Frontline Ltd. (FRO) Q2 2016 Earnings Call Transcript
Published at 2016-08-31 14:46:46
Robert McLeod - Chief Executive Officer Inger Klemp - Chief Financial Officer
Jon Chappell - Evercore ISI Michael Webber - Wells Fargo Fotis Giannakoulis - Morgan Stanley Jonathan Staubo - Fearnley Securities Magnus Fyhr - Seaport Global Erik Stavseth - Arctic Securities
Good day, ladies and gentlemen and welcome to the Second Quarter 2016 Frontline Limited Earnings Conference Call. For your information, today's call is being recorded. At this time, I would like to turn the conference over to Mr. Robert McLeod, CEO. Please go ahead, sir.
Thank you very much. Good morning and good afternoon. Thank you all for dialing in to Frontline’s earnings call for the second quarter of 2016. It was another good quarter for Frontline with strong spot earnings. I will start this call going through the highlights of the quarter. Following that, Inger will run us through the financials. We will then look at Q2 earnings sector by sector and I will guide you on our Q3 earnings. Moving on we will look at our time charter and accrued tanker order book. We will then look at the current market conditions and the market outlook as well as Frontline’s positioning of the long term. The call will be concluded by taking your questions. Let’s get started and look at company highlights from Q2. Earnings in the second quarter were strong. We achieved net income of $48.7 million adjusted for non-cash items. Frontline declared a cash dividend of $0.20 per share for the second quarter. On the fleet development side we have purchased two VLCC retails at an aggregate price of $168 million. We have also taken delivery of six other newbuilding so far this year two of them in Q2. We sold our six MRs and the deliveries are taking place shortly. We also terminated a long-term charter of the 98 built Front Vanguard and she was delivered to her new owners in Q2. We have four VLCCs on order at the STX and the uncertainty whether they will be delivered has increased given STX’s financial condition. We remain in discussions with STX and we have refund guarantees in place from first class banks. Inger, please can you take us through the recent financing secured.
Yes, thanks Robert and good morning and good afternoon ladies and gentlemen. In the second quarter we completed the financings from China Exim Bank of $328 million which we announced in the first quarter. We also secured commitment for a second loan facility with China Exim Bank of $325 million. This facility will be insured by SinoSure and we expect to be in the final stages of obtaining approval from SinoSure. The cost on these financings will be LIBOR plus 180 to 190 basis points and they will have a 15 to 18 year loan profile. These financings will cover all the eight newbuildings and the LR2 two newbuildings that we have. In addition we have through the quarter secured $220 million of debt financing from ING Bank and Credit Suisse at the cost of LIBOR plus 190 basis points. These financing have 17, 18 years loan profile and they will cover four VLCC newbuildings. Frontline has the secured bank financing of up to $548 million and is in what expecting to be the final stages of obtaining approval for further bank financing of $325 million. This financings will then forward finance 20 of the company’s new building contracts. The company has not yet secured bank financings for the vessels under construction at STX as it is unclear whether they will be delivered. All these financings together with the existing financing we have enable us then to maintain the very low cash breakeven rates that we have. Moving then to Slide 3, financial highlights, sorry Slide 2, financial highlights. Frontline achieved total operating revenues net of voyage expenses of $160 million in the second quarter. EBITDA came in at $72 million and net income came in at $14 million equivalent to earnings per share of $0.09. In the second quarter, we have recorded certain non-cash charges. These non-cash charges were vessel impairment loss of $25.5 million relating to the agreed sale of the six MR tankers and also the termination of the long term charter Front Vanguard. Further, an impairment loss on shares of 4.6 million and a mark to market loss on derivatives of $4.2 million, finally a minority interest of $200,000. After adjusting for these non-cash charges, we show EBITDA of $98 million and a net income from operation of close to $49 million in the second quarter equivalent to $0.31 per share. Frontline declared a dividend of $0.20 per share this quarter representing approximately 65% of adjusted earnings per share and reserves approximately 65% of adjusted earnings per share and reserves approximately $0.11 of the adjusted earnings to provide flexibility for accretive investment opportunities going forward. The company continues to believe that there will be a accretive investment opportunities in the near to medium term as asset values seem disconnected from the forward earnings power of vessels on the water. We further believe that this disconnect is based upon access to get store. We remain however committed to returning value to our shareholders and have always done so in the form of cash dividend either now or later and we didn’t expect that to change. We believe we are serving part of the dividend now to provide flexibility for accretive investment opportunities will increase the cash dividend later and enhance the values returned to our shareholders. Moving then to Slide 3, income statement, as just mentioned Frontline achieved net income adjusted for certain non-cash charges in this quarter of $48.7 million against $89.4 million in the first quarter. The decrease in sales per operation in the second quarter of $40.7 million is explained by first of all a decrease in the sale on time charter basis or almost $32 million due to the lower spot rate achieved in the second quarter compared to the first quarter. Then secondly, an increasing contingent rental expense by $4.1 million, first quarter included contingent rental income of $3.4 million and the second quarter on expense of 700,000 due to the fact that the actual profit share arising in the second quarter of $14 million was $700,000 more than the amount achieved in the lease obligation payable when the lease is going to be recorded as fair value at the time within adjusted Frontline 2012. Then we also have an increasing running expense this quarter of $3 million primarily due to an increase in dry docking expenses this quarter two vessels with dry docks compared with one less in the previous quarter. We also have increase in charter hire expenses of $6.4 million due to a DT [ph] vessels that was coming in as charter in vessels that will effect this quarter. Offsetting these we had a decrease in depreciation of $2.5 million primarily due to that Front Vanguard [ph] was to be delivered as capital lease and chartered instead. And also we had a decrease of the expenses by $2.2 million. Moving then to Slide 4, impacts for the lower cash breakeven lower [ph] cash breakeven levels. We estimate that the average cash cost breakeven rate for the remainder of 2016 will be approximately $21,200 for the VLCC, $17,300 per day for the Suezmax's, $15, 300 per day for the LR2 tankers and $13, 700 per day for the MR tankers. These trades are the all-in daily rates that our owned and leased vessels must earn to cover their budgeted operating cost and dry dock estimated interest expense, bareboat hire installments on loans and G&A expenses. In the remainder of 2016 no vessels are schedule for dry docking. While we have competitive premise the low cash breakeven base are primarily explained by the loan profile debt and the low interest cost on new and existing debt. We believe these cash breakeven rate are highly competitive. Every $1,000 per day lower cash breakeven rate means approximately $16 million to $20 million income per year were $0.10 to $0.13 per share which shows the high importance of maintaining low cash breakeven rates. Then moving to Slide 5, balance sheet. The changes to the balance sheet at June 30 from end of March 31 are a total decrease in balance sheet value of approximately $32 million. The changes in assets are mainly related to increase in newbuildings with close to $84 million that is the net of $176.6 million newbuildings almost paid which is offset by 93 million due to delivery or two LR2 vessels in this quarter. The vessels increased by $29 million that is due to delivery of the two LR2 vessels this quarter as I mentioned partly offset by the termination of the Front Vanguard lease of the current asset came down by $8 million and cash decreased by $137 million. Total liabilities are down $13 million and equity with $46 million due to dividend paid offset by net income in the quarter. With this, I leave the word to Robert again.
Thank you very much Inger. Please turn to Slide 6. The spot earnings have come down from Q1 which was a very strong quarter especially on the VLCCs. In the second quarter, our spot earnings were $48,100 on VLCCs, $28,600 on the Suezmax's, $22,300 LR2 and $16,000 per day on our MRs although down from the previous quarter, we are encouraged by our performance in the quarter. Towards the end of the second quarter the tanker market experienced strong downward pressure on rates and this has continued as we are now well into the third quarter. This was caused by oil supply disruptions in the Atlantic Basin and left waiting important places around the world. Although we expect rate environment to improve from current levels, the second half of 2016 will certainly be weaker than the first half of the year. For the third quarter, we have locked in 75% of our VLCC days at $30,000. The Suezmax's we've done 81% at $19,000 and although we have relatively few trading days in the quarter on the LR2s due to the number of vessels and timer charter the number is about $22,000 and 79% is covered. On the MRs we have done 88% at around $15,000. Let’s move to our time charter cover please on Slide 7, for the balance of 2016 28% of our fleet is chartered out. We capture the recent strength of the tanker market and locked in forward earnings. The timing was good as time charter rates has often significantly since then. Our TC cover reduces our exposure to market weakness while reducing our cash breakeven levels for the vessels in our fleet trading spots. For the balance of 2016, the breakeven is below $19,000 on VLCC, and just under $13,000 on Suezmax's. On the LR2s, we have locked in five ships on time charter, leaving us book trading LR2s with a cash breakeven below $6,000 per day. Our time charter coverage forced to about 13% in 2017. We will continue to capture market strength and secure forward cash flow through time charters if we believe it is in the interest of the company's shareholders. To give you an example the net cash effect of our TC outs is $28 million for the second half of 2016 and $40 million in 2017. Let’s move to Slide 8, the crude tanker order book. Newbuilding deliveries are accelerating particularly in the second half of 2016 and into 2017 as can be seen from this slide. Almost 100 VLCCs are on paper still to be delivered over next two years and this is expected to put pressure on the tanker markets. There is uncertainty on a number of these orders however our order at STX being one and some slippage is also expected. There has been no really absence of new orders placed in 2016 and we expect that constraints in debt financing will continue to restrict newbuilding orders. This gives reasons to believe in a stronger market further out in the cycle. Shipyards are also under pressure to restructure and the reduction of capacity at several yards is expected. Areas of market weakness like the one we are currently experiencing may also encourage scrapping of all the tonnage a factor which has been virtually absent for the last two years. Let’s look at the current market please, the market is currently at a 24 month low. There have been recently significant disruptions in crude oil supply from the Atlantic Basin and this has led import markets like India and China sourcing more crude from the Middle East rather than the Atlantic. This had a negative impact on ton mile demand and also coincided with a share decrease in waiting at fortune places around the world. Consequently the ton to market experienced downward pressure on rates in May and this trend has continued as we are now well into the third quarter. The third quarter is also maintenance season, meaning less crude demand from refineries. Several of the factors that have recently impacted the crude oil tanker market should return to normal conditions over the coming months, some production has been restored. There are also signs that oil supply from the Atlantic may begin to normalize. China and India are both expected to increase imports from the Atlantic and in particular from West Africa once the production is back on street. Once this occurs, the recent negative trend in ton mile demand should begin to reverse and the market become more balanced. Let’s move to the slide please. Frontline remains focused on maintaining our competitive breakeven levels and strong balance sheet combining with our large scale and strong shareholder base, we believe that we are well positioned in the tanker markets. We have a very strong commercial team and our aim is to continue to create value for our shareholders. With that, I would like to conclude the presentation and move to your questions.
Thank you. [Operator Instructions] We will pause for just a moment to allow everyone to signal. We will take our first question today from Jon Chappell of Evercore ISI. Please go ahead.
Thank you, good afternoon.
Robert, first question for you is just a little bit of a clarification on the dividend policy, I think you are pretty clear both in your comments and or in Inger’s comments and in the press release that you see opportunities and you are retaining some capital for that but this call it two thirds payout ratio is that kind of the rates number to think about going forward as the market remain in your term so much challenged for the second half of the year or could we see a return to the full payout if there is a seasonal uptick in the fourth quarter?
No it’s okay, we have a full payout and we had to hold the sale for the reason that we stated and Inger just went through, we changed it. But our policy remains unchanged going forward.
Okay and is there any minimum I mean just we have seen how weak the third quarter has been in the circumstance where there is no earnings in the third quarter or even small operating loss would there be some two penny, three penny type minimum or just stick to whatever the earnings is?
No we will look at the earnings. If we go to in line is then we will not pay out.
Okay sounds good. Two other quick ones is there any drop dead date on the STX as part of the refund guarantees or concern, is it the end of this year. When will you know for sure whether those VLCCs are completely off the table or you are moving forward?
It’s a work in process, we have been working all through the summer here and it’s a process that I think by the time we have our next call we will have – it will be clarified but it is taking time as I can’t give you a timeframe.
Okay that’s helpful and then the final thing is if I do the numbers on the new facilities that you put together and assuming they all come together you know about $873 million pledge financing for $964 million of capital commitment, so you are basically almost there and if you look at the terms that you’ve received on these new facilities 180 to 190 basis points compare that you what you are paying to Hemen which is 625 basis points, is there any thought of potentially refinancing or not even using that facility using what you have today and then any excess cash that you are generating rather than taking unexpensive debt?
I think too differencing in a way. I mean the bank debt that we have established is let’s say not same as what you can in a way through one the facility that Hemen has provided. That’s probably more for let’s say the equity part of an investment which will come from the end facility.
Right okay, I understand, thank you Inger, thanks Robert.
Thank you. We now move to Michael Webber of Wells Fargo, please go ahead.
Hi good morning guys, how are you?
Good. Robert, just a couple of questions on asset base [ph] rates and I will turn it over, but during the summer you acquired two Vs that would look like pretty effective prices, there are two options that will expire the acquisitions [indiscernible] in the absence they decide, since then we have seen a couple of points that I believe [indiscernible], so what in the absence they will seem to make sense even if they are already a touch above what the market is. But I am just curious where do you think a drop on asset values is per say [indiscernible] resale VLCC, how close to a bottom run away and you know those options were in parity with the pricing that you guys got earlier in the summer, would you love to acquire those as well, just curious as to how to think about things there?
No there is little bit of summer ahead, there has been very little activity and things have not changed much since I commented on that last time and maybe it’s down $1 million maybe it’s down $2 million but it’s very – I would call it flat. I think we are close to a bottom as you say, we did the 84, we had options we chose not to take it. But we are sitting here monitoring it and having said there will be some interesting opportunities going forward.
Okay without putting words in your mouth, I think it’s fair to say that that for asset values just like you will have still has an aid handle on it or do you think we can move down in the last [indiscernible]
I think for the good quality or the good speck I think you are in the, you are around that I just indicated low to mid eighties depending on the stake but I guess that could be around that.
Okay that’s helpful thanks. And guess one more and to get under basin at this just about I recall but at this time of year when we are seeing degree of seasonal weakness and it’s accentuated by some of the details from the recent cycle but just curious as we start moving into Q4, you know how you see the backend of the year shaping up in terms of whether or not we get some degree of a Thanksgiving day effect and or seasonal prompt or whether we see you know the inventory grow out proper [ph] just basically longer this year and so swing away that if you will.
Looking at the overall – the overall [ph] market has come down, it has come down lower than we expect it to this year and there are several factors like I went through earlier and I think you sort of a perfect storm an order of an effective running tanker fleet. Everything has been in favor of the fleet running effectively that’s waiting less Atlantic crude more Middle Eastern crude, tone mile down and I think one or more of these factors will turn around. So it would not surprise me. I am pretty confident here that we will improve from the levels that we are right now that I am confident on but going through into Q4, I don’t think we will have a strong Q – as strong as last year but I think the seasonal uptick, I wouldn’t be surprised if we don’t see that.
Clear enough and then along those lines we think about the 30% charter that we are getting into 17%, is it fair to assume that number is going to remain relatively static, the reason that we get kind of further into Q4 or even early Q1?
That is a market, where as I said earlier at least we took the carb, the markets come of a lot so the window to lock in good rates is behind us and in the next strike it will come back and we will keep monitoring that and take cover if we feel it strike but the market is certainly not there at the moment.
Great, okay very helpful thanks guys.
Thank you. We will now move to Fotis Giannakoulis of Morgan Stanley. Please go ahead sir.
Yes, hi Robert, hi Inger. I want to follow up on Jon’s question about the STX newbuildings. Is this delay simply a delay of the shipyards or its inability of the shipyards to deliver the vessel and I understand that you have ordered vessels at slightly higher price than the current market. If STX were to reduce their price would you accept such an arrangement or if you pursue to cancel this vessels given the delays and the failures under the newbuilding contract?
STX as for given the financial situation so we don’t think renegotiation is on the cards, it will be a much of accounts in them.
And I understand that STX has a few other newbuilding vessels in the Aframax and Suezmax sector and these seems to be for a while, they have been ordered well before your vessels, do you expect that these vessels will also be cancelled and taken out of the order book and in the broader scheme how many vessels, how many VLCC do you expect that they won’t be delivered from the vessels that they are in the current order book?
STX were the only ones with recent order. In terms of tanker book it’s in high 30 somewhere and these contracts will be different from each owner, so I can only comment on our own orders of course. When I talk about cancelation, there will be some looking to cancel that they are giving the pricing and there will be restrictions on so I think the order book will, well the actual delivered will look different from what I was presenting earlier but the fact is the order book is still substantial.
Thank you, Robert. One last about the market, you identified the weakness of the market citing the difficulty, the lack of supply and the disruptions in West African production, if you can try to analyze the different factors that they have affected the market apart from West Africa and disruption for example the lack of trading activity and the flood, oil curb or the higher fuel expenses, how would you allocate the weakness of the charter market to the several factors.
Let me get to look at the simpler, I don’t necessarily agree with your statement of the lack of supply. I think the – what’s happening is the supplies come down the Atlantic Basin and then there has been – it has been covered by the Middle East instead. So overall the volumes are there. We were down worldwide in Q2 to 96 million barrels a day but we are here for the second half of 2016 and it looks like we are at 97 million barrels, so it’s, I think it’s a more a question where its being shipped from. We have had a high ton mile and that’s kind of, that’s the factor, it’s not the supply itself that would be much more earning if the supply has fallen down from 96 million but it’s actually coming up from Q2. So I expect the Atlantic to get some of the production, Nigeria being one example get some of the production back. And then you will have places like India who moved from Nigeria supply on parts and replace Nigeria by Middle East, it’s a huge difference if you look at the – one VLCC can probably deliver four cargos from the Middle East and at the same time span as one cargo from Nigeria.
And a part of the tone mile impact, can you also comment about how active traders are if what you have seen also any decline in trading activity given where the spreads, time spreads and also the regional spreads?
Well I think in terms of trading I haven’t seen any difference in activity, there is maybe less talk about that stories but that’s not really trading. Trading ID, capturing of arbitrage, I haven’t seen much change so it does seems very active for me.
And regarding the delays at several ports, has there been any change compared to the previous quarters?
Yes that is set together with Atlantic production, that is the big factor. Basra, Iraq come down from up to 20 days here in the winter down to 67 days here in the summer so there is a combination of factors, the weather, they have not had about good weather over the summer, they seems to have organized themselves that they have had less maintenance of the bus [ph] but this will change I think, it’s – the weather has come letting the season then you will have periods with other will effect it, they will have to take some bus down to maintenance again. So here we are talking, I think what we are seeing now in Iraq is as good as it’s going to get in terms of logistics in the short to medium term. The volumes remain higher at the area and they are flat, so it’s for them to organize rather than organizing in a period where the volumes are growing month by month like we’ve had last year and the year before. China is another one in terms of delays, they’ve had months there with less imports and less imports means it’s easier to arrange in the districts and [indiscernible], so that’s had an impact. So I think it’s very, very important factor and now it’s running very smoothly but that mean it’s going to run smoothly as we move along here because there is no different, no change in on the supply side and demand is still strong. So I think we got reason to believe that delays will come back in and the tanker fleet will not be running sufficiently further down the road as it is today.
Thank you very much, Robert. Thank you, Inger.
Thank you [Operator Instructions] We will take our next question from Jonathan Staubo of Fearnley Securities. Please go ahead.
Hi guys, thanks for taking my questions. When you are talking about accretive investment opportunities, have you identified any vessels or fleets or anything at this point?
We are constantly looking at it Jonathan, so that there are the – there are plenty out there and we will – we are constantly looking but I will not be too specific.
Alright, thanks. And then little bit on the market outlook, you are talking about the second half being a real softer than what we saw in the first half of this year, could you provide any commentary on your expectations for 2017?
Putting a number on that will be a guess work. I think, I will much rather talk about the overall market as I have done on the presentation and my previous comments on other question, so that overall you get my view and identify the factors right, so when it comes to the second half of the year, it will be weaker. We have locked in $30,000 on about pre fills or the trading days on the VLCCs in Q3. For the first half of the year we made almost 60 on the VLCCs, right.
Brilliant thanks, that’s it for me.
Thank you. We now move to Magnus Fyhr of Seaport Global. Please go ahead.
Yes, hi Robert. Just, you guys done a very good job in fixing some of the ships into ahead of the weaker market. Can you talk a little bit about what kind of appetite you are seeing from the oil companies now to go along on time charters, I know that probably rates are below what you would expect to charter but maybe you can shed some light on that, thanks.
Overall, the charter market has been relatively quiet and that goes for oil majors, it goes for traders and forfeits [ph], it’s inactive, I mean people have – it’s come off lot last few months and probably people waiting for it to stabilize and there are lot of books out there where we are just re-delivering, so I would expect this to become allright, so right in the year but we might also need some more positive signs in the spot market. But when it becomes active again, I think it will become very active.
And you would expect that may be into the New Year?
It can happen in Q4. Normally, it happens in Q3. But August, September it’s going to be very active period. So let’s see September but they will probably be some action in Q4.
Okay, alright, thank you.
Thank you. We now move to Erik Stavseth of Arctic Securities. Please go ahead.
Hi, just a quick question on your SFL fleet, I mean, you did talk earlier this year about reducing your exposure and you did take out one vessel in the quarter. Where do you sort of see that fleet heading and at what pace you see you yourself building down the fleet?
Yes, we – on the SLF fleet there has been ways from us here in the group here to get exposure down on the pre-2000 ship. So we sold last year and we delivered a Front Vanguard in Q2. So we believe these – these are sales candidates so we are looking to get them out, it’s getting increasingly difficult to trade all the ships. So ideally, we trade two thousand plus only when we get into 2017 but there is not much liquidity in the market. But overall it’s, we believe it’s a right thing to do and renew the fleet. Our customers are constantly looking to chart so modern ships rather than the older ones and now in Europe, we are taking the 15 plus ships west from the Middle East and trading them in Europe back as we find challenging. So overall, it’s going for, the fleet, the customers are preferring that the newer tonnage and we have to follow that and it’s also a sign that the tonnage as we go further out from the site, this could help the overall markets.
Right, but as you say the liquidity of the market is preventing you from sort of doing a rapid build out of that fleet?
Yes, we have done two thirds of the pre-2000s in last 12 months, so we have actually done half. So we are on our way but it is, there is not much liquidity now. But that could be, we are going tying back in the old pricing and storage make sense then suddenly it’s back and it will be active again.
Thank you [Operator Instructions] As we have no further questions, I would like to turn the call back over to Mr. Robert McLeod for any additional or closing remarks.
Thank you all for calling into this presentation. I would also like to take the opportunity to thank everyone at Frontline for their great efforts. Thank you all very much.
Thank you. Ladies and gentlemen that will conclude today’s conference call. Thank you for your participation. You may now disconnect.