Robert McLeod - CEO Inger Klemp - CFO

Jonathan Chappell - Evercore ISI Magnus Fyhr - Seaport Global Fotis Giannakoulis - Morgan Stanley Donald McLee - Wells Fargo Herman Hildan - Clarksons Platou Securities Erik Stavseth - Arctic Securities

Good morning, everyone. Thank you for dialing in to Frontline's earnings call for the Third Quarter of 2016. I will start this call by going through the highlights of the quarter. Following that, Inger will run us through the financials and then we'll look at Q3 earnings segment by segment and I will guide you on our Q4 earnings and time charter cover. We will then move on to the current market conditions and the market outlook as well as looking at Frontline’s position for the long term. The call will be concluded by taking your questions. Let's get started and have a look at the company highlights from Q3. Earnings in the third quarter were healthy given the relatively weak market conditions during the quarter. Our results underscore both the benefits of our low cash breakeven levels as well as Frontline's earnings potential. We achieved a net income of $16.6 million or $0.106 per share adjusted for non-cash items. Frontline declared a cash dividend of $0.10 per share for the third quarter. For the first three quarters combined, we're just under $155 million or $0.99 per share. On the fleet development side, we took delivery of four newbuildings, one VLCC, two Suezmax's and one LR2. We sold our six MRs earlier in the year. Five of these were delivered in the third quarter and the final MR in November. As we previously announced, we canceled four VLCCs on order at [SCX] and received a full refund less $2 million in total castration fees. On the financing side, we have secured $870 million in bank debt financing following receipt of a $321.6 million commitment in November. With this, Frontline's current newbuilding program is fully funded. Inger, please can you take us through the financials in more detail.

Thanks Robert and good morning and good afternoon, ladies and gentlemen. Moving on to Slide 2, the financial highlights, Frontline achieved total operating revenues and net voyage expenses of $113 million in the third quarter and the EBITDA came in at $63.3 million and net income at $5.5 million equivalent to earnings per share of $0.03. In the third quarter, we reported certain non-cash charges and these non-cash charges consisted of a loss on the cancellation and sale on newbuildings and vessels of $2.7 million, a vessel impairment loss of $8.9 million relating to three vessels that we leased from Ship Finance and impairment loss on shares of $0.3 million and mark-to-market gain on derivatives of $0.9 million and a non-controlling interest expense of $0.1 million. After then adjusting for these non-cash charges, we show EBITDA of approximately $65 million and a net income from operation of $16.6 million in the third quarter, equivalent to $0.106 per share. Frontline declared a dividend of $0.10 per share this quarter, representing approximately full payout of adjusted earnings per share. Then moving to Slide 3, income statement, Frontline achieved net income adjusted for certain non-cash charges as I said in the third quarter of $16.6 million, again it's $48.7 million in the second quarter. And a decrease in sales from operation in this quarter of $32 million is mainly explained by a decrease in the sales on time charter basis of $46.5 million due to the lower spot rates achieved in the third quarter compared to the second quarter. Also we had a decrease in contingent rental expense by $9.5 million. In the second quarter, we included contingent rent expense of $0.7 million and in the third quarter, we included an income of $8.8 million due to the fact that the actual profit share in the third quarter of $5.4 million was $8.8 million less than the amount accrued in the lease obligations payable when the leases are recorded at fair value at the time of the merger with Frontline 2012. We also had a decrease in running expenses of $1.7 million primarily due to a decrease in drydocking expenses. Two vessels that dry-docked in the second quarter compared with none in this quarter. We also had a decrease in charter hire expenses of $3.7 million, mainly due to the redelivery of two MR tankers and two LR2 tankers this quarter and we had an increase in oil expenses by $0.4 million. Moving then to Slide 4, cash breakeven rates and OpEx; we estimate average cash cost breakeven rate for the remainder of 2016 of approximately $21,200 per day for VLCC; $17,300 per day for Suezmax’s and $15,300 per day for the LR2 tankers. These rates are the all-in daily rates at our owned and leased vessels both earn to cover their budgeted operating cost and drydock cost, the estimated interest expense, bareboat hire, installments on loans and G&A expenses. In the remainder of 2016, no vessels are scheduled for drydocking. The OpEx per day in the third quarter came in at $9,100 for VLCC, $7,400 for Suezmax’s tankers, and $7,000 for LR2 tankers, and no vessels were dry docked in the third quarter. While we have competitive running expenses and admin expenses, the low cash breakeven rates are to a large extent explained by the loan debt amortization profile and the low interest cost on new and existing debt. We believe these cash breakeven rate are highly competitive. For every $1,000 per day, lower cash breakeven rates means approximately $16 million to $20 million extra net income per year day or $0.10 to $0.13 per share, which shows the high importance of maintaining the low cash breakeven rate. Moving then to Slide 5, remaining newbuilding CapEx and debt capacity, as of September 30, 2016, the Company’s newbuilding program comprised three VLCCs, excluding the four cancelled STX vessel, six Suezmax tankers and seven LR2 tankers newbuilding. The total installments of $208.1 million have been paid with respect of these newbuilding and the remaining commitments amounted to $760.4 million, which was distributed with $76 million payable in 2016 and $684 million payable in 2017. All the 16 vessels are expected to be delivered in 2017. During the third quarter, we completed the financing from China Exim Bank of up to US$328 million announced earlier this year. In November, we also secured a commitment for a second facility with China Exim Bank of up to US$322 million and this facility will be insured by China Export and Credit Insurance Corporation. These facilities will carry an interest rate of LIBOR plus margin in line with some plant's existing loan facilities and have an amortization profile of 15 to 18 years. The Chinese financings will finance all the eight newbuildings and the eight LR2 newbuildings. In addition, we have through the third quarter, secured up to US$220 million on debt financing from ING and Credit Suisse at an interest rate of LIBOR plus margin of 190 basis points and 17 to 18 years amortization profile. These financings will finance four times VLCC newbuilding. We consider the terms achieved highly attractive, enabling us to maintain our low cash breakeven levels. Frontline has thus secured bank financing in a total amount of up to $870 million to partially finance all of the company’s 16 newbuilding contracts and also the four vessels, which were delivered during the third quarter. In addition, we have a senior unsecured loan facility in an amount of $275 million with an affiliate of Hemen Holding Limited. This slide shows the remaining newbuilding CapEx of $760 million, the drawn debt as per September 30, 2016, for the four vessels delivered in the third quarter and the undrawn secured bank debt under the different facilities, the assumed draw on the cash and the undrawn unsecured loan facility. The company has thus fully financed the newbuilding program and has an additional capacity for further growth. Moving then to Slide 6, the balance sheet; changes to the balance sheet on September 30 and June 30 are a total decrease in balance sheet value of approximately $25 million. The changes in assets are mainly related to decrease in newbuilding to $52 million, which is still net of $206 million newbuilding installments paid, offset by $255 million due to the delivery of one LR2 tanker, two Suezmax’s tankers and one VLCC this quarter. Vessels increased by $43 million due to delivery of one LR2 tanker, the two Suezmax’s tankers and the one VLCC, partially offset by sale of high MR tankers and the termination of the front lease. The other current assets came down with $6 million and cash decreased $9 million. Total liabilities are the same and equity is down with approximately $25 million due to dividend paid offset by net income in the quarter. With this, I’ll leave the word to Robert again.

Thank you very much Inger. Please turn to Slide 7 and we look at the Q3 performance and the guidance for Q4. The spot earnings have come down from Q2. The third quarter is often the weakest quarter of the year due to seasonal factors. This year several other factors made the market weakness more pronounced. These included supply disruptions, easing refinery margins, less waiting time in ports and places around the world and inventory draw-downs. These were all factors that led to a slowdown in demand for our ships. The spot earnings for the quarter were just under 27,000 on the VLCCs, 92 on Suezmax's and just over 20,000 on our LR2s; although down from the previous quarter, we are encouraged by our overall performance given the market conditions. For Q4 we have locked in 75% of our trading days in the VLCCs at $28,000 and the Suezmax's are at $19,000 for 55% of the days and the LR2s are at $16,000 for 60%. All these levels are of course well above our cash breakeven levels. Let's move to Slide 8 please and look at the time charter cover. For the balance of 2016, 28% of our fleet is chartered out at relatively attractive rates as we capture the strength of the tanker market going into 2016. By end 2017, the recovery is 18% and we'll start the year with 27% coverage. The net cash effect of TC relapse is about $40 million for the year 2017. This time charter cover reduces our exposure to market weakness by lowering our cash breakeven levels for the vessels in our fleet trading spots. We will continue to pursue TC cover if it is in the interest of the company's shareholders. Let's move to the next slide please and look at the current market. The market began to recover from the 24-month low and showed signs of improvements towards the end of the third quarter and this trend has continued through November. The winter has traditionally been strong for the tanker markets and we expect that conditions will remain into the first quarter of next year. We're beginning to see congestion building at ports in certain areas as import volumes increase. Also crude oil inventories have been declining reversing the factor that had a negative effect on tanker market in the third quarter. We believe that demand for crude oil remains robust and import volumes into China, India and the U.S. continue to grow. The increase in U.S. import volumes has contributed to ton miles and India's contribution to ton miles is expected to increase its consumption grows and diversifies its spot vessels. Both tanker owners and charters have been focused on the OPEC meeting scheduled for this week. OPEC previously indicated that its members agreed to production cuts with the details to be sorted out in this week's meeting. A reduction in the supply of crude oil is potentially negative, but it is unclear whether the OPEC members will be able to come to an agreement. As of yesterday, discussions with several members seem to stalling and just minutes before starting this call, there were rumors that Iran were not cutting, so we'll follow the news closely, but we do not believe that the outcome of the meeting will be vital for shipping as we regarded volumes of oil transported as robust. As we've pointed out in earlier presentations, demand is the key driver for tanker freight. Global oil demand is strong and is expected to continue to grow firmly going forward. Rising prices could challenge demand, but that would in turn give non-OPEC producers an incentive to increase production. Ultimately a more balanced oil market may actually prove to be positive for tanker markets. Please move to Slide 10 and we'll have a look at the crude tanker order book. Newbuilding deliveries have accelerated this year with about 50 VLCCs and 30 Suezmax's delivering. However the market has been resilient despite the historically high delivery pace on the other factors discussed earlier. The same number of VLCCs are expected to be delivered next year. For Suezmax's, that number is increasing to 60 and this is expected in periods to put pressure on the tanker markets. It has been a dramatic slowdown of oil in 2016. This is a trend that is forecasted to continue giving the expected contraction in global shipyard capacity and the limited availability of capital to finance new orders. Likewise, scrapping is expected to accelerate at 43 VLCCs and 31 Suezmax's are scheduled to undergo third and fourth special service next year. With new regulation like those requiring balanced water treatment assistance, increasing the cost of these special surveys, the odds are in favor of scrapping picking up going forward. It is worth mentioning that eight VLCCs had exited the trading fleet this year to pursue long-term storage or other projects, so all those scrapping is minimal. This is posted for the fleet profile. Also the spread between older tonnage and scrap value have narrowed significantly, providing further justification for scraping decisions. Any period of prolonged market weakness will likely cause scrapping to accelerate. This will in turn lead to a more balanced market. With newbuilding deliveries starting to tail off after the first half of next year and a portion of the global fleet that is becoming increasingly difficult to trade, we see good reason to be optimistic. Let's move to the final slide. We believe that our performance in the third quarter highlights Frontline's competitive position in the market as well as our efficient operations. We have a positive long term outlook on the tanker market as we expected to balance as vessels are absorbed into the global fleet and older vessels retire from trading. At the same time, crude oil demand is forecasted to grow. In the meantime, we believe that periods of market weakness will create attractive opportunities to acquire assets at historically low prices. We are in a unique position to grow our fleet and continue to generate substantial returns to our shareholders in a strong tanker market and health return for the more muted markets like we saw in Q3. Our large commercial scale, low breakeven levels, active approach to time chartering and access to capital are important factors, which support our leading position in the tanker market. With that, I would like to conclude this presentation and move to your questions.

[Operator Instructions] Our first question is coming from Jon Chappell from Evercore ISI. Please go ahead. Your line is open.

Thank you. Good afternoon, guys. Robert, to start where you left off on the supply side and especially, the two-tiered market that's developing, obviously Frontline through the ship finance has been getting more to some of the 1990s built tonnage, but you still have a handful of older ships as well. What are the costs that you're looking at as you look to balance water treatment and also the sulfur regulations in 2020 and will that accelerate the scrapping or release the removal from the trading fleet of your older tonnage?

It's good to sort of give you an expect sum, but I can give you an idea and this is all the part of the calculation which in sum gets me to the conclusion that scrapping is more likely going forward. We started the year with a spread between the 98 built ship and scrapped by $12 million. That value is now in relative to straight dollar terms down to about five and you have the cost of balance water for example anywhere between two and three and half on a VLCC depending. And then at a cost of a special survey could be anything between two and five. So it's very much down to each and every ship and what the cost actually is because it's down to how much steel is required in the special survey and so forth, but definitely a dispense coming in and I think it will be a catalyst there in terms of scrapping as we go forward. For our sales there, I should say, we're getting rid of our ship finance to get rid of a few of the pre-2000. We have a few left, but looking at opportunities and our long-term aim here is to renew the fleet.

Great. And then on that point, you also mentioned in the press release that this market weakness is creating attractive opportunities. Obviously Frontline over its history has been a consolidator of the industry. So two-part question here; one as you look to modernizing the fleet and taking advantage of these opportunities, is it more of a focus on buying assets out there and kind of a one by one basis or do you think there's more company to company consolidation that's likely? And then two, as you think about financing either one of those tasks, would it be like the unsecured debt and adding more leverage to the fleet or do you think that you would want to use equity whether it's shares or ships or straight equity issuances as a way to finance?

It's good on the first part here. We're looking at the opportunities on a ship-to-ship basis or one ship deal, two ship deals, that market has been pretty unchanged over the summer. Same goes with fleets and we're looking at both for the time, the values are at historic low prices and it's interesting and it's also interesting on a company basis, but yes, we've been saying this every quarter here and the conclusion is basically we keep looking and we are confident we'll find good opportunities that will be right for Frontline.

And to your second question, I guess we do have capacity for growth in the unsecured loan facilities. So that's our focus.

Okay. Thanks Inger and Robert.

Thank you.

Our next question is coming from Magnus Fyhr from Seaport Global. Please go ahead.

Yes. Thank you. Just two quick questions, first on the time charter market, you've been doing a good job in securing some of these ships at attractive rates. Have you seen the sentiment change at all from the oil companies with rates moving up here maybe little higher than most people had expected?

Yes markets -- yes, first of all [comment, we got value which is nice], and then on the market now it's actually been quite an exciting couple of weeks maybe three, four weeks where the rates have definitely come up on the VLCCs, but the periods are relatively short. So we're probably now, people are looking at six months as the main target and then you get up to a years. There been a couple of two year deals done, but there are not many of them, but rates have come up quite nicely. They're probably up 20% in this -- during November.

Can you lock in a 12-month charter at about $30,000 a day?

Yes, you can -- and the ship you're conducting to do that.

Okay. Thank you. And second question on the LR2 segment performed very well, what's the -- how many of those are trading dirty versus clean right now?

We've put during November here, we've taken two sets dirty, two [IS cost] Aframax's or LR2s and that's always been the aim to trade them dirty. When we made that decision two three weeks ago, the spread between the two markets was almost $30,000 a day. So we definitely saw the upside and we will continue to push ships into the dirty market if we feel that is right and we're set up technically operationally to not only go dirty, but also to come back clean. So we will actually work both markets.

Okay. And just refresh my memory here on the cost of bringing them back into clean to trade them dirty.

I've done quite a few of these and from experience it's anywhere between $0 million and $1 million. So if that answer to your question, but over time it averages between $300,000 and $400,000 unless you have access to [content others].

Okay. That's it from me. Thank you.

Our next question is coming from Fotis Giannakoulis from Morgan Stanley. Please go ahead.

Yes. Hi Robert. Hi Inger. Thank you. Robert I want to ask you how much of the increase in the chartering activity and in rates over the last few weeks is attributed to the OPEC meeting and how much is seasonality because of the cold weather, the colder weather in the Northern Hemisphere? And also if you can give us an update of what is happening with congestion and what is the average speed that you see out there and how this has changed compared to the previous quarter?

On the first then the activity on the time charter, it's definitely down to the seasonality, the pickup in rates and I think very little if any is down to the OPEC meeting. So that's the first one and on the second one, in terms of congestion, then we're seeing a bit more in China, especially North Jersey the colder weather and we're also seeing some in Iraq. So it's clearly building and it's like a [indiscernible] when Q2 starts, it quickly adds up. So we expect this to grow as we expect this to grow as we go into December. As for the speed there is not been that much change. We were somewhat put down to balance speed. I think we're probably about 11.5, 12 on the balance now and the laden so the service speed is unchanged.

And I want to ask also if you can give us an overview of what this company with the shipbuilding industry and we have seen second hand values dropping. Are there buyers companies willing to place orders for 2019 and the yards able to provide attractive enough prizes to stimulate additional orders for delivery in the future?

I think it hasn’t changed that much since we spoke last year. Activity remains low in terms of number of contract signed. It's a very, very low number here not seen for many, many years. So that activity we don't expect that to pick up any time soon. If there are attractive deals in the second hand market and generally there is not many buyers out there. So the conclusion we draw from this is that this will help build a positive long-term outlook for the tanker market going into '18 and '19.

Thank you very much Robert.

Our next question is coming from Michael Webber from Wells Fargo. Please go ahead.

Hey, this is Donald stepping in for Mike. Thanks for taking my question. Just had one follow-up, we've seen a short pop in Suezmax and Aframax rates and then that in North Sea. Can you just give a little detail on what's driving that as just sort of the congestion related impact that you spoke to earlier, or is there something else that that work there?

Q3 was down to for example the -- or main reason was Atlantic production and all the Atlantic production, the West African volume or Nigeria was the main reason. So you have Nigeria come back and then you had an increase in expense both from Black Sea and the Baltic for Aframax's. Suddenly there weren’t enough Aframax around. So the Suezmax were brought in to do the Aframax expense and at the same time, the activity in Suezmax expense counters. Basically it's a volume growth that came as a surprise on that drove the market up very quickly.

Great. Well thank you for the color Robert. That's it for me.

[Operator Instructions] Our next question is coming from Herman Hildan from Clarksons Platou. Please go ahead.

Hi Robert and Inger. I have some very short and simple questions. A year from now, do you think asset values will be higher than then they are today?

I think there is a chance that asset price will start moving second half next year, but I don't think -- I don't think it's going to be a dramatic move as there is no indication of that. As a guess second half of '17 is maybe earlier, but I am quite sure, that in the medium to long term, there is certainly more upside in the prices than the rest of the downside.

Okay. So the kind of the interesting part I think is the Hemen facilities, that intended as a best on top of the low cash breakeven you have, or is it intended at the right time fully utilized for fleet growth.

Primarily it's securing capacity for further growth.

Okay. That's all for me.

Our next question is coming from Erik Stavseth from Arctic Securities. Please go ahead.

Hi guys. Couple of quick ones from me as well, Inger, could you just dissect what the debt draw down on the two Suezmax's and the Aframax vessel was in Q3 and also give us your estimate of cash breakeven for 2017?

We expect the allocation of the vessel down $109 million on the first China Exim facility in the third quarter that was for two Suezmax’s and for one LR2 tanker.

And the split will be between those two? Could you give us a split between the Suezmax’s and the Aframax?

It was approximately $38 million on Suezmax’s and approximately $33 million on LR2 tanker.

Okay.

Okay, and then we drew down assets sold from the graph, $64.6 million on one lessee on the ING facilities in the third quarter.

All right, and then on the breakeven for 2017, do you have any early guidance there?

No, I do not have any early guidance. But you still expect them to be pretty much in line with what we have had so far.

All right. Okay, that’s all from me. Thanks.

[Operator Instructions] There is currently no question over the phone sir.

Okay. Then I’d like to conclude by thanking all for calling into this presentation and I would also like to thank everyone at Frontline for their great efforts. Thank you very much.

Ladies and gentlemen, that will conclude today's conference call. Thank you very much for your participation. You may now disconnect.