Robert Macleod - CEO Inger Klemp - CFO

Jon Chappell - Evercore Joe Nelson - Credit Suisse Fotis Giannakoulis - Morgan Stanley Magnus Fyhr - Seaport Global

Good day, ladies and gentlemen, and welcome to the Quarter Two 2017 Frontline Ltd. Earnings 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, sir.

Thank you very much. Good morning and good afternoon. Thank you very much for dialing in. This is Frontline's earnings call for the second quarter of 2017. I will start the call by briefly going through the highlights of the quarter and the subsequent events. Following that, Inger will run us through the financials and we'll then look at Q2 earnings, and I will guide you on our Q3 earnings. We will then move on to the current market conditions, the crude tanker order book, and discuss the composition of the current operating fleet. The call will be concluded by taking your questions. Let's get started and look at the company highlights. Our earnings in the quarter were significantly reduced from the first quarter. We recorded a loss of $14.2 million or $0.08 per share adjusted for non-cash items. We had high dry-docking expenses in the quarter and we also terminated two long time charters. Our results were obviously driven by significantly lower spot earnings versus Q1. I'll come back to this in more detail. We ordered two VLCCs from Hyundai Heavy Industries. Financing has been secured for these vessels. Frontline's newbuilding program remains fully financed. We took delivery of five vessels during the second quarter and have already taken delivery of the two newbuildings we had scheduled for delivery in Q3. Our order book today stands at seven vessels, five VLCCs and two LR2s. We have so far this year terminated five long-term charters. These vessels are all expected to cease trading as conventional tankers. 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 resale and newbuilding markets. Inger, please take us through the financials in more detail.

Thanks Robert, and good morning and good afternoon ladies and gentlemen. I'd now like to move to Slide 2, financial highlights. Frontline achieved total operating revenues, net of voyage expenses of $90 million in the second quarter and reports a loss of $19 million equivalent to $0.11 per share. The loss was primarily due to $7.8 million in dry-docking expenses during the quarter and a $12.2 million loss on termination of two long-term charters. In the second quarter, we recorded certain non-cash items. These non-cash items consisted of a loss on the termination of these long term charters of Front Scilla and Front Brabant, net of termination payment due of $2.1 million and a loss on derivatives of $3.1 million. After adjusting for these non-cash items, we show adjusted EBITDA of $37 million and adjusted net loss from operation of $14 million in the second quarter, equivalent to $0.08 per share. The company generated net income attributable to the company of $7.6 million, or $0.04 per share for the six months ended June 30, 2017. The net income attributable to the company adjusted for certain non-cash items was $13.6 million or $0.08 per share for the six months period. Moving then to Slide 3, income statements. As mentioned, Frontline achieved [ph] net loss adjusted for certain non-cash items in the second quarter of $14 million against a net income of $28 million in the first quarter. The decrease in the results of operation in the second quarter of $42 million is mainly due to decrease in result on time charter basis of $32 million due to the decrease in time charter rates in the second quarter compared to the first quarter. Increase in lease termination payments of $10.1 million, increasing contingent rental income by $4.9 million, in the first quarter we included contingent rental income of $3.8 million and the second quarter income of $8.7 million. The contingent rental income in the second quarter is due to the fact that the actual profit share to Ship Finance was zero and then $8.7 million less than the amount accrued in the lease obligations payable when the leases recorded fair value at the time of merger of Frontline with Frontline 2012. Also we had increase in running expenses of $6.9 million, primarily due to the dry-docking of five vessels and delivery of five new vessels in the second quarter. Also we had a decrease in charter hired expense of $4.8 million due to the effect of redelivery of vessels on time charter, and we had an increase in other expenses of $2.9 million. Moving down to Slide 4, balance sheet. The changes to the balance sheet ended June 30 from end of March 31, our total increase in balance sheet value of approximately $71 million. The changes in assets mainly relate to a decrease in marketable securities with $18 million due to the sale of DHT shares in the second quarter, a decrease in newbuildings with $117 million, an increase in vessels by $274 million due to delivery of prior vessels in the quarter offset by $18.3 million of depreciation, a decrease in vessels on a capital lease of $60 million due to termination of two leases and depreciation, and a decrease in other long-term assets by $3 million. Total liabilities are up with $120 million, which mainly relates to other current liabilities decreased by $38 million, due to the accrual for two newbuilding installments on two new ordered newbuildings in the first quarter, drawdown loans of $230 million, ordinary loan repayments of $19.5 million, and a reduction in obligations on the capital lease with $64 million due to termination of leases on two vessels and ordinary repayments. Equity has decreased by $49 million, mainly due to payment of $25.5 million in dividend and lossses in the quarter. Moving then to Slide 5, cash breakeven rates and OpEx. We estimate the average cash cost breakeven rates for the remainder of 2017 of approximately $21,600 per day for the VLCCs, $17,500 per day for the Suezmax tankers, and $16,700 per day for LR2 tankers. These rates are all-in daily rates as our owned and leased vessels must earn to cover budgeted operating costs and dry docks, estimated 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-term debt amortization profile and low interest costs on new and existing debt. Every $1,000 per day lower cash breakeven rates means approximately $20 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 second quarter was $13,100 for VLCCs, $7,300 for Suezmax tankers, and $7,000 for LR2 tankers. The higher VLCC OpEx per day this quarter is due to the $7.8 million in dry-docking expense during the quarter for five VLCCs. In the third quarter, no vessels are scheduled for dry-docking. With this, I'll leave the word to Robert again.

Thank you very much, Inger. Let's turn to Slide 6 please, and we’ll have look at the Q2 performance. The quarter generated relatively poor spot market returns which was not unexpected given market conditions. In the VLCC segments, the earnings spread between modern and ships over 15 years was evident with the spread of more than $5,000 a day and the spread has widened further on the Q3 days booked so far. In the Suezmax segments, we operate only modern ships after having gone through a complete fleet renewal. The lost actions through disposing of our 1997 and 1998 built ships in Q2 and early Q3. In the Aframax segments, we also have a fleet of modern vessels only are obvious own ship being built in 2014. Renewing the VLCC fleet remains Frontline's focus. The combined spot and time charter earnings for the quarter were 23.8 on VLCCs, 16.4 on Suezmaxes, and 18.1 on our LR2s. For Q3 we have locked in 62% of our VLCC trading days at $16,800. Looking at our modern lease only the number is around $20,000. On the Suezmaxes we have fixed 63% of our trading days at $17,500. On the LR2s the number is about $15.7 million and 77% is covered. Let's move to the current market please on Slide 7. The growth in crude tanker tonne-mile demand suggests that the current tanker market is not suffering from weak demand growth. The demand growth equates to around 500 million barrels of oil per year, one VLCC transports around 10 million barrels a year. It seems clear that the fleet supply growth that has secured over the last 18 months is the course of the weak market. The market was resilient all the way through to Q1 this year but we’re now at spot levels last seen three years ago. The global oil market is balancing as global inventories decline the current pain should be a gain for the tanker industry further out. Demand for crude oil remains robust and import volumes into Asia especially India and China continues to grow. The Middle Eastern exports are expected to increase as local demand slows and the Northern Hemisphere prepares for winter. A seasonal improvement as we approach the last quarter of 2017 is expected. Please now move to Slide 8, and we’ll have a look at the tanker order book. Newbuilding deliveries accelerated in 2016. 47 VLCCs and 26 Suezmaxes were delivered and we have had about 35 vessels deliver in each segment so far this year. We expect vessel scrapping to pickup as we progress through 2017. So far this year, only seven VLCCs and eight Suezmaxes have been scrapped. 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. 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 delivery in 2018 and 2019, but it is scrapping that will determine the long-term outlook for tankers. We believe it will outnumber new deliveries. It also looks likely to us that many options will not be declared. We therefore believe that the market will begin to tighten in 2018 as vessels are retired from the global fleet and oil demand continues to grow. Let's move to Slide 9 and look at how the current fleet is dissected. Despite current market weakness, I continue to believe that the market will begin to improve in 2018 as deliveries of new vessels slows and as I said the scrapping picks up and vessels are retired. There are about 91 VLCCs built in 2000 or earlier that continue to operate. This is roughly equal to the current VLCC order book of 99 vessels. At some point in time, these older vessels will permanently exit. Current market conditions coupled with rapidly approaching environmental relations should serve as a powerful catalyst for many owners. Combined this with a still difficult financing environment for many owners, it is difficult to imagine a scenario where the market does not begin to tighten. Let's move to the last slide please, the summary. Over the last several quarters we have divested of older less economical VLCCs and Suezmax tankers and have remained focused on acquiring high-quality modern VLCCs at attractive prices. In the process we have lowered the average age of our fleet from just over eight years to below six years. Next several quarters may present challenges as vessel supply continues to increase but we will be very well positioned when the market recovers. We expect the near term pressure on crude tanker rates to continue, but believe that the market will ultimately return to balance, likely in 2018 as I just mentioned. Over the long-term, we expect our strategy to result in significant cash flow which we intend to return to our shareholders as Frontline has done throughout its history. With that, I would like to turn over for questions please.

Thank you very much Mr. Macleod. [Operator Instructions] And now we’ll take our first question from Jon Chappell from Evercore. Please go ahead.

Robert, I want to ask you about one of the updates in the press release, vis-à-vis your expansion plan. So you decided not to exercise the option on the two VLCC newbuildings, and those options have lapsed. Is that a call on kind of asset prices? Going forward, do you think that this market weakness will continue to pressure asset values and you have better opportunities in the secondhand market?

Yes, got it, yes, you just answered the question that is we think – in the secondhand market there will be some opportunities come up, and with the weakness there in the market that will get people – we’ll get these -- these opportunities will come sooner rather than later, so rather than waiting and we placed the orders we have and we decided not to take the options.

And then as it relates to being able to finance acquisitions, obviously you just announced new credit facilities in the second quarter, and you seemed like you’re pretty fully funded for the newbuilding program and even a little bit of excess. I noticed also you drew $50 million from the Hemen loan - can you just explain that it didn't necessarily seem necessary given your cash outflows and your cash balance, and that's a pretty expensive debt. What was the reason for the drawdown in that, and will that be paid back promptly with the new credit facilities?

Yes, the reason out of it, we intend in a way to – or always have been intended that we will use the facility from time-to-time when we have a cash need and that we have during this quarter. So that's the reason why we did that.

But kind of post quarter and the new credit facilities, do you have the liquidity now to prepay that to lower the cost of debt?

No, we are not going to - although we have not in medium term to repay that but we will of course repay it when we have the cash position to do that.

Final thing, it seems like the shares for ships has not been successful thus far as far as opportunities earlier this year and now with the entire group under pressure, maybe shares for ships isn't the ideal situation for sellers either. What's your liquidity firepower? Is it strictly the remaining $225 million on the Hemen facility or do you have other liquidity above and beyond that you would use to acquire secondhand ships?

That is what in place at the moment, but we have the support of our main shareholder, John Fredriksen. He is in a very good position in terms of cash and he is a very strong supporter of Frontline, and I have absolutely no doubt that he will continue to be so.

Our next question today comes from Gregory Lewis from Credit Suisse. Please go ahead.

It's actually Joe Nelson on for Greg today. Just a couple from me Robert, you kind of walked through some of the age of the fleet and you did mention we’re seeing some - or we will see some upcoming environmental regulations. I'm just kind of curious what's your take on how you know the industry is going to manage some of these capital outlays which could be substantial and then second part of that is how do you view Frontline - how is Frontline positioned for some of these upcoming changes?

In term of 2020 with scrubbers, that's something we’re going through now and we will give ourselves time here to conclude but from what we're seeing, it's pointing towards the scrubbers will be required but the prices are coming down. So it's something that we not in Frontline but as a group we are watching this very closely and we'll plan accordingly.

And then maybe just kind of corollary to that - are any of these environmental requirements kind of making their way into financing transactions if you're an owner may saying needing to come up on a refinancing facility. Are you seeing banks and other lenders making sure dot in the eyes and making requirements part of their willingness to say lend?

We have not experienced that.

[Operator Instructions] And our next question today comes from Fotis Giannakoulis from Morgan Stanley. Please go ahead.

I want to ask you about, how do you see the volume that is coming out of the Middle East? Have you seen any notable changes in flows, is it this weakness in the market just a result of additional vessel supply or the results of decline in flows?

No, I think looking at the Middle East I would say, those are the costs, but there is also the summer season where local demand is at its peak. So combined that then we have the present situation, so and this is why -- one of the reason why we expect the market to pick up season here is to - the exports will increase due to the less local demand.

I want to ask you about your long-term outlook, obviously this is a very challenging market and you have decided not to exercise these options. But I’m wondering if you expect asset values to come further down where you’re already at a historical low levels and if you’re holding your acquisition power for future acquisitions at more attractive prices?

No, I think now with the development of the market, I think in terms of the values I don't think they’re going to come much down. I think it's now all about the overall balance of the tanker fleet. So the way I view the fleet now in terms I said earlier, oil demand is strong, volumes are increasing. So that part and demand looks to me to stay strong with Asia driving it. So to me it's all down to how the fleet or the tanker fleet the numbers develop. And looking at scrapping, we've had very less to last few years but I cannot see any other scenario that we will have the scrapping pick up and pick up a lot. If you go back a year than a 17-year old ship where scrapping was worth I’ll say about 12 plus/minus a million bucks and then the value of the ship in the secondhand market was in the low 20s. So the margin on a 17-year old ship between scrap value and secondhand value was in the region of $10 million. That has gone down to anywhere between zero and $3 million, let’s call it $2 million. You combine that gap coming in like it has and you combine that with the weak spot market. Then I think you've got the perfect catalyst for scrapping to pick up and I think the pain we’re going through now is what we’ll rebalance the fleet and we do need scrapping. We need the old ships to disappear for the rebalance otherwise we’ll be something around in the lower earnings, we’ll still be out of volatility, we’re not going to stay at the levels we are now, but it will not be anywhere close to the average as we had through 2015 and 2016.

Obviously scrapping is one positive catalyst, positive driver for the market and you have done your fair amount of per share into that. But I want to ask about the demand picks, you mentioned about the Asian demand keeps growing. How important is Asian demand and the increase in OPEC production that will drive versus the trading activity and the fact that probably the low oil prices they deter a number of trader from buying crude and moving it around and that has also some impact on demand for shipping?

I think on demand side, yes you said that Asia is the driver, I don’t have the percentage sort of in regions in front of me here. So but on overall we’re talking about 1.3 million barrels this year which also is a very helpful but when it comes to trading, on the crude trading we’ll see it’s an important factor, but it's more important on the product side. So we obviously have our fleet of modern LR2s and increased trading is really what you want to kickoff of the earnings. So that's a guess but yes you get the volatility back and you get more volumes trading that is obviously positive.

One last from me, I want you to ask about how is the competitive landscape? Earlier this year you made an effort to expand but didn’t find a positive response. But I'm wondering if there are fleets out there either private equity controlled or private owners that they might be willing to sell or they might be forced to sell. I'm just trying to understand what is the competition out there?

There is not really any big changes. In terms of the banks we’re not seeing big opportunity - any significant opportunities but I’d say I think this will come and probably soon or rather than later as the spot market stays as weak as it is now.

Thank you very much Robert.

Well thank you Fotis and I look forward this is first time on my watch that you don’t start with congratulating us with a strong quarter, so I’m looking forward to having that comment again, hopefully soon.

I'll hold it for the next quarter.

[Operator Instructions] We have another question from Magnus Fyhr from Seaport Global. Please go ahead.

Just a question on the book - the fixtures for the third quarter it looks like the LR2s and the Suezmaxes were a little bit higher than expected. Can you give some color on that why those numbers were higher?

They are higher we have included the time charters in that rate, so the time charters are just below the box where those numbers are then they specify what time charter are included. When it comes these - there is virtually no - that is the spot number you’re seeing, so yes that's where we are.

And do you see anything - I mean it's early to tell now by what’s going on Houston, we’re seeing it firsthand here but a lot of dislocation of the refinery outages are you seeing any developments here on the LR2s and maybe bringing products into Houston?

No, at this stage when it comes, I think we're right in the middle of disaster, so I wouldn’t comment too much on it to be honest.

Thank you very much. We have no further questions at this time. So I’d like to turn back over to you for any closing remarks. Thank you.

Thank you. I would like thank everyone at Frontline for their great efforts. And thank you all for calling into this presentation. All the best.

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