Robert Macleod – Chief Executive Officer Inger Klemp – Chief Financial Officer

Jon Chappell – Evercore Magnus Fyhr – Seaport Global Fotis Giannakoulis – Morgan Stanley Anders Karlsen – Danske Bank. Anders

Good day and welcome to the Q3 Report 2017 Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Robert Macleod. Please go ahead.

Thank you very much. Good morning and good afternoon everyone. Thank you for dialing in. This is Frontline’s earnings call for the third quarter of 2017. I will start the call by briefly going through the highlights of the quarter and subsequent events. Following that, Inger will run us through the financials and we’ll then look at Q3 earnings, and I will guide you on our Q4 earnings. We will then move on to the current market conditions, the crude tanker order book, and I’ll try to predict the tanker fleet development going forward. The call will be concluded by taking your questions. Let’s get started please and look at the company highlights. Our earnings in the quarter were reduced from the second quarter. We recorded a loss of $23.1 million or $0.14 per share adjusted for noncash items. For the first nine months, we are down $9.4 million or $0.06 per share. Our results were driven by significantly lower spot earnings versus previous quarters. I will come back to this in more detail later in the presentation. We terminated one long-term Suezmax charter in Q3. Our older Suezmax is now 2009 and we have been continuously disposing of older vessels, while at the same time growing our fleet. We have so far this year terminated six long-term charters for older vessels. We took delivery of five new buildings during the third quarter. And our order book today stands at five vessels, three of which we’ll deliver in January 2018. Inger, please, can you take us through the financials in more detail.

Thanks Robert, and good morning and good afternoon ladies and gentlemen. Moving then to Slide 2, Financial Highlights. Frontline achieved total operating revenues, net of voyage expenses, of $76 million in the third quarter and reported a loss of $24 million, equivalent to $0.14 per share. The loss was primarily due to weak average spot TCE earnings achieved by our fleet and also a $5.8 million loss on the termination of the long-term charter of Front Ardenne. In the third quarter, we recorded certain noncash items, consisting of a loss on the termination of the long-term charter of Front Ardenne, net of termination payments due, of $1.2 million and a gain on derivatives of $200,000. After adjusting for these noncash items, we show adjusted EBITDA of $31 million and adjusted net loss from operation of $23 million in the third quarter, equivalent to $0.14 per share. The company generated net income attributable to the company of $16 million or $0.10 per share for the nine months period ending September 30. The net income attributable to the company adjusted for certain noncash items was $9 million or $0.06 per share for the nine period ending September 30, 2017. Moving then to Slide 3, the income statement. As I said, Frontline achieved net loss adjusted for certain noncash items in the third quarter of $23 million against a net loss of $14 million in the second quarter. The decrease in result from operation in the third quarter of $9 million is mainly explained by a decrease in the result on time charter basis of $14 million which is due to the decrease in time charter rates in the third quarter compared to the second quarter. We also had a decrease in lease termination payment of $5.4 million, a decrease in contingent rental income by $2 million. The second quarter included contingent rental income of $8.7 million, and the third quarter included income of $6.7 million. The contingent rental income in the third quarter result from that the actual profit share was zero and then $6.7 million less of the amount accrued in the lease obligations payable when the leases were recorded at fair value at the time of the merger of Frontline to Frontline 2012. A decrease in ship operating expenses of $3.4 million, primarily due to the drydocking of five vessels in the second quarter, where the one vessel was drydocked in the first quarter, but expensed in the second quarter. We also had a decrease in charter hire expenses of $1.7 million due to the effect of the delivery of vessels on TCE and an increase in interest expense by $12.8 million due to draw down of debt in relation to the delivery of the five vessels in the second quarter and also the five vessels in the third quarter. And finally, an increase in other expenses by $0.6 million. Moving down to Slide 4, the balance sheet. Changes to the balance sheet end September 30 from end June 30, is a total increase in balance sheet value of approximately $119 million, and the changes in assets mainly relate to a decrease in newbuildings with $89 million due to delivery of the five vessels in the third quarter, partly offset with additions to newbuildings resulting from yard installments in the quarter. Then an increase in vessels by $320 million due to delivery of the five vessels in the quarter offset by $21 million of depreciation. And also a decrease in vessels on the capital lease of $27 million due to termination of the lease of Front Ardenne and ordinary depreciation. And the total liabilities are up with $213 million, which mainly relates to drawdown of debt of $250 million relating to the second delivery of the five vessels in the quarter and ordinary loan repayments of $22 million and a reduction in obligation under the capital leases with $21 million due to termination of the lease on one vessel and ordinary repayment in the period. Equity has decreased with $23 million, mainly due to the loss in the quarter. Then moving to Slide 5, cash breakeven rates and OpEx. We estimate that the average cash cost breakeven rates for the remainder of 2017 will be approximately $21,600 per day for the VLCCs, $17,700 per day for the Suezmax tankers and $16,700 per day for the LR2 tankers. These rates are the all-in daily rates that our owned and leased vessels must earn to cover budgeted operating costs and dry docks, interest expenses, bareboat hires, installments on loans and G&A expenses. While we have competitive running expenses and admin expenses, the low cash breakeven rates are, to a large extent, explained by the long debt amortization profile and low interest costs on new and existing debt. Every $1,000 per day lower cash breakeven rate means approximately $200 million extra net income per year or $0.12 per share, which shows the high importance of maintaining the low cash breakeven rates. The OpEx per day in the third quarter was $9,4000 per day for the VLCCs, $7,300 for the Suezmax tankers and $6,800 for the LR2 tankers. And in the fourth quarter, we planned no scheduled drydocking. So with this, I leave the word to Robert again.

Thanks very much, Inger. Let’s turn to Slide 6 and look at the Q3 performance. The market in the third quarter was particularly weak, with spot earnings at levels not seen since 2013. During the quarter, the market was offering rates well below OpEx in certain circumstances. We refrain from accepting these rates. The decision to show commercial discipline and hold our vessels back was made with the assumption that we would see the market improve halfway through the third quarter. This resulted in extended waiting time, particularly on our VLCCs, and this is reflected in our average TC earnings for Q3 as well as our Q4 guidance. The market improvement did not come until the fourth quarter, and it has been far weaker than previous years. In general, our Suezmaxes and LR2s have achieved better relative performance than our VLCCs. It is evident that the VLCC market would benefit from consolidation. The fleet has never been larger. Ultimately, the fleet sits in too many hands, which provides charters the upper hand in periods of market weakness where small owners are often price-takers. The spot earnings for the quarter were $13,200 on VLCCs, $14,100 on Suezmaxes and $12,300 on our LR2s. The earnings on the modern part of our VLCC fleet were significantly better than the average presented here. For Q3, we have locked in 76% of our VLCC trading days at $19,200. On the Suezmaxes we have 67% of our trading days at $18,200. On the LR2s the number is about $17,000 and 60% has been covered. Please turn to the Current Market Slide, 7. The high pace of deliveries has continued, and a number of vessels returned from dry dock in the quarter, adding pressure to the market. Overall, it is fair to say that the seasonal upturn clearly indicated by the five-year average trend has been subdued due to excess supply of vessels. The growth in crude tanker ton mile demand is forecasted to remain strong due to increasing underlying oil demand, and the volume moving from the Atlantic to Asia remains high, adding to ton miles. Additionally, global crude inventories are declining after reaching peak levels last year, and the oil market is showing signs of recalibrating. The current crude oil tanker rate environment, however, does not presently reflect that strong demand. Let’s move on to the crude tanker order book, please. We are carefully watching vessel supply growth as this is the most critical variable for the tanker market. The fleet growth over the last two years is the main cause of the current weakness. Newbuilding deliveries have continued at a high pace through 2017. 44 VLCCs and 48 Suezmaxes has delivered, and a handful more will deliver this year. The combination of a poor spot market and a 50% year-on-year increase in scrap values seems, to us, to be the perfect catalyst for scrapping. So far this year, only 10 VLCCs and nine Suezmaxes have been scrapped, but it is actually a significant increase compared to 2016. We expect vessel scrapping to accelerate as we progress through 2018. Combined with oil demand, scrapping is definitely a main factor, and it will determine the development of the tanker markets. A lot of focus has been put on orders placed earlier this year for ships delivering in 2018 and 2019 but it is scrapping that will determine the longer-term outlook for tankers. We believe it will outnumber new deliveries. We also believe that the market will begin to tighten in 2018 as vessels are retired from the global fleet and oil demand continues to grow. While a good portion of the global VLCC fleet is relatively modern, over 20% of the VLCCs in the fleet will be candidates for scrapping in the coming years. When you consider that the current VLCC order book is equal to about 13% of the existing VLCC fleet, it’s easy to see how supply dynamics can quickly change. Let’s move on and have a closer look at scrapping. Scrapping, as I said, is now finally a real alternative. The spread between the value of a 15-year-old vessel and scrap value is at an historical low point. The market environment should, based on accelerating scrapping activity, see improvement in the second half of 2018, perhaps sooner if the pace of scrapping increases faster than we expect. Looking out two years, significant expenses will be required by owners to ensure compliance with environmental mandates. We believe the effect of these mandates will be twofold. First, they will serve as catalysts for further scrapping. Vessels that are 20 years old today will almost surely be removed from the global fleet. If they have not been scrapped, they will be sitting idle and completely uneconomical. Second, this may serve as a catalyst for industry consolidation. The tanker industry, like many other shipping segments, is highly fragmented with many small owners of one two vessels who lack commercial or financial scale. Some owners will not be able to be competitive during the current down cycle and may exit the industry ahead of the implementation of the environmental mandates. Consolidation of the tanker market has been discussed for quite some time and a combination of the current market environment, limited financing options and environmental regulations may provide the catalysts. This would be positive for the tanker market. Let’s move on and do a summary on the last slide here. Thank you. The combination of taking delivery of newbuildings and terminating long-term charters has, since 2016, brought the average age of the Frontline fleet down from 8.1 to 5.4 years. We will continue to take proactive steps to increase the earnings potential of our fleet through the ongoing renewal and by pursuing opportunities in the resell and newbuilding markets. We expect the near-term pressure on crude tanker rates to continue, but believe that the market will ultimately return to balance. I said before, light in 2018 after vessel supply slows and scrapping inevitably picks up. We will be very well positioned when the market recovers. Weak markets often create opportunities for financially strong market participants. The risk-reward scenario following the drop in asset prices now appears to be more balanced, offering stability and upside potential. Frontline is in a unique position to take advantage of the current market. Despite being a lean organization, we have a very large presence within the industry by virtue of our scale, our long operating history and our commercial brand. These factors, among others, enable us to cast a wider net of opportunity and to pursue accretive transactions backed by attractively priced capital. We believe our optimistic approach to fleet growth will drive value appreciation over the long run and position us to carry on our tradition of returning value to our shareholders. With that, I would like to move to the questions, please.

Thank you. [Operator Instructions] We will now take our first question from Jon Chappell from Evercore. Please go ahead. Your line is open.

Thank you, good afternoon guys. Robert, I don’t think there’s any doubt that you’ll be very well positioned for the upturn in the market. But just to take the other side of that, given some of the near-term challenges and the potential that maybe this weaker market would stand for another maybe six to months, are there any other actions you need to take, you think, to prepare for a downturn? How do you feel about your liquidity today, whether it’s more asset sales, maybe sale and leasebacks, even equity, as you continue to trade at any premium?

I think in terms of our position here, we – Inger has done a great job on the financial side. We have low breakevens, and we have some time charter cover through – until the first half of next year, so not that much left. But the spot market has improved here. We certainly need to improve our overall performance on the spot, but I think that’s a short – that was a short in the Q3, and we’re already showing signs of improving that. We’ve renewed our fleet on the aframaxes and LR2s. We have some work to do on the VLCCs, but we are well underway here and we have the financial means to go through and keep building Frontline. So I’m very happy with the overall position of the company.

Okay. And then regarding the chartering strategy, I understand the thought process behind it, not accepting money- losing levels and trying to be a market leader. As you said yourself, though, there’s a lot of ships in the hands of maybe relatively weaker owners and, therefore, kind of no one’s bigger than the market. So is that something that you’ve kind of changed back to now? Are you just kind of taking what’s out there because the waiting time seem to be pretty detrimental and the order market doesn’t kind of return to profitable levels?

Looking back at Q3, I think we did the right thing. We tried to show discipline and not accepting half the OpEx rates. And looking back, yes, we would have been better off if we had just accepted and kept running because the upturn came much later than I expected. I expected it to be two to three weeks after our last call. But it only happened, say, four, five weeks ago. So there was a delay there. But I think from a charter perspective, it’s very important to have a view on the market. And sometimes, taking some waiting time is the best thing you do because it pays off on future fixing. So I think it’s important for me here to be completely honest about getting it wrong in Q3, but then I would also ask everyone to look at our performance over time and look at how we performed in 2015, 2016 through the stronger markets where our outperformance was driven by taking – making decisions. And sometimes, even in a strong market, taking some waiting time and having a market opinion if you think it’s moving up, the last five, six points you’re getting by taking that time really pays off. So we will continue to have a view and, hopefully, we will continue to get it right more often than we get it wrong.

Yes. Okay. That makes sense. Last question for me, just for Inger. I noticed that you drew another $40 million from the Hemen Holdings facility, bringing that up to $90 million. Is that money needed for the newbuilding commitments? Or is that something that you’re just keeping on the balance sheet, whether it’s to meet covenant requirements or just to kind of keep flexibility?

No. If you look back, you saw that we took delivery of five newbuildings in the second quarter, and we also took delivery of further five newbuildings in the third quarter. And you’re also – these sums are, in a way, part of the financing of taking delivery of these vessels.

Okay. And then we look at the capital commitments going forward, it’s in the press release, I can’t – it’s not at my fingertips. And there’s another, I think, $185 million from the Hemen facility. Do you anticipate drawing more from that? Or do you have it from the banks and credit facilities enough to finance the remaining capital commitments?

We don’t expect to draw, let’s say, expensive amounts on the debt facility in that respect going forward. We do also have, as you know, some cash in connection with the marketable securities that we hold on the balance sheet as well in addition to the cash that we have on the balance sheet. So I think that will be limited in a way, but you can’t rule out that there will be certain more drawn on the facility.

Okay. Thanks Inger, thanks Robert.

Our next question comes from Magnus Fyhr from Seaport Global. Please go ahead. Your line is open.

Hi guys. Just a question on consolidation. You mentioned the weaker asset values here. Are there still modern assets out there for sale? And what – how do you balance taking advantage of opportunities versus keeping cash on for maybe a weaker market and…

In terms of opportunities out there, I think, to take the prices first, pretty stable, maybe up a tick, but we feel we’ve reached bottom. But there’s not been, as it has been – the same on previous calls here, the amount of ships available will – has actually not been – of modern, has not been that much. But I think we’re starting to see a few more. Obviously, we are watching this very, very closely. And I think we shouldn’t forget that we had like 9, 10 quarters of strong earnings, and it takes time before we see the sellers come out. But I think if we remain at the current levels, the number of ships available will increase in the secondhand market. And we will continue to look and inspect and time it right and then look against what we have available and – on the finance side. But we certainly have the means here to do quite a few things.

All right. Thank you. And just on the current spot market, I mean, you gave guidance for fourth quarter. It seems to be a big discrepancy between the Far East routes versus the Atlantic. What – do you see that changing here in the seasonally stronger winter period? I mean, it looks like the AG U.S. Gulf is almost at negative earnings.

Yes. This – it’s quite an easy explanation, and I’ll try to sort of explain what’s happened in the past and what I think is going to continue to be the case. If you look at the Middle East, that’s where the 15-plus ships have some place to enjoy, still. It is shrinking, but you can still operate in the Middle East with all the ships. Whilst the Atlantic is, in terms of approvals required in age, it’s far more stringent. And that is why we have the spread and why we’re seeing the Atlantic being the driver. To be honest, I would have thought, by this time of year, the Atlantic should be even a more – even a stronger driver, but we’re seeing the modern ships now come – ballast straight from Asia to the Atlantic. And what we’re seeing is that some would want to take the backhaul at low earnings just to give some contribution to the ballast. But it is extremely marginal, doing that run to the U.S. Gulf is very, very marginal. But if you think the market is firming a month forward, then it’s also a way to kill time instead of sitting the ships. So it could be part of a chartering strategy as well. But going forward, Atlantic will be driving the market with the modern ships. And I’m hoping that the Middle East will require more and more modern ships, which again will help balance the worldwide VLCC fleet and also drive scrapping. Because as I repeated, three or four times, I think, earlier, it’s really the scrapping that is required to rebalance how things are.

All right. Thank you. And just one last question for Inger. On the newbuilding program, what – how much do you expect to finance that remaining payments and versus cash?

The newbuilding CapEx that we have remaining now at the end of the third quarter is $311 million. And with respect to debt bank facilities in place, we will draw approximately around $250 million, I think.

All right $250 million..

$250 million now yes.

Okay. Very good. Thank you.

Our next question comes from Fotis Giannakoulis from Morgan Stanley. Please go ahead. Your line is open.

Yes. Good morning and thank you. Robert, I want to ask you about how the increased oil price environment impacts the tanker market and how your outlook changes compared to three months ago, given the fact that all analysts are projecting that OpEx cut will be extended until the end of 2018?

No, I think, first of all, I’m very pleased to see the increase in the oil price, overall, because it’s another – it’s the real sign that the demand for oil is strong. And I think we can then have confidence in the demand growing here as per what is predicted by all the major agencies. And looking at the volume at 1.5%, we’re increasing by 500 million barrels next year. And a VLCC, as an example, only carries 10 million a year on average. So I think it’s a very, very good sign. I would have liked to see the freight rates jump at the same time here because, obviously, it’s our main cost with the fuel. But I think it’s a healthy sign, and it takes away the worry of oil demand dropping for the short, medium and probably quite a few years. And also, we’re eating into inventories and we could also see that the higher price leads more oil to the market, which obviously is something that we would benefit for in the tanker market straightaway.

I want to ask about the sentiment out there about the market recovery. When do your fellow shipowners place it? And what is the sentiment in regards to additional newbuildings? We have seen quite a few orders in the beginning of the year. Is this something that has ended and now everybody is going to be more disciplined? Or you think that there is a continuing risk? And also, if you can comment, what makes the – keeps the shipowners far away from each other? Why don’t we see more cooperation in terms of expansion of pools or some more disciplined like the one that you have shown so far?

I love it when you ask many questions at once, Fotis. Thank you. With the sentiment in terms of the recovery, I think it’s when – I think, yes, all owners have different views, right? But to repeat my own view, second half of next year, I think, can be a turning point. Again, it all depends on scrapping. But things are sort of perfectly placed to old ship is difficult to trade, difference between a 17, 18-year old ship and scrap it is virtually down to zero. It’s now that I think we’ll see this accelerate. Only 10 ships so far this year. There was only one during 2015 and 2016. But I am convinced that, that will start playing here in 2018. And we could see the signs already in the second half that we’re starting to see an improvement as we move towards a winter market, which will hopefully be more interesting for a shipper owner than what we’ve had this year. But that’s my guess, and I don’t think the general opinion is way off that. But some might say that we have to wait about 2019 , but then that could well be the case. As for orders, we did obviously see quite a few orders for the first half of the year. We did some ourselves, and that basically filled the – up most of 2018 and 2019. But what is very positive, I think, for the tankers is that we’ve seen other segments enjoy better times and orders being placed. In a weak market, then it’s often the tankers that are placed first. It’s often there where the biggest gamblers play. So I think now, obviously, there will be orders, but I do expect it to slow, and I’m hopeful the other segments will help us there. As for the last question, I think there are some market participants that have discipline, and also, there are some alliances out there. I think many – well, a lot of the problem lies with the smaller owners, the one-, two-, three-shipper owner who can probably see the cargo less the six or seven person and you don’t have a sort of an overall market approach and you could then be a price-taker rather than having discipline. But that’s – in a ship market, you can never get completely away from that. But it would be good to see the fleet sitting on a fewer hands, which will make the participants stronger and, hopefully, then we will start making money again, right?

Thank you very much, Robert.

Thank you.

[Operator Instructions] Our next question comes from Anders Karlsen from Danske Bank. Please go ahead. Your line is open.

I was wondering, you mentioned or you talked a little bit about it, but you also mentioned it in your report, about port restrictions and age restrictions and that coming more into play. Could you elaborate a little bit around that?

What I’m referring to is the primary point is age. So ships over 15 years is – are off. Ships younger than 15 are preferred more and more across the globe. And the Atlantic is the driver and Asia is lagging behind, but Asia is also now picking up in terms of having restrictions, and China being the best example.

Is that in terms of ports or in terms of charters?

In terms of calling – entering a charter, which will enable you to call various ports.

Okay. All right. Thank you.

There are no further questions from the phone. [Operator Instructions] As there are no further questions, I’ll now turn the call back to your host for any additional or closing remarks.

Okay. Thank you very much. I would like to thank everyone at Frontline for their great efforts, and thank you all for calling into this presentation. All the best.

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