Frontline posts preliminary Q4 loss of US$11.8M versus earnings of US$12.3M in prior quarter; results includes non-operating losses of US$5.2M related to loss of US$9.4M from market price adjustment of Overseas Shipholding Group shares
Alison Gallant
HAMILTON, Bermuda
,
February 23, 2011
(press release)
–
Preliminary Fourth Quarter and Financial Year 2010 Results
The Board of Frontline Ltd. (the "Company" or "Frontline") announces a net loss attributable to the Company of $11.8 million for the fourth quarter of 2010, equivalent to a loss per share of $0.15, compared with net income attributable to the Company of $12.3 million and earnings per share of $0.16 for the preceding quarter. The loss attributable to the Company in the fourth quarter includes non-operating losses of $5.2 million, which mainly relates to a loss of $9.4 million following a market price adjustment of shares owned in Overseas Shipholding Group Inc. ("OSG") partially offset by a gain of $3.6 million (before minority interest) in Independent Tankers Corporation Limited ("ITCL") arising on the termination of a funding agreement. The loss attributable to the Company in the fourth quarter also includes a gain of $4.6 million relating to the amortization of a deferred gain on three lease terminations. Net operating income in the fourth quarter was $29.3 million compared with $48.4 million in the preceding quarter. Net operating income and net income attributable to the Company decreased primarily as a result of the weaker spot market.
The average daily time charter equivalents ("TCEs") earned in the spot and period market in the fourth quarter by the Company's VLCCs, Suezmax tankers and Suezmax OBO carriers were $24,700 (including single hull VLCCs), $16,500 and $45,100, respectively, compared with $29,800, $18,200, and $48,600, respectively, in the preceding quarter. The spot earnings for the Company's double hull VLCCs and Suezmax vessels were $22,600 and $15,200, respectively, in the fourth quarter compared with $30,000 and $15,700, respectively, in the third quarter. The Gemini Suezmax pool had spot net earnings of $14,600 per day in the fourth quarter compared with $17,500 per day in the third quarter. The Company's double hull VLCCs, excluding the spot index related time charter vessels, had spot earnings of $23,300 per day in the fourth quarter compared with $30,200 in the third quarter.
Profit share expense of $2.0 million has been recorded in the fourth quarter as a result of the profit sharing agreement with Ship Finance International Limited ("Ship Finance") compared to $5.8 million in the preceding quarter reflecting the lower TCEs. The total profit share expense to Ship Finance for 2010, which will be paid in the first quarter of 2011, was $30.6 million.
Ship operating expenses increased by $4.0 million compared with the preceding quarter mainly due to an increase in dry docking costs of $3.3 million. Frontline drydocked three vessels in the fourth quarter and two vessels in the third quarter. Charter hire expenses decreased by $2.9 million in the fourth quarter compared with the preceding quarter primarily due to a period of off hire for one vessel due to a dry docking and a decrease in loss making voyage provisions from the previous quarter.
Interest income was $2.7 million in the fourth quarter, of which $2.6 million relates to restricted deposits held by subsidiaries reported in ITCL. Interest expense, net of capitalized interest, was $37.7 million in the fourth quarter of which $7.5 million relates to ITCL.
Frontline announces net income attributable to the Company of $161.4 million for the year ended December 31, 2010, equivalent to earnings per share of $2.07. The average daily TCEs earned in the spot and period market in the year ended December 31, 2010 by the Company's VLCCs, Suezmax tankers and Suezmax OBO carriers were $35,900, $25,800 and $47,400, respectively, compared with $38,300, $25,300 and $43,000, respectively, for the year ended December 31, 2009. The spot earnings for the Company's double hull VLCCs and Suezmax vessels were $36,800 and $24,300, respectively, in the year ended December 31, 2010. The Company's double hull VLCCs excluding the spot index related time charter vessels had spot earnings of $38,100 per day and the Gemini Suezmax pool had spot net earnings of $24,900 per day in the year ended December 31, 2010.
As of December 31, 2010, the Company had total cash and cash equivalents of $176.6 million and restricted cash of $244.1 million. Restricted cash includes $181.6 million relating to deposits in ITCL and $62.0 million in Frontline, which is restricted under the charter agreements with Ship Finance.
In February 2011, the Company has average total cash cost breakeven rates for 2011 on a TCE basis for VLCCs and Suezmax tankers of approximately $30,100 and $24,500, respectively.
Fleet Development
In November 2010, Frontline extended the time-charter in agreements of Front Chief, Front Commander and Front Crown (all 1999-built double hull VLCCs), for one year from January 2011 at $26,500 per day per vessel.
In January 2011, Frontline sold its 2006-built VLCC Front Shanghai. The net sale proceeds were $91.24 million and after repayment of debt the sale generated $31.5 million in cash. Frontline has in connection with the sale agreed to charter back the vessel from the new owner. The duration of the time charter is approximately two years at a rate of $35,000 per day. Delivery to the new owners and commencement of the time charter took place on January 26, 2011. The Company expects to record a gain of approximately $6.2 million on delivery of the vessel. In addition, a gain of $15.2 million will be recognized on a straight line basis over the period of the time charter.
In January 2011, the chartered-in VLCC Desh Ujaala was re-delivered to the owners.
In February 2011, Frontline agreed with Ship Finance to terminate the long term charter parties between the companies for the single hull VLCCs Front Highness and Front Ace and Ship Finance has simultaneously sold the vessels to unrelated third parties. The termination of the charters is expected to take place in March 2011. Ship Finance will make a compensation payment to Frontline of approximately $5.8 million for the early termination of the charters, which will be recorded in the first quarter of 2011.
Newbuilding Program
As of December 31, 2010, Frontline's newbuilding program comprised two Suezmax tankers and five VLCCs, which constitute a contractual cost of $650 million. Installments of $198.5 million have been made on the newbuildings and the remaining installments to be paid as of December 31, 2010 amount to $451.5 million, with expected payments of approximately $106.9 million in 2011, $168.9 million in 2012 and $175.7 million in 2013.
In November 2010, the Company secured pre- and post-delivery financing in the amount of $147 million representing 70 percent of the contract price for the first two VLCCs to be delivered in 2012.
For the three remaining VLCCs and the two Suezmax tanker newbuildings to be delivered between late 2012 and 2013, the Company has not yet established pre- and post-delivery financing. Based on the recently secured financing for the VLCCs we assume a 70 percent financing of current market values for these newbuildings. On this basis, Frontline has already paid the equity investment and the remaining newbuilding installments will be fully financed by bank debt.
Corporate
In October 2010, Frontline sold the 15.8 percent stake in Navig8 Limited and received net proceeds of $19.8 million.
In January 2011, Frontline sold all its shares in OSG. The sale generated approximately $46.5 million in cash and the Company expects to record a loss of approximately $3.3 million in the first quarter of 2011 in addition to a loss of $9.4 million recorded in the fourth quarter of 2010 following a market price adjustment of the shares. The Board is very disappointed with the performance of this investment and also with the way OSG has developed since the investment in 2008. The management of OSG has never opened for real discussions about consolidation between Frontline and OSG. The decision to sell the shares was taken after thorough evaluation of OSG's debt situation, mainly focusing on OSG's sustainability and financing needs in case of a continued weak freight market.
In February 2011, Frixos Savvides has for personal reasons decided to step down from the Board. The Board will look for a replacement of Mr. Savvides.
On February 21, 2011, the Company's Board of Directors declared a dividend of $0.10 per share. The record date for the dividend is March 9, 2011, ex dividend date is March 7, 2011 and the dividend will be paid on or about March 23, 2011.
77,858,502 ordinary shares were outstanding as of December 31, 2010, and the weighted average number of shares outstanding for the quarter was 77,858,502.
The Market
The market rate for a VLCC trading on a standard 'TD3' voyage between The Arabian Gulf and Japan in the fourth quarter of 2010 was WS 58; equivalent to $15,600/day; representing an increase of approximately WS 6 points or $2,400/day from the third quarter of 2010 and an increase of WS 10 points from the fourth quarter of 2009. Present market indications are approximately $22,000/day for the first quarter of 2011.
The market rate for a Suezmax trading on a standard 'TD5' voyage between West Africa and Philadelphia in the fourth quarter of 2010 was WS 93; equivalent to approximately $21,700/day compared to approximately $14,000/day in the third quarter. There was an increase of about WS 18 points from the third quarter 2010 and an increase of WS 23 points from the fourth quarter of 2009. Present market indications are approximately $15,000/day in the first quarter of 2011.
Fujairah bunker prices averaged $488/mt in the fourth quarter of 2010 compared to $444.5/mt in the third quarter of 2010; an increase of approximately $44/mt. Bunker prices varied from a low of $462/mt mid October and a high of $512/mt at the end of December. On February 18, 2011, the quoted bunker price in Fujairah was 627/mt.
Philadelphia bunker prices averaged $503.5/mt in the fourth quarter, which was an increase of $39/mt from the third quarter of 2010. Bunker prices varied from a low of $475.5/mt at the end of October and a high of $527.5/mt at the end of December. On February 18, 2011, the quoted bunker price in Philadelphia was 600/mt.
The International Energy Agency's ("IEA") February 2011 report stated an average OPEC oil production, including Iraq, of 29.46 million barrels per day (mb/d) during the fourth quarter of the year. This was an increase of 190,000 barrels per day compared to the third quarter of 2010, and an increase of 500,000 barrels per day compared to the fourth quarter of 2009.
IEA further estimates that world oil demand averaged 89.3 mb/d in the fourth quarter of 2010, representing an increase of approximately 680,000 barrels per day compared to the third quarter of 2010, and approximately 3.4 mb/d from the fourth quarter of 2009. Additionally, the IEA estimates that world oil demand will average approximately 89.3 mb/d in 2011 representing an increase of 1.7 percent or approximately 1.5 mb/d from 2010.
The VLCC fleet totalled 547 vessels at the end of the fourth quarter of 2010, up from 539 vessels at the end of the previous quarter. 11 VLCCs were delivered during the quarter versus an estimated 17 at the beginning of the year. 54 vessels were delivered in 2010 versus an estimate of 67 deliveries, representing 19 percent slippage, and throughout 2011 the current estimate is 79 deliveries. The orderbook counted 185 vessels at the end of the fourth quarter, down from 189 orders from the previous quarter. Seven new orders were placed during the quarter and the current orderbook represents approximately 34 percent of the VLCC fleet. During the quarter three vessels were removed from the trading fleet for scrapping or conversion/storage purposes. According to Fearnleys the single hull fleet now stands at 43 vessels.
The Suezmax fleet totalled 409 vessels at the end of the fourth quarter, up from 405 vessels at the end of the previous quarter. Six vessels were delivered during the quarter versus an estimated 17 at the beginning of the year. 37 vessels were delivered in 2010 versus an estimate of 61 deliveries, representing 39 percent slippage, and throughout 2011 the current estimate is 63 deliveries. The orderbook counted 146 vessels at the end of the quarter, down from 151 vessels at the end of the previous quarter. Two new orders were placed during the quarter and the current orderbook now represents 36 percent of the total fleet. During the quarter one newbuilding contract was cancelled two more vessels were removed from the trading fleet. According to Fearnleys the single hull fleet now stands at 14 vessels.
Strategy
We focus on maintaining our position as the leading operator of VLCC and Suezmax tankers. By following a strategy of maintaining a certain fixed charter coverage percentage for the double hull vessels, full fixed charter coverage for our single hull vessels and a high fixed charter coverage percentage for the OBO vessels, we provide downside protection in a weak tanker market as well as preserving upside opportunities from the spot trading vessels in a strong tanker market.
We maintain a lean organization and use outsourcing extensively to keep a low cost basis and low cash cost breakeven rates. We emphasize maintaining high financial flexibility and a strong balance sheet and are always looking for enhancing shareholder value and maintaining a high quarterly dividend payout ratio.
Outlook
IEA estimated in the February 2011 report that the global oil demand increased by 680,000 b/d or 0.8 percent in the fourth quarter compared to the third quarter. At the same time the tanker market experienced a higher growth in fleet supply due to a high number of newbuilding deliveries and henceforth the depressed tanker rates experienced in the third quarter also continued in the fourth quarter. This development has also continued so far in the first quarter of 2011, however with some improved trend in the VLCC market.
The International Monetary Fund forecasts world growth to rise by approximately 5.0 percent in 2010 and 4.4 percent in 2011, and the IEA projects an increase in world's oil consumption in 2011 by 1.5 mb/d, compared to 2010, which indicates strong long term oil demand.
The newbuilding orderbook includes a high number of expected vessel deliveries in 2011 and 2012. However, the actual deliveries in 2010 have been significantly lower than anticipated with 19 percent slippage in the VLCC segment and 39 percent in the Suezmax segment and this development is likely to be further strengthened by the expected delays, slippage and cancellations of newbuilding orders going forward. This combined with slow steaming, increased ton-mile scenario and stricter oil major requirements could create a more positive fleet utilization for both the VLCC and Suezmax tanker segments going forward.
In 2010, Frontline secured approximately $640 million in new capital, committed new bank financing and release of restricted cash. The Company also re-negotiated the newbuilding program and managed to reduce the program in 2009 and 2010 with net $476 million. Furthermore, sale of vessels and shares in 2011, have generated additional $84 million in cash after repayment of debt.
The Company's newbuilding program contributes to renew the fleet and the vessels will be delivered in the period 2012 to 2013. Assuming 70 percent debt financing of current market values, Frontline has already paid the equity investment and the remaining newbuilding instalments will be fully financed by bank debt.
The Board is not satisfied with reported earnings for the quarter. The poor earnings are mainly a reflection of the weak global freight market. This weakness might continue until the current large gap between supply and demand in the tanker market narrows. Based on the Company's trading results achieved so far in the first quarter, the Board expects the weak trend in the fourth quarter results to be extended into the first quarter.
Frontline will in case of a continued challenging market situation focus on having financial flexibility and a healthy balance sheet. Through such a strategy the Company will be better positioned than peers to tolerate a prolonged weak trend in the tanker market and be able to react to attractive market opportunities that may occur.
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