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

Joshua Katzeff - Deutsche Bank AG, Research Division Jonathan B. Chappell - Evercore Partners Inc., Research Division Fotis Giannakoulis - Morgan Stanley, Research Division Rune Sand - Carnegie Investment Bank AB, Research Division Ole G. Stenhagen - SEB Enskilda, Research Division

Good day, and welcome to Q2 2013 Frontline Ltd. Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jens Martin Jensen. Please go ahead.

Thank you. Good morning, good afternoon, and welcome to our Q2 presentation. We will follow our usual program for this presentation with Inger going through the Q2 highlights and main transactions, financial review of the quarter and an update on our small newbuilding program. After that, I will follow up with some market comments and some comments on the present situation and on the present situation of Frontline. Inger, if you could start, please. Inger M. Klemp: Thank you, and good morning, and good afternoon, ladies and gentlemen. Moving then to Slide 4, highlights and transactions. Frontline has recorded a vessel impairment loss of $81.3 million in the 3 and 6 months ended June 30, 2013. This loss relates to 3 vessels leased from Ship Finance: the Front Century, the Front Champion and Golden Victory. Impairment losses are taken when events or changes in circumstances occur that cause the company to believe that future cash flows from an individual vessel will be less than its carrying value and not fully recoverable. In May of 2013, the company redelivered the chartered-in vessel double-hull Eagle to its owners. Following this redelivery, the company no longer has any vessel chartered-in under operating leases. At the 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 effective May 14, 2013. In June 2013, the company announced that it has entered into an equity distribution agreement with Morgan Stanley, under which Frontline may, at any time and from time to time, offer and sell new ordinary shares, having aggregate sales proceeds of up to $40 million through Morgan Stanley in an at-the-market offering. Frontline has issued 985,094 new shares following the launch of this ATM in June 2013. Then moving to Slide 5, financial highlights and fixed income statements. Frontline reports a net loss of $120.3 million, equivalent to loss per share of $1.54 in the second quarter of 2013, compared with a net loss of $18.8 million and a loss per share of $0.24 for the preceding quarters. The net loss attributable to the company in the second quarter includes a gain on sale of assets and amortization of deferred gains of $500,000 being the deferred gain relating to the sale and leaseback of double-hull Eagle and an impairment loss of $81.3 million relating to the 3 vessels leased from Ship Finance. Net loss ex-impairment loss in the second quarter was $39 million. The increased loss ex-impairment loss in the second quarter compared to the first quarter is mainly due to the lower TCE rates in the second quarter compared to the first quarter and also increased OpEx due to an increase in drydocking costs. Slightly offsetting this was a reduction in charter hire expenses in the second quarter following the redelivery of the double-hull Eagle. Moving then to Slide 7, income on time charter basis. Frontline's double-hull VLCC fleet earned $11,200 per day in the second quarter compared with $14,600 per day in the first quarter. The average for the whole VLCC fleet was about $14,100 per day in the second quarter compared with $17,000 per day in the first quarter. The Suezmax fleet earned $13,800 per day in the second quarter compared with $14,500 per day in the first quarter. The TCE numbers this quarter were disappointing in the VLCC segment and relatively satisfactory in the Suezmax segment compared to both peers and market. Moving then to Slide 8, ship operating expenses and off-hire. The average OpEx for the fleet in the second quarter was approximately $12,500 per day compared to approximately $9,900 per day in the first quarter. We drydocked 4 vessels in the second quarter compared to one vessel in the first quarter, as you can see from the graph on the upper right-hand side of the slide. However, Q2 includes one vessel overlapping from Q1. As you can see from the graph on the lower right-hand side of the slide, off-hire days were 208 in the second quarter compared with 157 days in the first quarter. Although we drydocked only one vessel in the first quarter, we commenced drydocking for 3 more vessels in the first quarter, hence the tie [ph] off hire days number in the first quarter. We expect to drydock 2 Suezmax tankers in the third quarter of 2013. Moving then to Slide 9, balance sheet. The total balance sheet in June 30, 2013, is approximately $120 million less than end March 31. This is mainly explained by vessel and equipment under capital lease decrease by $103 million, of which $81.3 million relates to impairment charge and $21.6 million relates to the quarterly depreciation. In addition, cash decreased by $25 million mainly due to lower TCE rates and increased OpEx due to an increase in drydocking costs. Otherwise, there were small changes to all the balance sheet items in this quarter. Moving then to Slide 10, cash cost breakeven. The estimated average cash cost breakeven rates for the remainder of 2013 are approximately $25,000 per day for VLCCs and $19,000 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 costs. These breakeven rates exclude CapEx and ITCL vessels. Moving then to Slide 11, newbuilding overview. After June 30, Frontline's newbuilding program comprised 2 Suezmax tankers, and the company was committed to make newbuilding installments of $87.9 million. We expect payments of $6.2 million in 2013 and $81.7 million in 2014 and delivery in the first quarter of '14 and the second quarter of 2014, respectively. Moving then to Slide 12 and 13, Frontline fleet. The number of vessels currently in the Frontline fleet is 48 vessels, including the vessels on commercial management and the ITCL vessels. And this is compounded by 32 double-hull VLCCs and 16 double-hull Suezmaxes. We have contract coverage of 5% on average in 2013 and 3% on average in 2014. The average net TC rate for the total fleet is about $40,000 per day in 2013 and $40,400 per day in 2014. With this, I'll leave the word to Jens again.

Thank you, Inger. We are now on Slide 14, earnings and market factors. The increased crude demand mainly due to the increased refinery demand and resilience from the owners finally pushed the market up. It did not last long, and unfortunately, we are back to earnings below operating levels. The Suezmax rates are holding up relatively well in comparison, which is positive. Despite healthy VLCC lifting volume monthly from the Persian Gulf, rates are falling. There are simply too many ships. Only increased scrapping or layup can reverse the market on a short-term basis. Slide 15, the VLCC fleet. We are now in the last year with the last number of VLCCs to be delivered. Positive so far, very few VLCC orders has been placed in the shipyards in our book well into 2016. Slide 16, the Suezmax fleet. Also in the Suezmax segment, we ended last year of a huge order book. However, as mentioned, the pace of scrapping for both VLCCs and Suezmaxes must improve. Otherwise, the fleet will continue to be imbalanced. Slide 17, newbuilding prices and rates. We see that the newbuilding prices have actually increased over the last 6 months, and we estimate newbuilding prices for good specification VLCCs to be in the region of about USD 90 million and USD 55 million for Suezmaxes depending on the actual shipyard. Time charter rates. On paper, the 3-year VLCC time charter rates is around $22,500 per day and we estimate that the rate for 3 years on Suezmaxes to be in the region of $19,000 per day. However, there's very limited time charter activity at present. The outlook, Slide 18. The market is tough. I think that is the best way to describe it. Despite the amount and ton mile have increased, there's simply too many ships and the spot market is again back to levels which are below operating costs. On this, we see increased scrapping or some consolidation of the market. The market will not improve in the short term. As mentioned earlier, we are in the last year with the large newbuilding deliveries, which is positive long term. Frontline, our sales, we are now down to our core fleet and we intend to self-terminate further tonnage during the balance of the year with upcoming expensive drydrockings. Cost cutting continued, and increased efforts on fuel savings consumptions are being made, big differences from various ships in the fleet up to $10,000 per day, different on some of our VLCCs. It gives a huge difference in earnings. Also, continued cost-cutting shore based and in our own whole [ph] company and in our own office, we are now only down to around 30 people in Frontline. We are continuing monitoring the situation, which is obviously also market-related, and we are looking for opportunities to improve the company's financial situation. I think they're very interesting times ahead for all tanker owners. With that, we are now ready to take your questions. Thank you.

[Operator Instructions] Your first question, from Joshua Katzeff from Deutsche Bank. Joshua Katzeff - Deutsche Bank AG, Research Division: This is Josh Katzeff. I just wanted to start -- quickly just jump in to your comments around vessel scrapping.

I'm sorry, moderator, we can't hear the question. Could you [indiscernible] the sound? Joshua Katzeff - Deutsche Bank AG, Research Division: Is that better? Is that better? Can you hear me now?

Very bad line, sorry. Joshua Katzeff - Deutsche Bank AG, Research Division: Is this better?

Yes, try now. Joshua Katzeff - Deutsche Bank AG, Research Division: Okay. I just wanted to start off with your comments around vessel scrapping. Is there any kind of difference on your thoughts between your Suezmax fleet and your VLCC fleet for your 15-year-old ships and maybe some of the older ones?

I hope I hear you correctly. There's a difference between VLCCs and Suezmax scrapping. Of course, the older VLCCs tend to be more expensive going to drydocking, so we are looking at that and the earning potential going forward with slightly better earnings on the Suezmaxes on a relative scale. I think the scrappings or the sales will be happening on the VLCC side. Joshua Katzeff - Deutsche Bank AG, Research Division: So when we go to your fleet list, you have a substantial amount of ships that are '98 or '99 built or even older. So I... [Technical Difficulty] Inger M. Klemp: We cannot hear anything. Joshua Katzeff - Deutsche Bank AG, Research Division: I'm sorry, I'll drop off the line and I'll get...

Try and re-dial in, yes. Inger M. Klemp: Please do that.

We will move to our next question from Jon Chappell from Evercore Partners. Jonathan B. Chappell - Evercore Partners Inc., Research Division: I want to ask about kind of the next steps for Frontline. I mean, you talked about possible restructuring. I know there's probably a lot of different avenues you could go down, but you've talked about scrapping. But at what point do you start thinking about maybe selling the Suezmax newbuild slots or maybe even selling the stake in Frontline 2012? It's obviously been a successful equity in Frontline Ltd. in a situation where it could get really use the cash right now.

Well, as you mentioned, there are several opportunities in which we can utilize Suezmax. Newbuilding is one thing. And as Inger mentioned, there seems to be some delay in the program there. So it's too early to say what we will actually do on the Suezmaxes. Otherwise, I think there will potentially be some reduction in the fleet, but that's mainly docking and cost related. And then, of course, later on, we can be looking at the shareholding in Frontline 2012. But there are certain opportunities which we can use and we will certainly be looking at all of them. Jonathan B. Chappell - Evercore Partners Inc., Research Division: Okay. And just to be clear, you do plan on taking delivery of the Suezmax newbuildings?

We have to see first how the developments are at the shipyard. I think everything is up in the air a little bit at the shipyard. But of course, normally, we honor our obligations and we intend to do that. Jonathan B. Chappell - Evercore Partners Inc., Research Division: Okay. You mentioned in the presentation that the 1999 builds or earlier are less preferable from charters. Are you seeing a 2-tiered market? Are your older ships being discriminated against and facing significant waiting time?

I think we have seen that for quite some time now, that certain -- older ships more than 15 years old are not appealing to the major oil companies. And then I think with the low market like this where the balance is clearly in the charter's favor, it's very difficult to employ the older ships in a profitable way. So that's definitely a 2-tier, maybe even a 3-tier market. So we are feeling that. Jonathan B. Chappell - Evercore Partners Inc., Research Division: Yes. And one of the surprises of this year, I think, so far is the reluctance to scrap some of those older ships. Do you have any commentary on why other owners may be potentially holding out? I mean, it sounds like you're going to move forward with some scrapping as you approach the third special surveys.

The only thing I can say is I guess tanker owners by nature have been born optimist, hoping for improved market tomorrow, but then -- including ourselves. But certain decision has to be taken because we can't operate at below cost operating levels. So hopefully, scrapping will be increased. I think that's the only way forward. Jonathan B. Chappell - Evercore Partners Inc., Research Division: Right. Okay, one last one. I know there were a lot of drydockings in this past quarter, but it seems like even less so than in the year ago, yet the OpEx per day was significantly higher. Should we expect the OpEx to come down as the drydockings kind of decrease from 4 a quarter or now that you're operating an older fleet, will the kind of base rate OpEx per day be a higher the number than in the past?

Well, the big gain [ph] in cost contribution is the drydocking itself and the preparation for drydocking older ships tends to need steel renewal, a lot of tank cleaning and use lot of fuel for that. So hopefully, we'll reduce drydockings. The operating costs should go down. But it is more expensive to operate older ships compared to the more modern ships. But the main contributing effect to the increased operating cost is drydocking cost related.

We will now take a follow-up question from Joshua Katzeff from Deutsche Bank. [Technical Difficulty]

I'm sorry, moderator, we can't hear anything if you are saying anything but... Joshua Katzeff - Deutsche Bank AG, Research Division: I just want to clarify around your scrapping. Are all your ships that are over kind of 15 years old or getting closer that 15-year-old mark? Are those potential sale candidates in the next couple of years?

Well, we have passed drydocking on older ships actually built in 1995, Suezmaxes earlier in the year. It has to do with the condition of the ship and where we believe it has earning potential. So we cannot say it's just age-related. It depends on each individual ship and where we see the drydocking cost being. But of course, anything more than 15 years old, we should consider selling and not pass drydock. But it's up to the individual ship. Joshua Katzeff - Deutsche Bank AG, Research Division: Oh, okay. And I guess you kind of touched this on your higher OpEx levels on your older ships, but I guess last quarter, we saw a big tick-up in the actual vessel OpEx, was that...

Do you mind speaking up a little bit, sorry? Joshua Katzeff - Deutsche Bank AG, Research Division: Was the Q2 increase in vessel OpEx -- so was that related to any drydockings or anything in particular?

Yes, it's related to drydocking, mainly drydocking. Joshua Katzeff - Deutsche Bank AG, Research Division: Okay. And then just one last quick question with regards to restricted cash. I just want to clarify how much of that $76 million is at Frontline versus at ITCL. Inger M. Klemp: The $76 million is mainly only ITCL. Joshua Katzeff - Deutsche Bank AG, Research Division: Okay. And I assume the majority of the actual cash, the $84 million, is that Frontline rather than ITCL? Inger M. Klemp: Yes, that is correct, yes.

[Operator Instructions] We will take our next question from Fotis Giannakoulis from Morgan Stanley. Fotis Giannakoulis - Morgan Stanley, Research Division: I want to ask a little bit about your liquidity that you mentioned at your press release. Obviously, the crude tanker market is quite weak, particularly for VLCCs. And given the fact that you have the repayment of the convertible notes, what are the alternatives there if the market does not improve to the levels that it's going to be sufficient to help the refinancing of these notes? Have there been any discussions with Ship Finance in relation to the repayment of the capital lease obligations? Inger M. Klemp: Actually, we said in our press release that for the time being, we are monitoring the situation, and we are looking for and considering all opportunities. Jens also mentioned some opportunities to improve cash some minutes ago. So I guess it's too premature in a way now to talk anything more about that. We will give out [ph] later. Fotis Giannakoulis - Morgan Stanley, Research Division: Is there any timeline that you have in mind right now that we should expect some more developments around this issue?

Of course, we know that the clock is ticking, so this is something that has been worked on, I would say, on a daily basis. Fotis Giannakoulis - Morgan Stanley, Research Division: Okay. In relation with the market, the second quarter was quite weak, but we saw at the beginning of the third quarter some improvement. Can you give us your view about the third quarter? What shall we expect about the results of the third quarter? And also, how do you see the rest of the year developing for the VLCC markets?

Well, the market has been actually quite strange in comparison to other years. We saw a fairly good start of the year, then a complete collapse in mid-January, which was quite abnormal. Then we see a raising market going into the summer, which is also abnormal. And then we have seen a collapse again. So it's very difficult to predict why we have these big swings when we have such a healthy volume. I can only describe it as some panic mode going on. We used months to try and build up a market point by point and then it takes 2 or 3 days to get it completely eroded. There could be changes in the autumn with the tension in the Middle East. I guess that could happen with the oil price, I don't know, but the market is very erratic. But I would say the earnings for VLCCs right now is below $10,000 in the spot market and around the same for the Suezmaxes. And we are still -- we still have 1 month left for the third quarter. So it's very difficult to predict. But then something has to happen to spike the market, that's for sure. Fotis Giannakoulis - Morgan Stanley, Research Division: Can you -- Inger, in one of the previous quarters, you mentioned that there is an oversupply of around 50 VLCCs, the activity -- the chartering activity has improved a little bit. At what number do you place right now the oversupply? How many ships do we need to see to be scrapped in order to balance the market? And as a second question, you mentioned something needs to happen. If there is going to be an invasion in Syria, how do you think that this is going to impact the crude tanker market?

Well, if we go to your first question first. I think the surplus of VLCCs is between 50 and 75, around that. Tension in the Middle East, of course, it will lead to higher oil prices. It will lead to higher bunker prices. Normally, the market, as a result of that, will go up. Maybe there will be some more erratic purchases, and depends if this will be considered as a short-term scenario or long-term, there will be more stockpiling going up. So unfortunately, when we have tension and incidents like this, it tends to help the shipping market. But then, of course, we hope that the situation does not escalate, but it could help the market in the autumn if this thing happened.

We will now move to Rune Sand from Carnegie. Rune Sand - Carnegie Investment Bank AB, Research Division: I just had a question regarding the book value of your equity, which is now negative.

Sorry, do you mind speaking up again? I think we're having a very bad line. Rune Sand - Carnegie Investment Bank AB, Research Division: I just had a question regarding the book value of your equity, which is now negative. So I was wondering if there, under Bermuda law, are any restrictions regarding how long a company can operate with negative equity. Inger M. Klemp: No, not that we are aware of. We have been speaking to our Bermuda counsel and have not heard anything about any restriction in period. Rune Sand - Carnegie Investment Bank AB, Research Division: Okay. And last question regarding your newbuildings, I don't know if you could comment anything on the exact delivery window of the newbuildings.

This is the present situation at the yard today where activity has gone down quite a lot over the last months. We estimate potential delivery during the first and second quarter of next year, but it seems to be a lot of uncertainty with that shipyard in question. So it's difficult to pinpoint. Rune Sand - Carnegie Investment Bank AB, Research Division: Yes, okay, I understand. But when will the contract or when will the newbuildings be in cancellation territory?

It's not so far from those dates.

[Operator Instructions] We will take our next question from Ole Stenhagen from SEB. Ole G. Stenhagen - SEB Enskilda, Research Division: Inger, given that your normal cash outlays, I guess, would vary from period to period a little bit, so how much cash do you need to hold to operate the company in a regular way and not have trouble with unpaid bills and stuff like that? What's your estimate of that, please? Inger M. Klemp: The cash cost breakeven rates will give you a picture of that. We need to earn $25,000 a day for VLCC and $19,000 a day for Suezmaxes. So that's what they need to break even. Ole G. Stenhagen - SEB Enskilda, Research Division: Sure. But how much do you need to hold? Inger M. Klemp: Pardon? Ole G. Stenhagen - SEB Enskilda, Research Division: Do you need to hold $20 million, $50 million, $10 million in cash in your balance sheet in order to be able to handle the fact that bills turn up at different times and that you get paid for charters at different times? I mean, you draw cash up and down. How much do you need to hold to run your company properly? Inger M. Klemp: I think that's a very -- I lost it. We don't really, let's say, monitor that exactly on the million, on the dollars, if that's what you mean. But I think it's most important that these are the cash breakeven rates that we have and that we have in the burning -- burn -- cash burn rate, which is different depending upon the earnings that we have in the market. So in a way, it calculates the earnings [ph] that we are burning every day. Ole G. Stenhagen - SEB Enskilda, Research Division: Well, so a rough estimate is that you burn almost $30 million in the past quarter and your board says that you are going through your cash at some rate. And if one was to assume that you did the same cash burn rate for another quarter or 2, you would be getting quite low. And my question really is -- and you said that you're not really in the territory we need to speak about a lot of things quite yet. But if you need $50 million in your account to actually run your company, you're only about a quarter away from that threshold at these burn rates. That's the background for my question.

It's less than $50 million. Inger M. Klemp: But we don't need $50 million in our bank account to operate the company so that's out of the question. Ole G. Stenhagen - SEB Enskilda, Research Division: That's why I asked. Inger M. Klemp: [indiscernible] we are moving downwards on the cash. So obviously, as Jens mentioned a bit earlier in the conference call, time is ticking here. So this is something we are looking into. Yes.

[Operator Instructions] It appears there are no further questions at this time. I would now like to turn the call back over to you, Mr. Jens Martin Jensen, for any additional or closing remarks.

Yes. Thank you for dialing in, everybody. I'm sorry, it seems to be a bad line. If there are some questions or anything you feel we have not answered, if you could call Inger or myself or send us an e-mail, and then we will try to respond to that during today or tomorrow. Thank you for dialing in, everybody, and thank you, everybody, in Frontline for their work and efforts in a very difficult market. Thank you very much.

That will conclude today's conference call. Thank you for your participation, and have a good day.