak and instead of being the market leader forcing the spot rates down, we have taken a lot of commercial waiting time. Market clearly lacks direction and leadership, and without that, this market will not change for the better in the short term. Suezmax, in the Suezmax segment, our earnings on a relative scale was in line with the market. Unless the spot market improves, our cash position is deteriorating rapidly. It will be very interesting times ahead, I think, for all tanker owners. With that, I think we would like to take your questions. Thank you.

[Operator Instructions] Jon Chappell of Evercore Partners. Jonathan B. Chappell - Evercore Partners Inc., Research Division: Inger, you mentioned in the Annual General Meeting the decrease in the par value of the shares. Can you just talk about why that was done? It's kind of a new process to me. Inger M. Klemp: Yes. Well, according to the new [ph] law, shares cannot be issued at below par value. And in order then for the company to provide the company with the ability to issue additional shares, we suggested then the reduction in par value to the shareholders, which then was approved at the shareholder meeting and was effective May 14. Jonathan B. Chappell - Evercore Partners Inc., Research Division: Okay, that makes sense. You've mentioned on the press release that you may need to issue equity or sell assets if the market doesn't recover or then a potential restructuring. Given, Jens, your outlook that the market is probably not going to get better anytime soon, kind of relying on scrapping, which isn't happening, to the extent that you would think, given the rate, what's the timing of starting to move forward on any of those options? You mentioned some vessels sales but have you thought about the timing of issuing equity or potentially discussions with your banks or your charters for a further restructuring? Inger M. Klemp: No, I just think we had to consider that as we move along in a way. I mean, we have to just look the opportunities we have and look at the market and see when the timing is right to do that. Jonathan B. Chappell - Evercore Partners Inc., Research Division: Okay. Are there any vessels held for sale right now or any that are being marketed of your older fleet?

Well I think, we always have 1 or 2 ships out in the market and just to test the prices and to see if the opportunities are there. So I would say, at any given time, we would always have 1 or 2 ships out for sale. Jonathan B. Chappell - Evercore Partners Inc., Research Division: Okay. And then finally and really quickly, Inger, you mentioned that the 3 drydocks for the second quarter actually started in the first quarter. What's the anticipated off-hire time in the second quarter for those drydocks? Inger M. Klemp: Well, I think, it would be more in line what you have that -- the off-hire days in the first quarter, in a way.

Our next question comes from Fotis Giannakoulis of Morgan Stanley. Fotis Giannakoulis - Morgan Stanley, Research Division: You mentioned about the refinancing and the maturity of the convert. How shall we think of this maturity and what are the different alternatives that the company has in relation to this convert? Inger M. Klemp: As of what the sorts of alternative, of course, that everyone has with relation to such a finance instrument. But I guess, you shouldn't think differently upon this that it has a maturity in April 2015, that's for sure. And for the time being, we are paying interest on the convertible, that's what we're doing. And we just have to see what we would like to do or what kind of opportunities or considerations we will make going forward on that. Fotis Giannakoulis - Morgan Stanley, Research Division: Okay. And I just want to ask if you had any discussions with Ship Finance in relation to the lease payments. Have you been in discussions right now? And if not, when do you think that such a discussion might begin?

We have not had any discussions on that. I think it's a -- looking at the market situation and trying to see where we are going forward to that. There's not been any discussions on that at present, no. Fotis Giannakoulis - Morgan Stanley, Research Division: Okay. And in relation to the market, can you give us your outlook and what do you want to see in order for VLCC rates to recover? Do we have to dismiss completely the 2013 in terms of market recovery? Is this 2014 event or we might have some drivers that can move rates for VLCC lower? Also, if you can explain why the smaller vessels, Aframaxes for example, they are performing better compared to VLCCs.

The market view of course so far in autumn -- traditionally, the first quarter of the year used to be quite good, but unfortunately, the beginning of January, it has completely came down. I would say unless we see much more scrapping than what we have seen so far, the market is imbalanced. We still have a lot of ships being delivered. And despite increased activity lately, I think it will be a difficult year, 2013. On the Suezmaxes and Aframaxes, there seems to be much more cross-trade opportunities, we see a lot of movements from the Mediterranean going East on Suezmaxes, which of course adding a lot of ton mile. I think when the rates are so depressed, many traders or oil companies actually prefer to ship in larger -- in smaller size for inventory cost. And I think that's why we have seen relatively better earnings in the Aframax and the Suezmax market. Fotis Giannakoulis - Morgan Stanley, Research Division: My last question is, there's a lot of discussion about newbuilding vessels, that they have much lower fuel consumption. There is also a bit strong support that these vessels, they can earn $5,000 -- $4,000 to $5,000 higher charter rate compared to conventional vessels. Can you give us your perspective about the size of the fuel savings of the newbuilding vessels versus existing vessels. And do you have any concerns that the existing vessels might become obsolete when newbuildings hit the water?

I think the VLCC -- or the new designs of VLCCs, if you look at high-speed service being 13.5 to 14 knots, you can have a potential saving up to 30 tons per day compared to old VLCCs. But of course what we are seeing right now, everybody is slow steaming -- or most owners are slow steaming down to the 9, 10 knots, and their savings is not so big on their modern ships. I think positively right now that even though newbuilding prices may be tempting, I think everybody's view is that the present market could not support VLCC newbuildings and equally there's beginning to be more and more attractive second-hand transactions, which is maybe putting a bit of a damper on the people ordering ships.

Our next question comes from Isaac Arnsdorf from Bloomberg News.

Jens, you mentioned ships getting -- starting to be arrested by their financiers. And I was just wondering, is that having any impact in the market either from tougher [indiscernible]?

[indiscernible] seems obviously correct. So some charters would do not touch certain ships, which is where they know the owners has financial problems and the ships could be arrested. Some ships has been arrested but also some ships are in potential danger of doing that. So we are seeing that, which is of course a [indiscernible].

About how many ships are [indiscernible]?

[indiscernible] not actually arrested, but I will say the ship with potential financial problem is probably between 10 and 20 ships.

And what kind of problem does that present for traders or oil company [indiscernible].

Less ships, higher rates, I guess, is the easiest reply. But I guess, [indiscernible] now before oil are being shipped. So I think it's positive for owners of a good standing that this is actually happening. It should probably have happened before.

Our next question comes from Justin Yagerman of Deutsche Bank. Joshua Katzeff - Deutsche Bank AG, Research Division: It's actually Josh on for Justin. I just want to follow up on some of the newbuilding talk and maybe, I guess, discuss some of your -- I guess, your current newbuilding program. You mentioned that you have payments due, I guess, in both 2013 and 2014. I guess, does that mean that 1 of the vessels will be taken this year and 1 next year.

Yes. As it looks now, 1 will be in the fourth quarter this year and the other 1 will be in the first quarter next year. Joshua Katzeff - Deutsche Bank AG, Research Division: So -- I guess, so is the current plan to still try and take delivery? Or should we expect to see maybe some of these contracts marketed as resells? Or even there's the possibility for further, I guess, maybe yard payment reductions or restructuring?

I think we intend to fulfill our obligation towards the shipyard, that's our intention. But I think it's too early yet to determine what we will end up doing with the ships. Joshua Katzeff - Deutsche Bank AG, Research Division: And then maybe kind of touching back on the restructuring, or necessarily not the restructuring but on the potential for one going forward. And I guess, you said you weren't talking with Ship Finance or any of your charters now to reduce rates. But given your weak market outlook for 2013, [indiscernible] I guess my question is would it be easier to go to some of these guys now while you do still have a substantial amount of cash on your balance sheet rather kind of waiting through -- I guess waiting for this weak 2013 period where those balances are going to decline further?

It is a discussion we will probably need to have later in the year, what we do with these leases and what can be done. But like we mentioned before, we have not had that discussion yet.

Your next question comes from Eirik Haavaldsen of Pareto Securities. Eirik Haavaldsen - Pareto Securities AS, Research Division: I actually had my question answered. But can you maybe give us a bit more color on your performance in Q2 and whether you've been able to sort of capture any of the recent uptick you've seen there in the market?

Of course, the uptick has basically only happened within the last week to 10 days. So it's coming very tail end in the second quarter. It's of course very welcome we have this boost, but it will not, unfortunately, assist the second quarter much. But of course, what is important is that the market continues [indiscernible] I guess everybody's hoping for right now.

Our next question is from John Reardon of Crowell, Weedon.

Could you talk about the recent boost. Was that just the luck of the draw? Or is there something in development -- I mean, what's your opinion or what's going on? It's been impressive?

It has been very impressive actually and I wouldn't say surprising. I think it was about to boost. I think the VLCC fleet has been quite spread out. A lot of ships have been balancing into the Atlantic and taking oil there. So there's suddenly a shortage of ships in the Persian Gulf. But we're also seeing quite an increased activity from ships loading for China. Apparently, there's some haulage problem in China and there seem to be ships stuck outside Chinese ports congesting, so that could be one of the reasons also why suddenly we are seeing extra oil being moved. But there's definitely much more activity.

And as a follow-up, could you talk about the U.S. oil shale production. And what I mean by that is originally, a lot of people looked at that and said "Oh boy, that's bad for the tankers." But now I'm reading some things, where some of the traditional suppliers to the U.S., like Nigeria and Venezuela, are now having to ship their product farther afield, which is helping on a revenue ton basis -- mile basis, is that correct or am I incorrect?

There's actually been an increase in the ton mile over the last 12 months. Unfortunately, the fleet increase has been larger. But you're right, there seems to be much more oil moving from the Caribbean out to the Far East, and also from West Africa. So that has helped the ton mile situation. But if we will have a ton mile plus of about 2%, unfortunately as we have 8%, 9% fleet growth over the last 2 years, including this one, there is clearly an imbalance there.

Your next question is from Michael Webber of Wells Fargo. Michael Webber - Wells Fargo Securities, LLC, Research Division: I just wanted to go back and touch on the liquidity question again and kind of relate it to the newbuilds. And I guess you said in the release and on the call, that you guys have committed to this newbuild commitments. But if liquidity is going to be a long-term issue. You're cautious on the market and a market recovery is what you need to avoid a restructuring. And your calling out the 2015 notes as kind of a fulcrum security. Why are you still committed to those newbuild commitments?

Well it's not easy to bid out of shipbuilding contract, otherwise I'm sure we would have looked at that. But I think, of course, going forward, we will see when the ships are delivering, and of course, we could always resell them in the market. It may have to be done at a loss but it depends of course also what kind of financing we can establish. So that's something that we will look at going forward. But we could end up maybe reselling the ships. Michael Webber - Wells Fargo Securities, LLC, Research Division: Okay. All right. Thoughts around, I guess, new equity and then you touched on this a bit earlier, I'm just curious, given what is most likely a negative NAV, kind of normal math kind of goes out the window, when you think about potentially doing something on the equity side, I'm assuming kind of a deal size that matters is kind of what you would look at. What number do you think would be enough to be meaningful or below what floor would you -- is not a viable option? Inger M. Klemp: What kind of number -- what are you thinking about? Number with respect to what? Michael Webber - Wells Fargo Securities, LLC, Research Division: Outside of -- it's relative value on a rate is kind of out window considering it, even a negative NAV, but if you think about basically what size rate is worthwhile for you all at this point when you think about your liquidity. What will be the threshold that you would actually think about doing something, in terms of what's available to you in the market? Inger M. Klemp: Much too premature in a way to start saying or answering that sort of questions. I think we -- what we did now in the press release is to tell you in a way that if the market wasn't improved and we are not able to raise equity or sell assets, we might have difficulties. But we haven't really made any specific plans yet with respect to what you're asking. So... Michael Webber - Wells Fargo Securities, LLC, Research Division: No, no, no, that's a fair. But these dynamics have been in place for a while. So I was just curious as to when you guys think you would start taking a harder look at that? Inger M. Klemp: It really depends, as I said earlier, it really depends on the developments in the market in a way. Michael Webber - Wells Fargo Securities, LLC, Research Division: I got you. Just one more for me, I'll turn it over. Jens, you talked about scrapping not meeting expectations and kind of not being where it needs to be. If I kind of look at it from the perspective of long-term charter rates kind of getting down towards somewhere between OpEx and cash breakeven, kind of an indicator that the long-term sentiment has really bottomed and then people are going to start scrapping. Where is -- if you kind of look at this that way, where do you think the rate is that we would need to see as kind of an indication that scrapping will finally pick up? Or are we already there and it just hasn't happened yet?

I think we're already there. And we have been there almost for the last 12 months. So $10,000, the operating cost, some of these ships has to be dried out. So if you're having maybe over a year, $12,000, $13,000 operating cost -- we should have seen much more scrapping than we have seen now. But then hopefully that will pick up.

Our next question is from Greg Lewis of Credit Suisse. Gregory Lewis - Crédit Suisse AG, Research Division: I guess, my question, I just want to circle back to the 2 newbuilding Suezmaxes that you have. Clearly, there are some decisions that need to be made. But has 1 decision been thought about, and that would be maybe the decision to potentially convert those Suezmaxes or not even convert them, maybe upgrade them into being product tankers? And if you thought of -- and if that has been done, how much roughly would that cost to sort of upgrade that order to a Suezmax product tanker?

That's -- of course, we have thought about it and normally, these ships are actually fixed with gas oil when they come out of the yard. But the problem is -- you can of course convert them and you use them more to floating Suezmax product tanker, you can't really engage in the product tanker trade with them because they'll be too large for the product terminals port. So it's a possibility, that can be done. You have to apply. The full tank coding of these ships will probably be around $5 million and you have to do some upgrading to some of their bells [ph] and so on. But it's about $5 million upgrade.

Our next question is from David Beard of Iberia. David E. Beard - Iberia Capital Partners, Research Division: What are your thoughts relative to repurchasing your converts in the open market? Is it a question of the price of the bonds or whether you want to use cash to do that? Could you give us a little insight into that option? Inger M. Klemp: I think we will have kind of a strategic approach on that. We have bought back some converts at the previous points in time. However, we will of course continue just to see in the future whether we think that is the right thing to do. So apart from that, I don't think we have any plan. We're just going to figure out in a way.

[Operator Instructions] We have a follow-up question from John Reardon.

[indiscernible] follow up. I seem to recall you have a significant shareholding in Frontline 2012, which is worth, I believe, somewhere between $70 million and $80 million. Any thoughts on liquidating that to raise some money? Inger M. Klemp: Again, as we stated in the press release, I mean, these are of course options that we have with respect to selling assets going forward. So that needs to be taken into consideration going forward when we consider the development.

[Operator Instructions] We have no further questions at this time. I would like to hand back to our speaker for any closing or additional remarks.

I would just like to thank you all for listening in and dialing in. And I would like to thank everybody in Frontline for their work and efforts in this difficult time. Thank you very much. Thank you.

We'll conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.