Robert MaCleod - Chief Executive Officer Inger Klemp - Chief Financial Officer

Jon Chappell - Evercore ISI Fotis Giannakoulis - Morgan Stanley Donald Bogden - Wells Fargo. Gregory Lewis - Credit Suisse

Good day and welcome to the Second Quarter 2015 Results Presentation Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Robert MaCleod. Please go ahead.

Many thanks. Good afternoon and good morning. Welcome to Frontline's presentation for the second quarter of 2015. This presentation will proceed as follows: Inger will start with the quarterly highlights, the main transactions and into the financial review of the quarter. I will then follow-up with earnings and market factors, newbuilding prices, fleet developments and time charter rates. Then we’ll move onto the present market, and finally we’ll look at the margin outlook. Inger, please go ahead.

Thanks, Robert, and good morning, and good afternoon, ladies and gentlemen. Then I would like you to move to slide four, Highlights and Transactions. In the second quarter, we issued 18.8 million new shares under the ATM program and the existing ATM program is not fully utilized. In April, the remaining outstanding balance on the convertible bond debt of $93.4 million was repaid in full upon maturity, and this was an important milestone for the company as its maturity was a concern in time leading upto April 2015. In June, the Company agreed with Ship Finance to amend the terms of the long term charter agreements relating to 17 vessels for the remainder of the charter period with effect from July 1, 2015. The six charter payments are expected to decrease by approximately $283 million as a consequence of the lower rate, but also as a consequence of increased OpEx payable by Ship Finance. We also agreed a new profit split of 50% each about the new charter rates and in connection with entering into the agreement with Ship Finance, Frontline issued 65 million shares to Ship Finance. Frontline was also released on the charter guarantee and in exchange a cash buffer of 2 million will be built up per vessel. In July 2015, the Company and Frontline 2012 entered into an agreement at the time of merger. The merger is in process and on August 24, Frontline filed a registration statement with the SEC covering the common shares to be issued by Frontline to Frontline 2012 shareholders in the merger. The shareholders meeting of each of Frontline and Frontline 2012 will be held after the registration statement is declared effective, and the effectiveness of the registration statement is subject among other things to SEC review. And we expect to complete the merger during the fourth quarter this year. Moving then to slide five, financial highlights and slide six income statements. Frontline reported net income of $17.4 million this quarter equivalent to earnings per share of $0.11 compared with a net income of $31.1 million and earnings per share of $0.25 for the first quarter, and this is a $13.7 million decrease from the first quarter. After adjusting for non-operational items, we showed a net income from operation of $21 million in the second quarter which is $4.4 million decrease from the first quarter showing $25.4 million. The decrease in results for operation in the second quarter is mainly explained by an increase in drydocking expenses by $5.9 million, partly offset by a decrease in running expenses of $900,000. Moving then to slide seven, ship operating expenses and off-hire. The average OpEx for the fleet in the second quarter was approximately $11,800 per day compared to approximately $8,500 per day in the first quarter. We have 4 drydockings this quarter compared with none in the first quarter, as you can see from the graph on the upper right hand side of the slide. The increase in OpEx per day is attributable to an increase in drydock cost in the quarter of $5.9 million which was then slightly offset as I felt by a reduction in running expenses of $900,000. As you can see from the graph on the lower right hand side of the slide, off-hire days were 127 in the second quarter compared with 32 in the first quarter due to the increase of vessels drydock in the quarter. We had 2 scheduled drydockings in the third quarter of 2015. Moving then to slide eight, the balance sheet. The changes to the balance sheet ended June 30, 2015 from the end of March are mainly as follows; the cash decreased by $10 million which is the net of repayment of the convertible bond loan of 93.4 million, the cash from issuance of shares under the ATM program and the cash generated from operation in the second quarter. Vessels and equipment decreased by 85 million which primarily relates to the renegotiation of the ship finance leases, but also for the appreciation in the quarter. The long term debt decreased by $321 million as a consequence of repayment of the convertible bond loan, the decrease in capital lease obligation as a consequence of renegotiation of the Ship Finance leases with Ship Finance and ordinary repayments of leases in the period. Primarily equity increased by $218 million in the quarter due to share issues in the quarter, otherwise there were small changes to other balance sheet items this quarter. Moving then to slide nine, the cash cost breakeven rates. The estimated average cash cost breakeven rates for the remainder of 2015 are approximately $24,500 per day for VLCC and $21,000 per day for the Suezmax. These rates are the daily rates other vessels must earn to cover budgeted operating cost and drydock estimated interest expense, bareboat hire installments on loans and corporate overhead costs. With this, I leave the word to Robert again.

Thank you very much Inger. Let's look at slide number 10, the earnings and market factors in Q2. The spot earnings for the quarter came in at $53,600 per day on the VLCCs and $38,000 on Suezmaxes. Whilst the overall results were 50,600 for the VLCC and $33,800 per day on the Suezmaxes including the time charter apps. Overall I would say that these numbers are satisfactory. They are also beating the Q1 results which were the company’s best quarter since the first quarter of 2009. The vessels we secured time charters for in Q1 this year brought the overall earnings down from our spot earnings but the time charter secures income forward and given the volatility of the tanker markets we feel that this cover is prudent to have. The markets were strong throughout the second quarter. It showed volatility but the rebounce was sharp giving a very good average income for tankers in the quarter. The continued decrease in bunker price improved the TCE further. So what’s made this quarter show the strength of debt? The most important factor is the high supply of oil. It actually increased slightly from the first quarter beating most estimates. The vessels were full as the store as they were instructed to wait at various ports and places around the world waiting for the cargo onboard to be sold. The ballast speed increased during the quarter as well and returned to normal levels which was a strong sign seeing this capacity to be absorbed. Overall, the tanker fleet was highly utilized and as the summer approached confidence grew that the summer downtime would be avoided this year. But the downturn did come this year as well later than normal, but I will get back to that in the reason for it later in the presentation. Let’s go to page 11, the VLCC Fleet. There are currently 639 vessels in the world fleet of which around 200 are controlled by oil companies whilst the balance is trading spots. The five vessels delivered in the quarter make little difference to the fleet developments, but the order book is now at around 17% of the present fleet, up 2% from our last quarterly presentation. Given the positive outlook on the tanker markets, we expect very little scrapping and the order book is a concern. As the delivery schedule shows, a significant number of ships has chosen to deliver from now upto end 2016. Let’s move to page 12 please, the Suezmax fleet. The fleet counts 450 ships and no ships were delivered during the quarter. The order book is a cause of concern again at around 15% of its present fleet or 67 ships, but it is worth noting that only two are due to deliver in the next six to eight months. Moving onto page 13 please, values and time charter rates. The prices have come off somewhat from the last quarter always depending on the specific yard and the final specification, but we estimate that a standard VLCC new billing will be priced at $94 million to $95 million and $64 million to $65 million for Suezmax. As for the time charter markets, it is interesting to note the development so far this year. During the previous 45 years, there has been reluctance by traders in oil companies to charter and tonnage for long periods. The transactions have mainly been for six and 12 months. Along with the sharp rise in the time charter rates, we have also seen the charter periods extend mainly to two years there has been a lot of deals done this year that we think that the three year deals will be more frequent in the near future. This is a positive sign and shows that charter’s belief in the market is stronger than it has been for quite some time. Just to put things in perspective, during the summer of 2014 Suezmax was priced just under $20,000 per day for three years; today that market is above $30,000 a day for the same period. Frontline expects to be active in the TCE markets going forward, both through time charters outs and time charters in depending on where we feel the current market is versus our future expectations. Let’s move onto page 14 please, the present markets. Given the correction in the crude tanker space during the last three weeks, I thought it would be worth looking at this and give you our view on why this happened and where we think we are heading. In short, earnings have moved from a peak of $80,000 a day down to earnings which are present over around $20,000 per day. The Saudi exports have dropped to about $1 million, a million barrels per day recently and with the heat wave in the Middle East, the locals consumption increased and refinery expansions in the Red Sea is also a factor. Exports from Basra in Iraq had a record average of about 3 million barrels per day in June and July, whilst August saw the volumes drop to 2.5 million barrels per day. This drop equates to about 2 million tons less being exported in August versus July. But estimates of September show that volumes are expected to get back to just over 3 million barrels per day. Chinese imports have also fallen recently after record highs in June and July, they were up around 28% year-on-year with the same period in 2014. A fall in Chinese imports month from month is not abnormal and from what we can see the Chinese oil demand remains robust. An important factor and this is also that we believe refineries have delayed their maintenance until the first quarter due to the record high refinery margins seen this year. Though our conclusion is that many factors all hit at once which caused the markets to correct significantly and that this lack of demand has led to a long list of available tonnage. Though we are hopeful that this has a short term effect only and the market will improve and will return to the rates environment seen earlier in the year. It will as always take some time to clear the backlog but our estimate is that we will see an improvement as we move into the fourth quarter. Let’s move on to the final slide, please the market outlook. If we start with looking at where we are today, the strength from Q1 kept this momentum into Q2 and through the quarter before it’s just now recently corrected down as we just conferred. But now let’s look a little further out and start with the risk factors going forward. Oil supply remains high putting downward pressure on the oil price, but the cut in supply, various political events, or a very strong increase in demand could change this. A price value would in turn not be positive for tankers as we rebound to hit demand and our fuel costs. As mentioned earlier, the order book is presently 17% and 15% of the VLCC and Suezmax fleets, this order book is a constant risk factor to the markets. With the recent strength in the spot market many ships that were predicted to be scrapped will keep trading and scrapping we can write off for now. Although it does not sound likely at the moment, a change of OpEx strategy and a cut of production could also change the course. Moving onto the bullish factors. The main factor is world oil supply. It is at its highest level ever at just about 96 million barrels per day. This has led to the tanker fleet, surpassing 85% utilization which is a sign of a healthy tanker markets. Our estimate is that we were somewhere around 88% utilized in Q2. This is the highest level seen from many years. Atlantic Basin Barrels, West Africa and Latin America as examples, keep going to the East, whilst two out of three new refineries under construction are East of Suez. This in turn keeps tonne miles high and we see this trend going keeping on this. The current volumes caused delays in ports and terminals, which also takes out supply. We expect this storage to take place in Q1 based on the contango in the oil price but this has now materialized, partly due to the higher earnings one could make in the spot markets. What we are seeing now is vessels awaiting orders in various ports and places around the world simply due to the high supply of oil leading to unsold cargoes -- on ships. And let’s call that forced storage and we expect that to remain a factor going forward. We believe the current oil price supports demand which in turn ofcourse is positive for tankers. All-in-all, there are some risk factors out there especially the order book but overall we expect the tanker market to rebound and show strong earnings going forward. Before we move onto the questions, I would like to say a few words with regards to the merger with Frontline 2012. As Inger mentioned, in July Frontline Limited and Frontline 2012 entered into an agreement and plan of merger. The merger is now in process and once completed which we expect to be during the fourth quarter of this year Frontline will have a fleets of about 70 tankers on the water and just over 20 new buildings due for delivery in the coming 24 months. Despite the current slowdown in the tanker markets, the board of Frontline expects that the merger company will be in a position to start returning cash to shareholders as quarterly dividends once the merger has completed. We believe that the combined company will be well positioned for further growth through both acquisitions and consolidation opportunities. With that, we are ready for your questions.

Thank you. [Operator Instructions] Our first question today comes from Jon Chappell from Evercore ISI.

Thank you, good afternoon. Just want to ask one question on Frontline 2012 before getting into post-merger strategy. Maybe the disclosure for Frontline 2012 is not as transparent as Frontline Limited. So, is there any way to provide any information on that charter in fleet? I see the ships on the website, but the duration of the charter-ins and the rates that are being paid for those?

This is obviously a call on Frontline Limited, but basically it’s MRs [ph] and we have five on at the moment. The average rate is 15/3 [ph] and periods are relatively short with exposure of max six months and there are lot of options. In total we are committed to about 450 vessel days and we have around 2,200 optional days.

Very helpful. All right. So, then post-merger, so maybe its goes through in the fourth quarter as you said couple of things. First of all on the consolidation front, its been pretty remarkable, the strength of the Time Charter market this year and the fact the asset values haven’t moved up and lot of people are kind of speculating as to why that maybe. But from your perspective is this somewhat of a sweet spot to add tonnage at this point in the market while the asset values continue to lag the earnings from the ships?

Yes. As we are looking at the newbuildings, they have come down and you’ve seen same on secondhand values as well. There’s less capital available in the markets and we are monitoring what’s going on closely, but for us the main focus is to get the merger done.

Then just one last thing and then I'll move on. From the fleet afterwards you mentioned a couple things I thought were interesting, Robert, talked about how it was prudent to do some Time Charter out business and that you may look to that going forward. That's not something that Frontline has historically done in a large manner. As we sit in the cycle today, do you think -- how do you think about the timing of Time Charters versus your optimism on the near term spot market?

The way the Time Charter market has developed over this year, I think with the fleet we have – I think it is prudent to take that cover. And as you say, that’s not been done in the past, but that is something that we certainly will be doing going forward to have a base. And that also gives opportunity to take in tonnage when the market drops and we still believe if it’s over correction now, so I think trading the steel in that way is something we will be much more active in.

And as we think about the combined fleet, would it make sense to maybe take more of that charter out on some of the existing vessels at Frontline Limited and use the newbuilds and the eco-ships from Frontline 2012 to keep your spot market exposure?

We will look at – since this is complete, we will look at it as one fleet and we’ll do what best for each individual ship, but what you’re saying there is obviously one strategy that could well make sense. But for us, we look at getting cover. We will be more likely to be interested in longer – in the longer charters as well as than the shorter and also we’ll be very open to do deals where we keep some of the upside, i.e., do profit share deals.

All right, make sense. Thanks for the time Robert.

Thank you.

We will now take a question from Fotis Giannakoulis from Morgan Stanley: Please go ahead.

Yes. Good morning and thank you. Robert, you mentioned earlier about the fact that the period market that has become more active. Can you give us some example, some numbers to see how liquid and how deep this market is? And given your answer to the previous questions with Jon, how many vessels do you expect that you are considering chartering under period contracts by the end of the year?

For the market in general what we’re seeing now is for the older VLCCs, the two-year deals are in a low 40s, probably 42, 43. The Suezmaxes are in a low 30s, 33 maybe for the similar period. And as per the release in Frontline 2012 you can see what we’ve been doing on the LR2s. As for what we will do here? I don’t want to give you a sort of a percentage on what will go out. It really does depend on how the market develops, but it is good to see the strength in the TCE rates now despite the fall in both VL and Suezmax market. It does show that in the market believe that this will – there will be a rebounce and expect once that happens the current levels have legs.

Thank you, Robert. We have seen that the last two, three weeks, while VLCC rates they have come down, Suezmaxes they seem to hold much better than these. And also what is quite surprising is that the LR vessels in the Middle East, they are even outperforming versus the previous period. Is it just the Yanbu refinery that is causing that? Why this discrepancy between the different asset classes?

Look, at the Suezmax first, there’s been correction now, but I think those day will come back. There’s not many ships as I said earlier. There’s not that many being delivered. As for the LR2s, I expect those two to take a bit of breather here coming into September. The recent being the refinery. So, as I saying earlier the refinery margin this year have been extraordinary as you know for this. So this has delayed the maintenance and the result of the maintenance will be that there will less expose now in September and I expect that to have an effect on the product market. So then things will become more sort of back to normal. But as you say, there’s some out-performance there and I must say, as a company we are very pleased with the decision we have when we were as a combined company with the LR2 fleet we have in Frontline 2012. I think it’s going to be a winner going forward.

Robert, you mentioned about the risks of the order book and I saw in your slide that you have broken nicely down the delivery schedules. And it seems that most of these deliveries are in the third and the fourth quarter of 2016. Are you getting a little bit more cautious about the second half of 2016, and overall how much more oil – how much growth in oil supply we are going to need in order to absorb these vessels and keep the rates above the current period market?

As most in this market, the order book has always cost concern and where we are now, the lowest point we saw was in 2013 we were down to about 11% of the fleet in order. The overall tanker has now about 16% in order. But at the same time, I think I can’t give you the sort of exact number that we need in terms of increase, but what I would say though, I think in terms of supply we’re moving from 93.5 to over 96 within this year and I expected to land somewhere between 97 and 98 possibly more for 2016. So I’m hopeful with the increased volume coming on stream. And I think this will be okay, but let’s see, time will show.

Okay. Robert. Thank you very much for your answers.

Thank you.

[Operator Instructions] We will now take question from Donald Bogden from Wells Fargo. Please go ahead.

Good morning. Can you talk a bit more to your stated goal of being more active in the TC market? I understand it will be somewhat opportunistic, but do you expect there to be a focus on a specific tanker segment? And should we expect Frontline to reach out following recent downward pressure at increase of TC exposure, or would you wait for the closing of the merger to ramp that up?

As I was saying earlier, we’ve had in 2012, there is some activity and for the combined company the main focus will be the four segments which are VLCC, Suezmax, LR2 and MR, that’s sort of core segment. And looking at those we’ll have an overweight toward crude. Crude will be the main focus. So first we will be optimistic. We will look at what give the best risk award, which gives us the best return and we will keep looking for opportunities.

Great, thanks for that. Just to follow-up on floating storage. Are you seeing any inquiry for structural floating storage come back into the market given downward pressure on tanker rates and an increase in contango? And also, could you quantify the non-structural, I think you called it forced, short-term floating storage earlier and just what quantity of vessels that is currently tying up? It's a tough figure to ballpark, but any color you could give on that would be appreciated?

First, just to take the contango-based storage, we’re not seeing contango-based storage questions as such, but I think indirect we are -- there a lot of people out there looking for storage options on the spot fixtures and where the current levels are on the VLCC and the Suezmaxes. I think it will be – it could be one of the factors, its not going to be the main factors. There could be one of the factors that helps bring this market back up. As for the forced storage, its difficult to put numbers on that, but just speaking of our own fleet, we have on many occasions this year been told to say, we’re loading the Middle East we’ve been told to sit in Fujairah or Dubai for 10 days, or 15 days or 20 and then the same situation in Singapore where simply the cargo is unsold and there’s no sort of choice on trade or oil company side than to let us wait until they know the direction we’re heading. And as long as the market is – the supply side as it is not right, I don’t think that’s going to change.

All right, well, thanks for the time and appreciate the color.

Thank you.

[Operator Instructions] Our next question comes from Gregory Lewis from Credit Suisse. Please go ahead.

Yes. Thank you and good afternoon. I guess there's really several questions. As we think about the fleet growing with the absorption of Frontline 2012, clearly Frontline has a lot of -- and with its relationships has a lot of legacy vessels in there, some late 1990s built, some early 2000 built vessels. Clearly, over the last year we’ve definitely seen the older tonnage in the market catch more of a bid up than the more modern tonnage. And just as we think about this going forward over the next, I don't know, six or 12 months, should we think about -- should we expect or is there a possibility that we could see Frontline continue to prune out its older vessels and actually book good profits? Just because it sounds like you see an opportunity for the market, but just given the whole time charter strategy it seems like you are more conservative than you have been in the past heading into what looks like a potential up cycle?

I will focus on the fleet age. As we were saying before we want to renew, we want to get the average age down. On the part of fleet that approaches 20 years, an example being the Front Glory, which we have on lease from – or we had on lease from Ship Finance which they’ve sold. I think we will – that is something that could well happen going forward here and try to sort renew ourselves a bit.

Okay. So it sounds like we should expect into the rising market continued asset sales of the older tonnage and that seems like the blueprint we should expect over the next two years?

Yes. The way we look at it is the premium we can get versus the stock price and compare that to the profit you can lock in on the time charters. And in most instances, things are now than the premium versus scrap price i.e., selling the vessel, is most often the winning strategy.

Okay. And just you mentioned the time charter market and looking at that, I mean what type of discount or -- when we think about time chartering vessels out, is there actually interest from charterers to be locking up some of this older tonnage or is it more -- is there discrimination where, if you are looking at a multiyear time charter, it's primarily just for the realm of more modern tonnage?

The demand the ships, say between 2015 and 2020 there’s good demand in that age segment.

Okay, perfect, guys. Thank you very much for the time.

Thank you.

We currently have no further questions. [Operator Instructions] There are currently no questions. As there are no further questions in the queue, I would now like to hand the call back over to Inger Klemp and Robert MaCleod for additional or closing remarks.

Thank you very much. Thank you all for dialing into this call and I would like to thank everyone in Frontline for their excellent efforts. Thank you.

That will conclude today’s conference call. Thank you for your participation ladies and gentlemen you may now disconnect.