Robert Hvide MaCleod - Chief Executive Officer of Frontline Management As Inger Marie Klemp - Principal Financial Officer and Chief Financial Officer of Frontline Management AS

Jonathan B. Chappell - Evercore ISI, Research Division Herman Hildan - RS Platou Markets AS, Research Division Matthias Detjen John A. Reardon

Good day, and welcome to the Q4 2014 Frontline Ltd. Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Robert MaCleod. Please go ahead, sir.

Good afternoon. Welcome to Frontline's Q4 Presentation. This presentation will proceed as follows: Inger will start with the Q4 highlights, the main transactions for the quarter and a financial review. I will then follow up with earnings and market factors for the quarter, the VLCC and Suezmax fleet developments, newbuilding prices, Frontline's present situation and finally, the market outlook. Inger, please go ahead.

Thanks, Robert, and good morning, and good afternoon, ladies and gentlemen. Moving to Slide 4, Highlights and Transactions. Frontline agreed with Ship Finance in July 2014 to terminate the long-term charter parties for the 3 VLCCs, Front Opalia, Front Comanche and Front Commerce and Ship Finance sold the vessels to unrelated third parties. These charter parties were terminated in November on the 4th, 12th and the 19th. In October 2014, Frontline bought $17.8 million of its convertible bonds at a purchase price of 91.6%. And in February 2015, Frontline bought another $33.3 million of its convertible bond at a purchase price of 99%. In October and December 2014, Frontline entered into a private agreement to exchange $45.5 million of its convertible bond for an aggregate of 13 million shares and an aggregate cash payment of $19.6 million plus accrued interest. The remaining outstanding balance on the convertible bond loan is currently $93.4 million and the Board is confident that Frontline will be able to repay all of its commercial bond loan in April 2014 -- '15, sorry. In January 2015, Frontline took delivery of its second and final Suezmax newbuilding, the Front Idun. Frontline has issued 10.9 million new shares under the ATM program during January and February 2015. And in January 2015, Frontline increased the ATM limit from $100 million to $150 million. Then moving to Slide 5, Financial Highlights, and Slide 6, Income Statement. Frontline reports a net loss of $13 million, equivalent to a loss per share of $0.12 in the fourth quarter compared with a net loss of $59.6 million and a loss per share of $0.60 for the preceding quarter. The net loss attributable to Frontline in the fourth quarter includes a noncash gain of $40.3 million arising on the termination of the charter parties for Front Opalia, the Front Comanche and the Front Commerce. Further it includes a noncash gain of $1.5 million arising on the convertible bond buyback in October and a noncash loss of $41.1 million arising on the convertible bond swaps in October and December. And finally, the share of results from associates relating to Frontline's share of the net loss in Frontline 2012 in Q4 of $7.2 million. If we exclude these onetime items, net loss in the fourth quarter was $6.5 million compared with $22.2 million loss in the third quarter. The increase in [indiscernible] of operation of $15.8 million this quarter is mainly related to increase in PCE rates, which led to an increase in result on time charter basis by $5.3 million. Offsetting this is an increase of $8.5 million in cash repayment to Ship Finance and the German KG. And the positive side of this is the net decrease in expenses of $19 million. The decrease consists of a decrease in ship operating expenses of $6.2 million explained by no dry-dockings in the fourth quarter as opposed to 2 vessels in the third quarter, and also a reduction in running expenses. We also had a decrease in net finance expense of $11.2 million, mainly due to fully amortized interest expense in the third quarter and reduction in lease interest expense due to lease terminations on the Comanche, Commerce and Opalia. We had an increase in admin expense of $0.5 million and a decrease in depreciation of $2.1 million. Then moving to Slide 7. Income on time charter basis. Frontline spot VLCC fleet earned $27,400 per day this quarter compared with $23,900 per day in the third quarter. The average for the whole fleet, including TC out, was about $27,900 per day compared with $24,600 per day in the third quarter. The Suezmax spot fleet earned $27,200 per day this quarter compared with $19,500 per day in the third quarter. And the average for the whole Suezmax fleet, including TC out, was about $26,000 per day this quarter compared with $18,600 per day in the third quarter. Moving then to Slide 8, ship operating expenses and off-hire. The average OpEx for the fleet in the fourth quarter was approximately $8,600 per day compared to approximately $10,400 per day in the third quarter. We have no dry-dockings this quarter compared with 2 in the third 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 24 in the fourth quarter compared with 70 days in the third quarter due to [indiscernible] dockings this quarter. We have 1 scheduled dry-docking in the first quarter of 2015. Moving then to Slide 9, the balance sheet. Changes to the balance sheet in December 31, 2014 is mainly as follows: The cash has decreased by $40.5 million. $35.9 million of this relates to bond buybacks and debt equity swaps, and $10.5 million relates to cash conservation paid to Ship Finance in connection with termination of the leases on Front Opalia, Comanche and Commerce. The remaining movement related to increase in cash flow from operations. The restricted cash in ITCL increased by $26 million, which relates to the proceeds received from the sale of the Ulriken. Vessels and equipment decreased by $17 million due to depreciation in the quarter. Other long-term debt -- sorry, other long-term assets decreased by $35 million, which is mainly related to sale of Ulriken. The long-term debt decreased by $133 million as a consequence of bond buybacks and debt equity swaps, decrease in capital lease obligations, partly offset by increase in notes payable to Ship Finance related to the lease terminations on Front Opalia, Commerce and Comanche. Otherwise, there were small changes to other balance sheet items this quarter. Moving then to Slide 10, the cash cost breakeven rates. The estimated average cash cost breakeven rates for the remainder of 2015 are approximately $26,400 per day for VLCC and $19,400 per day for the Suezmax. These rates are the daily rates our vessels must earn to cover the budgeted operating costs and dry-dock, estimated interest expense, bareboat hire, installment on loans and corporate overhead costs. The breakeven rates exclude the CapEx. With this, I leave the word to Robert again.

Thank you very much, Inger. Let's look at Slide 11, earnings and market factors. The quarter started off at very low levels, almost as low as we saw in Q2. The markets picked up quickly, though, driven by improved demand. For the VLCCs, it was virtually a nonstop improvement throughout the quarter. The Suezmax has had a spike similar to the one seen earlier in the year and then came back down. Overall, our Suezmaxes had a satisfactory quarter, whilst we are not that content with the returns for Frontline's VLCCs. As can be seen on the graph for both segments, the average earnings bases TD3 and TD5, are well above our vessel earnings for the quarter. There are 2 reasons for this: Firstly, our vessels are fixed forward. So at the start of the quarter, a substantial portion of our vessel days will already have been booked. Secondly, an oil price drop is instantly reflected in the index rates, whilst on ships you burn the existing fuel before you see the effects. In the falling shipping markets or rising oil markets, you will obviously have the opposite effect. Let's move to Page 12, the VLCC fleet. There are currently 638 vessels in the world fleet, of which around 200 are controlled by the oil companies, whilst the balance is trading spots. There were 5 vessels delivered in the quarter, one removed, which in turn makes little difference to the fleet developments. Overall, we think the fleet is relatively balanced, and our hope is that further consolidation will take place. The orderbook is at around 13% of the present fleet. This will outnumber scrapping for the period, at least if we stay at the current levels at the spot markets. [Audio Gap] Page 13, which is the Suezmax fleet. This fleet counts 450 ships. There were no changes in the quarter with 2 vessels delivered and 2 vessels scrapped. The segment ended the year on a strong note. And for ships on the water, it remains very interesting. As with the V segment, earnings are driven by increased ton-mile resourcing and higher utilization, and we see this continuing to be the case at least in the medium-term. At present, the orderbook is not a great concern at around 14% of today's fleet, but going forward, we are more concerned. I will come back to this TC market. The prices are pretty stable from the last quarter, always depending on the specific yard and the final specification of the vessel, but we estimate the standard VLCC to be priced at around $96 million, $97 million; and $65 million, $67 million for Suezmaxes. The U.S. dollar remains strong. he dry markets and offshore is hurting, thus we feel there could be some downward pressure coming up on newbuilding prices. As for the time charter market, it's enjoyed a steady increase throughout the quarter on the back of an improving spot market. So then let's look at Page 15, Frontline and 25 VLCCs. VLCC Chartering, which is Frontline's corporation with Tankers International, became fully operational early in the quarter, and market's approximately 10% of the world's VLCC fleet. We are very pleased with this performance. As Inger pointed out earlier, we are confident that we will be in a position to repay our convertible bond loan in April 2015. This is a very important step on the way to reach our ambition of rebuilding Frontline into a leading tanker company. Then let's go to the final slide, which is the market outlook. Q1 has started off very well. It's getting the full benefit of the improved spot markets in Q4 and the lower bunker prices. Demand remains high, volatility is back and the ton mile remains in earnest favor. Let's look at the factors that contribute to this and what we think the future has in store for us. The fleet utilization ended the year around 85%. And on paper, this is likely to increase in 2015, but it's very difficult to predict. Floating storage was the main theme on VLCCs coming into 2015. Around 40 vessels were confirmed for time charter. We did 4 of our ships at an average rate of around $44,000 for around 12 months average. But now, the jury is out on how many ships we'll actually end up storing. The contango in the oil market has narrowed and the spot markets remain strong; 2 important factors making incremental storage less likely. We still think some ships will store, though. Our estimate is 15 to 20 units. And the effect of this will be seen more in Q2 and Q3 rather than Q1. The oil price correction lowers bunker prices, our main costs. The low oil price is also likely to support oil demand, which in turn is positive for tankers. We are seeing consolidation in 2014, and we believe there will be more going forward. Having had years of very poor markets, the recent spot strength has boosted owners' confidence and the market sentiment is positive. The current orderbooks on Suezmax and VLCCs at around 13%, 14% is relatively well-balanced, as I mentioned before. But we are concerned that it would grow further, especially on Suezmaxes. The poor dry and offshore markets has already led to conversion of all listed tankers, and we fear that this will continue to happen, along with fresh orders being placed. This is a cause for concern. With that, we are ready for your questions.

[Operator Instructions] We'll now take our first question from Jon Chappell from Evercore. Jonathan B. Chappell - Evercore ISI, Research Division: Inger, quick question for you. What's the remainder on the new upsized ATM facility? How much is left there?

It's approximately $50 [ph] million, a bit more. Jonathan B. Chappell - Evercore ISI, Research Division: Okay. And then Robert, you've been with the organization for a short period of time. I'm sure you're still kind of learning the ropes a little bit. But you mentioned you're going to reach an important threshold by being able to pay back this convert that's obviously been a huge overhang in the company for a couple of years now, so that's great. And then you want to rebuild the company. So how do you go about rebuilding it with the limited liquidity that exists today? Does something need to be done in coordination with Frontline 2012? Or can Frontline Ltd. rebuild on its own?

It is something -- we're looking at various options and it's something that we will come back on and we cannot be more specific at the moment. Jonathan B. Chappell - Evercore ISI, Research Division: Okay. 2 just kind of market-related questions for you. One on the storage. I mean, you mentioned you had 4 ships that are hired for 12 months. I guess there's some concern that these are being hired potentially for storage and then are kind of reletting into the market immediately, so they're not really removing those vessels from the fleet. What are the terms on those? Are you just giving the vessel to the charter for 12 months and they can do whatever they want? Are there any specifics regarding the amount of time that needs to be used for storage?

No, this is -- it's fixed as a time charter. So the charters are free to trade spot or store. And as I said earlier, with the narrow contango here it's -- I think slightly a bit more go will go in the spot market than we thought a month ago, but at the same time [Audio Gap] So of our ships here, we are pretty certain that 2 are going to go straight in storage and likely 3. But these things could change, so our current estimate is between 15 and 20 of the 40 ships booked. Jonathan B. Chappell - Evercore ISI, Research Division: Got it. That's very helpful. And then final one. You mentioned the ferry conversions. Obviously there's been a lot of press about that. Can you talk about the timing? We've seen 2 examples already where Scorpio [ph] has converted 2 sets of dry bulk ships, and the actual delivery dates for the converted tankers are 12 months forward from when the original delivery dates were. Is this kind of standard? Do the yards even know they have to slot the steel? Do they need to get pipings and coatings? And if something was scheduled for a call it December 2015 delivery as a dry-bulk ship, is it feasible that it could be delivered in December '15 as a tanker? Or would it be significantly in the future?

This is -- it's sort of case-by-case. Some yards will swap deliveries and do all sorts. It's impossible to give you a clear answer.

We'll now take our next question from Herman Hildan from Clarksons Platou Securities. Herman Hildan - RS Platou Markets AS, Research Division: My first question is on the cash breakeven level on the general note before rebuilding the company or actually disregarding that. Do you feel like the $26,000 is, call it a comfortable level to have a cash breakeven for the current fleet? Or would you work to try to reduce this going forward?

This breakeven rate include, of course, the dry dock budgets that we have for the year. And it will be -- we will dry dock more VLCCs than Suezmaxes this year. That's why the breakeven rates for the VLCCs are a bit higher than you saw last time. Whether it's comfortable or not, I mean, this is obviously, of course, a consequence of mainly the lease structure with Ship Finance. And as you know, the rates are a bit high in that context. So what the future will bring with respect to the breakeven rates, it's a bit early to tell. I mean, we'll get back to that, as Robert said earlier. Herman Hildan - RS Platou Markets AS, Research Division: Okay. And furthermore, you have a few vessels [indiscernible] turning 20 years this year; a few VLCCs turning 15. How do you kind of weigh taking those through dry docking versus, call it selling them for scrap and renewing the fleet?

That will be considered on a case-by-case basis. Herman Hildan - RS Platou Markets AS, Research Division: Okay. And then finally, could you also -- there's been some debate on the speed of the tanker fleet. Could you also give your version of how you view speed as a consequence on the supply side in the tanker markets with the lower prices in mind?

I think on the speed issue, the slower folks on speeding up, we are keeping the lower speeds, but it's [indiscernible] you might speed up here on specific boats and this is always subject to change for any owner. But I think when it comes to the speed, what has not been focused that much on here recently is the speeding down. And looking at the contango, I think there will be cases here where charters will want to arrive in April rather than March, for example, because of the contango in the oil price. So I think you will have some slowdown and you will also have charters that will request you to arrive at these charter ports and not just hand your readiness and waiting for -- and then virtually be placed on floating storage whilst on a spot charter. But this is obviously -- nothing's set in stone here. So it's a complex picture on the speed.

We will now take our next question from Matthias Detjen from Morgan Stanley.

I have another question on the market, about the second-hand market for the vessels. I was wondering if you could give us a bit more color there, how price is developed and maybe as well as the -- some liquidity, how the liquidity is in that market?

No, say if you take a 15-year-old, for example, you're looking at just over $30 million. And on sort of one-ship deals, I think the liquidity seems to be pretty low at the moment.

Okay. And is that sort of like an option for you to renew the fleet by buying vessels in the second-hand market? Have you seen any attractive opportunities there, or not really at this point?

No, no. At the moment we are focusing on other, rather than a new purchase, we're looking at other things. So we'll get in position for that later.

We will now take our next question from John Reardon from Merriman Capital. John A. Reardon: Inger, does the break-even rate include the Ship Finance clawback that's, I believe, in effect right now? That's question #1. Rob, in rates. And finally, the last question is, recently a Saudi Arabian company called Bahri did a bond deal to finance a rather large acquisition. And in the bond prospectus, it said that Saudi Aramco was going to give them a rather large and long-term contract. Has that gone into effect? And has that affected Middle East Gulf to North Asia rates?

John, let's start with the first question you had. No, the cash breakeven base, they do not include the clawback that Ship Finance has. And that is explained by the clawback is dependent upon what we earn, of course, and it's hard for us to know what we are going to earn in the future. So that's why we keep the cash breakeven rates without the clawback. John A. Reardon: Okay. Can you tell us what you paid in the last quarter on the clawback?

Yes. It's in the Q4 earnings. [indiscernible] the number there, so yes. John A. Reardon: Okay, that's fine.

Yes. And then on the spring hit, yes, that's what normally happens. But the x factor here that we think will come into play is that you hear in Q1 the storage ships got fixed, and then into the Q2 and Q3 they will have loaded and will start their storing. So it could slow down at fall. It could actually save the quarter if large ships go in storage. So it's very difficult to say. John A. Reardon: Okay. And then how about the recent transaction that Bahri did and, in turn, got a Saudi Aramco, looks like an exclusive contract? Has that affected rates coming out of the Middle East? Or do you think it might?

This is the deal. From what we hear, it's been placed on a tender basis for 5 to 10 ships in Korea and it's forward delivery. So it's not having any effect for this year nor next year.

We will now take our next question from Nicholas Eposito from Pender [ph].

I have 4 questions for you. The first question is about the equity distribution agreement with Morgan Stanley, how long it will be? And what is the amount of shares issued until today? And do you plan to increase again, because it's the second time that you increased the share agreement, and now it's up to USD 150 million? The second question is, after the convertible bond will be paid in April 2015, do you think that you're issuing new debt or other loans or you think to sell vessel? The third question is if in 2015 you think [indiscernible] about net income? And the last one is about the contango effect. Do you think that how long will be?

Yes. Let's start with your first question. That was really with respect to the equity distribution agreement with Morgan Stanley. And you were asking -- I'm not sure I really understood your question. You were asking?

Yes, yes. About the equity distribution agreement. Is -- how longer it will be? Because for the shareholder it's very bad because with an agreement for many years, we have many shares on the market today. And if possible, to have how many times you think to reach USD 150 thousand -- [ph] million of countervalue?

This is -- I can't give you any number of shares which will be issued within that limit because that really depends on the market price, of course, the share price. Yes. So what I said earlier on the call is that the remaining limit is a bit more than $50 million.

50?

$50 million, $50 million. Yes, yes. And your other question -- did you have more question with respect to that? No?

Yes. The second question is after the convertible bond will be paid in April 2015, do you think of new debt or new loans or sell to vessel for increase the liquidity position?

Well, that remains to be seen. We will get back to you on these items later. It's a bit early for us to tell you anything about that now. And then?

And then it was the contango, was your last question?

Yes, yes, last question, please. The contango effect, if you think how long it will be?

Yes, the contango is very difficult to predict. We were up to almost $7 over a 6-month period. Now it's down to between $4 and $5 I think is the latest. And this is very much oil price-related. So telling you here the direction of the oil price, I'm not brave enough to give you a clear answer.

Okay, and the last question is about if in 2015 you go in black on your net income? What do you think about outlook on your net income after 2015?

I don't think we can comment with guidance or expectations with respect to the stated income in 2015. It's a bit early in a way.

Yes, of course. But you are optimistic or not?

Yes. As Robert said earlier on the call, I guess we are quite optimistic about 2015.

We will now take our next question from [indiscernible].

Can you please state your cash balance as of now?

Sorry? Our cash balance? Cash balance?

Yes, cash balance.

The cash balance you have in the earnings release. But right now I don't think we can state it. You have the numbers for the fourth quarter.

Well, it's a delicate time for the company. That's why I'm asking for the cash balance.

Yes, yes. No, but I understand that. But I don't think we will give away our numbers [indiscernible] in the quarter in a way.

[Operator Instructions] As there are no further questions at this time, I would like to turn the call-- we do have again a question from Nicholas Eposito from Pender [ph].

Equity distribution agreement with Morgan Stanley, do you have a security line being with Morgan Stanley?

No, we don't.

[Operator Instructions] As there are no further questions at this time, I would like to turn the call back to the presenters for any further remarks.

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

This will conclude today's teleconference call. Thank you for your participation, ladies and gentlemen, you may now disconnect.