Highlights
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Frontline reports a net loss attributable to the Company of $120.3 million for the second quarter of 2013, equivalent to a loss per share of $1.54.
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Frontline reports a net loss attributable to the Company of $139.0 million for the six months ended June 30, 2013, equivalent to a loss per share of $1.79.
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Frontline records a vessel impairment loss of $81.3 million in the three and six months ended June 30, 2013.
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Frontline will not pay a dividend for the second quarter of 2013.
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Frontline has issued 985,084 new shares following the launch of an ATM (“at the market”) offering in June 2013.
Second Quarter and Six Months 2013 Results
The Board of Frontline Ltd. (the “Company” or “Frontline”) announces a net loss attributable to the Company of $120.3 million in the second quarter, equivalent to a loss per share of $1.54, compared with a net loss of $18.8 million for the first quarter, equivalent to a loss per share of $0.24. The net loss attributable to the Company in the second quarter includes a gain on sale of assets and amortization of deferred gains of $0.5 million being the deferred gain relating to the sale and leaseback of DHT Eagle (ex Front Eagle). The net loss attributable to the Company in the first quarter included a gain on sale of assets and amortization of deferred gains of $9.2 million, which included a gain of $7.6 million on the termination of the charter party for the single hull VLCC, Titan Aries (Ex Edinburgh), and a deferred gain of $1.8 million relating to the sale and leaseback of the VLCC DHT Eagle.
The Company has recorded a vessel impairment loss of $81.3 million in the three and six months ended June 30, 2013. This loss relates to three vessels leased from Ship Finance (Front Century, Front Champion and Golden Victory). Impairment losses are taken when events or changes in circumstances occur that cause the Company to believe that future cash flows for an individual vessel will be less than its carrying value and not fully recoverable. In such instances an impairment charge is recognized if the estimate of the undiscounted cash flows expected to result from the use of the vessel and its eventual disposition is less than the vessel’s carrying amount.
Following the termination of the lease on the Company’s final OBO carrier, Front Guider, in the first quarter the results of the OBO carriers have been recorded as discontinued operations in accordance with U.S. generally accepted accounting principles. The Company reports a net loss from discontinued operations of $0.5 million in the second quarter compared with a net loss from discontinued operations of $0.5 million in the preceding quarter.
The average daily time charter equivalents (“TCEs”) earned in the spot and period market in the second quarter by the Company’s VLCCs and Suezmax tankers were $14,100 and $13,800, respectively, compared with $17,000 and $14,500, respectively, in the preceding quarter. The spot earnings for the Company’s double hull VLCCs and Suezmax vessels were $11,200 and $13,800, respectively, compared with $14,600 and $14,500, respectively, in the preceding quarter.
Contingent rental expense relates to the amended charter parties with Ship Finance International Limited (“Ship Finance”) and the amended charter parties for four other leased vessels and is based on the difference between the renegotiated rates and the actual TCE revenues up to the original contract rates. Contingent rental expense in the second quarter and the preceding quarter is income as the contingent rental expense relating to the four non-Ship Finance vessels is calculated quarterly on a cumulative basis over the four year period to December 31, 2015 and the accrued contingent rental expense at June 30, 2013 and March 31, 2013 was lower than the accrued contingent rental expense at December 31, 2012.
Ship operating expenses increased by $5.9 million compared with the preceding quarter due to an increase in dry docking costs.
Charter hire expenses decreased by $3.8 million compared with the preceding quarter as a result of redelivery of the chartered-in VLCC DHT Eagle on May 8, 2013. Following this redelivery, the Company no longer has any vessels chartered-in under operating leases.
Interest expense, net of capitalized interest, was $22.9 million in the second quarter of which $6.1 million relates to the Company’s subsidiary Independent Tankers Corporation Limited (“ITCL”).
Frontline announces a net loss attributable to the Company of $139.0 million for the six months ended June 30, 2013, equivalent to a loss per share of $1.79. The average daily TCEs earned in the spot and period market in the six months ended June 30, 2013 by the Company’s VLCCs and Suezmax tankers were $15,600 and $14,100, respectively, compared with $28,200 and $18,000, respectively, in the six months ended June 30, 2012. The spot earnings for the Company’s double hull VLCCs and Suezmax vessels were $12,900 and $14,100, respectively, in the six months ended June 30, 2013 compared with $28,300 and $18,000, respectively, in the six months ended June 30, 2012.
As of June 30, 2013, the Company had total cash and cash equivalents of $83.7 million and restricted cash of $75.8 million. Restricted cash includes $73.6 million relating to deposits in ITCL.
The Company estimates average total cash cost breakeven rates for the remainder of 2013 on a TCE basis for VLCCs and Suezmax tankers of approximately $25,000 and $19,000, respectively.
Fleet Development
In December 2012, the Company agreed to an early termination of the time charter out contracts on the two OBO carriers, Front Viewer and Front Guider, and received a compensation payment in December 2012 from the charterers for loss of hire due to the early termination of $35.0 million. This amount was recorded in operating revenues in 2012 and has now been recorded in the results from discontinued operations. The Company also agreed with Ship Finance to terminate the long term charter parties for these two OBO carriers. The charter party for Front Viewer terminated in December 2012 and the charter party for the Front Guider terminated in March 2013. The Company paid $23.5 million to Ship Finance as compensation for the early termination of the charters and the estimated loss of contingent rentals relating to the two vessels. The Company recorded a loss on termination of the lease for Front Viewer of $16.5 million in the fourth quarter of 2012 and a vessel impairment loss of $14.2 million on the loss on termination of the lease on Front Guider in March 2013. These losses have been recorded in the results from discontinued operations.
In January 2013, the Company terminated the charter party for the single hull VLCC Titan Aries and recognized a gain of $7.6 million in the first quarter of 2013.
In January 2013, BP Shipping gave twelve months notice of its intention to terminate the bareboat charter for the VLCC British Progress from the Company’s subsidiary ITCL. Termination will take effect on February 2, 2014.
In February 2013, the Company agreed with Ship Finance to terminate the long term charter party between the companies for the Suezmax tanker, Front Pride, and Ship Finance simultaneously sold the vessel. The termination of the charter party took place on February 15, 2013 and the Company made a net compensation payment to Ship Finance of $2.1 million for the early termination of the charter party.
In March 2013, the VLCC Ulysses (ex Phoenix Voyager) was redelivered to ITCL by Chevron and the vessel commenced trading in the spot market.
In May 2013, the Company redelivered the chartered-in VLCC DHT Eagle to its owners.
Newbuilding Program
As of June 30, 2013 the Company was committed to make newbuilding installments of $87.9 million with expected payment of $6.2 million in 2013 and $81.7 million in 2014.
Corporate
In January 2013, the Company paid $6.0 million for 1,143,000 shares in a private placement by Frontline 2012 of 59 million new ordinary shares at a subscription price of $5.25 per share. Following the private placement, the Company’s ownership in Frontline 2012 was reduced from 7.9% to 6.3%. The Company recognized a gain on the dilution of its ownership of $5.2 million in the first quarter of 2013 in “share of income (losses) from associated companies”.
In April 2013, Ms. Cecile Fredriksen and Mr. Tony Curry resigned from their positions as directors of the Company. One of the vacancies created by these departures was filled by Georgina Sousa. Mrs. Sousa joined the Company as Head of Corporate Administration in 2007. Mrs. Sousa is also a Director of Golar LNG Limited, Golden Ocean Group Limited and Frontline 2012 Ltd.
At a special general meeting of shareholders held on May 8, 2013 the Company’s shareholders approved a decrease in the par value of our ordinary shares from $2.50 to $1.00 per share effective May 14, 2013.
In June 2013, the Company announced that it has entered into an equity distribution agreement with Morgan Stanley & Co. LLC, (“Morgan Stanley”) under which Frontline may, at any time and from time to time, offer and sell new ordinary shares having aggregate sales proceeds of up to $40.0 million through Morgan Stanley in an at-the-market (“ATM”) offering.
The Company issued 655,552 new ordinary shares under that program during the month of June 2013. 78,514,054 ordinary shares were outstanding as of June 30, 2013, and the weighted average number of shares outstanding for the quarter was 77,916,110.
The Market
The market rate for a VLCC trading on a standard ‘TD3’ voyage between the Arabian Gulf and Japan in the second quarter of 2013 was WS 37, representing an increase of WS 2 points from the first quarter of 2013 and a decrease of approximately WS 18 points from the second quarter of 2012. The flat rate increased by 9.1 percent from 2012 to 2013.
The market rate for a Suezmax trading on a standard ‘TD5’ voyage between West Africa and Philadelphia in the second quarter of 2013 was WS 54, representing a decrease of WS 3.5 points from the first quarter of 2013 and a decrease of WS 18 points from the second quarter of 2012. The flat rate increased by 9.3 percent from 2012 to 2013.
Bunkers at Fujairah averaged $614/mt in the second quarter of 2013 compared to $633/mt in the first quarter of 2013. Bunker prices varied between a high of $640/mt on April 2nd and a low of $597/mt on June 28th.
The International Energy Agency’s (“IEA”) August 2013 report stated an OPEC oil production, including Iraq, of 30.8 million barrels per day (mb/d) in the second quarter of 2013. This was an increase of 0.4 mb/d compared to the first quarter of 2013.
The IEA estimates that world oil demand averaged 90.4 mb/d in the second quarter of 2013, which is an increase of 0.5 mb/d compared to the previous quarter. IEA estimates that world oil demand in 2013 will be 90.8 mb/d, representing an increase of 1.0 percent or 0.9 mb/d from 2012.
The VLCC fleet totalled 639 vessels at the end of the second quarter of 2013, up from 634 vessels at the end of the previous quarter. 10 VLCCs were delivered during the quarter, five were removed. The order book counted 57 vessels at the end of the second quarter, down 10 from the previous quarter. The current order book represents nine percent of the VLCC fleet. According to Fearnleys, the single hull fleet is 15 vessels, two less than last quarter.
The Suezmax fleet totalled 448 vessels at the end of the second quarter, up from 442 vessels at the end of the previous quarter. Six vessels were delivered during the second quarter whilst none were removed. The order book counted 39 vessels at the end of the second quarter which represents approximately eight percent of the Suezmax fleet. According to Fearnley’s, the single hull fleet stands unchanged at five vessels.
Strategy and Outlook
The Board is of the opinion that the tanker market is massively oversupplied today and that it may take some time before a reasonable market balance is restored and sustained recovery of the tanker market occurs. The Board believes that such a market balance and sustained recovery of the tanker market will be dependent on the extent of phase out of existing tonnage as well as global growth conditions.
Facing a market where tanker vessels are operated below cash cost break even rates, the Board is of the opinion that we as owners should seriously consider the investment we have to make in vessels which are more than 15 years old in order to take the vessels through special survey. Based on market rates it is likely that these investments will be unprofitable and we will be better of scrapping these vessels.
Frontline has two vessels coming up for special survey in the second part of this year. Based on no material improvement in the tanker market it is unlikely that Frontline will invest in these vessels to continue trading. If similar decisions are taken by other owners, it is likely to reduce the oversupply in the tanker market.
As of June 30, 2013 Frontline had total debt and lease obligations excluding debt linked to ITCL of 1,135 million. This is composed of approximately $851 million in lease obligations to Ship Finance, approximately $69 million in lease obligations to German KGs and $215 million in convertible bond loan. A full repayment of this debt is to a large extent dependant on a significant improvement in tanker rates in the years to come. The Company has as of June 30, 2013 no bank debt.
If the tanker market does not recover in the short term and no additional equity can be raised or assets sold there is a risk that Frontline will have insufficient cash to satisfy liquidity requirements and to repay the existing $225 million convertible bond loan at maturity in April 2015. Such a situation might force a restructuring of the Company, including modifications of charter lease obligations and debt agreements.
The Board expects that the operating result excluding gains and losses in the third quarter will be in line with the operating result in the second quarter and that the free cash position of the Company will continue to decrease.
The Board is actively monitoring the situation and looking for opportunities to restructure the balance sheet and improve the Company’s financial position.
Forward Looking Statements
This press release contains forward looking statements. These statements are based upon various assumptions, many of which are based, in turn, upon further assumptions, including Frontline management’s examination of historical operating trends. Although Frontline believes that these assumptions were reasonable when made, because assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond its control, Frontline cannot give assurance that it will achieve or accomplish these expectations, beliefs or intentions.
Important factors that, in the Company’s view, could cause actual results to differ materially from those discussed in this press release include the strength of world economies and currencies, general market conditions including fluctuations in charter hire rates and vessel values, changes in demand in the tanker market as a result of changes in OPEC’s petroleum production levels and world wide oil consumption and storage, changes in the Company’s operating expenses including bunker prices, dry-docking and insurance costs, changes in governmental rules and regulations or actions taken by regulatory authorities, potential liability from pending or future litigation, general domestic and international political conditions, potential disruption of shipping routes due to accidents or political events, and other important factors described from time to time in the reports filed by the Company with the United States Securities and Exchange Commission.
The full report is available for download in the link enclosed.
The Board of Directors
Frontline Ltd.
Hamilton, Bermuda
August 27, 2013
Questions should be directed to:
Jens Martin Jensen: Chief Executive Officer, Frontline Management AS
+47 23 11 40 99
Inger M. Klemp: Chief Financial Officer, Frontline Management AS
+47 23 11 40 76