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Executives

Jens Martin Jensen - Acting Chief Executive Officer

Inger M. Klemp - Chief Financial Officer

Analysts

Jonathan Chappell - JPMorgan

Anders Rosenlund - ABG Sundal Collier

Frontline Limited (FRO) Q4 2008 Earnings Call February 26, 2009 9:00 AM ET

Jens Martin Jensen

Good afternoon everybody listening in. Welcome to Frontline Q4 Presentation.

The agenda for this presentation will be that our CFO Inger Klemp will go through the major transactions and highlights in Q4, then after a financial review, some information regarding our newbuilding program. And after that, myself will be talking little bit about the market, and the way we see things going forward. And after that, there should be time for some questions and answers.

So Inger, if you could start.

Inger M. Klemp

Thanks Jens.

I would guide you quickly through the major transactions and the financial highlights in the fourth quarter of 2008 together with a run through of the newbuilding program.

Moving down to slide 4; in December 2008, Frontline and Teekey agreed to expand the Gemini Suezmax Pool, and that was bringing the number of vessel into that pool to 36 vessels. To manage the larger fleet and establish chartering presence in Europe to supplement its existing Stanford, Connecticut operation, Gemini has opened an office in Oslo as well in Norway.

In addition to the Jensen's plan, Teekey to an extend (ph) is participated in the pool. And for Frontline, we expect that this would improve utilization of our fleet and to reduce the cost basis by entering a large pool.

In January 2009, in which we've delivered the first newbuilding Front Kathrine from Shanghai and Waigaoqiao ship yard, and that was more than two months ahead of contract delivery dates.

In Q4 2008 and Q1 2009, we have done a number of time charter out agreement, and we have increased on our fixed contract revenues. First of all, we did in November 2008 two contracts, one for Front Energy and one for Front Champion; first for three years and second one for one year; both were delivered in November.

Then we did a contract for Front Brabant, three years period commencement in January 2009. And in the first quarter 2009, we further did contracts for Genmar Phoenix and Genmar Harriet G, both Suezmax tankers, which was then chartered out to Shell for balance of period of existing charters. And in early December, we delivered costs to relate (ph) after total length of the charter pat both at 3.5 years.

Moving to slide 5, and Frontline reported net income of approximately $52 million, equivalent to earnings of $0.66 in the fourth quarter 2008. Net income includes then a loss of $28.4 million mainly related to a loss of $27.5 million forcing a price adjustment of shares in overseas Shipholding Group.

At the 31st of December 2008, the overseas share price is significantly lower than it was when being acquired the shares. And therefore in accordance with prevailing U.S. general accepted accounting principles, we decided to write down the value of these financial assets at the year end 2008. And then charge $27.5 million to the fourth quarter 2008 income statement.

Then the next income excluding this loss was approximately $80 million in the fourth quarter, equivalent to earnings of $1.03. On this basis, we announced a dividend of $0.25 for the fourth quarter. Frontline reported annual 2008 net income of 699 million equivalent earnings per share of $9.15. This is the second best year for Frontline; only the golden year of 2004 was better.

Moving down to slide 6, net income excluding gain is 57 million lower than in the third quarter of 2008. The decrease can mainly be experienced first of all by reduction in time charter equivalents in the fourth quarter compared to the third quarter. At the same time, on high days increase in the fourth quarter and being down the net effect of this to a reduction in income on time charter basis of $90 million.

The profit sharing payable to ship finance has decreased in the quarter with $13 million. Ship operating expenses decreased by $13.3 million compared with the third quarter, mainly as a consequence of less drydocking, but also as a general cost decrease.

Charterhire expenses have decreased by $12.million in the fourth quarter compared with the third quarter of which $12 million is a reduction relating to the successful chartered in from Nordic American Tankers. A further $2.8 million reduction is applicable to the two vessels chartered in from Knightsbridge Tankers under a profit sharing arrangement.

And this is offset by an increase in charterhire expense of five Suezmax vessels chartered in. And this increase is due to full chart in the fourth quarter for these vessels. Rest of the items is more or less minor changes.

Income on time charter basis, slide 7, VLCC fleets earned in the spot market approximately $60,000 a day for double and 33,500 per day for single, giving an average of 58,500 per day. And then for the whole fleet including the vessels on the coverage, we have 54,100 per day.

Earnings for single relates only to one vessel and that was Front Voyageur (ph). The Suezmax fleet earned in the spot market approximately 43,400 for double and 12,000 for the single vessels with an average spot earning of $42,000 a day. The average for the whole fleet was about 41,900 a day, and the earnings for the single relate to only vessel, which was the Front Voyageur.

The OBOs earned 42,800 per day in the quarter.

These timer charter equivalent number show that Frontline this quarter has stayed in line with the competitors that have released their numbers in the fourth quarter 2008. VLCC vessels are not included in these numbers.

Moving down to slide 8: ship operating expenses and off hire. We have drydocked three vessels in the fourth quarter 2008, which is five less than in the third quarter 2008. As you can see from the slide, we have average OpEx for the fleet of approximately $12,000 per day in the fourth quarter that is in comparison with approximately 13,500 per day in the third quarter.

Main reason for the decrease in OpEx is less drydockings in the quarter that's what it's representing $674 per day, but also as a consequence of lower running cost. The number over five days in the fourth quarter has also decreased again due to the less drydockings in the quarter.

The average OpEx for the fleet in 2008 is 11,300 per day compared to 9,600 per day in 2007. And we expect to drydock three vessels in the first quarter of 2009.

Moving down to slide 9, the balance sheet: Total balance sheet is approximately 120 million lower than in the third quarter 2008, main items have changed. Cash is lower than in the third quarter mainly as a consequence of that we have prepaid profit share of $60 million of Ship finance in the quarter. We did this to receive the best return and of course we had excess cash.

Book values revenue building have increased with installments paid in the quarter and vessels and equipment having decreased as a consequence of depreciation in the quarter.

Short-term portion or long-term debt, our long-term debt is in line with the third quarter due to draw down on new debt estimated out with the repayments for that. Other current liabilities are reduced mainly as a consequence of the prepayment on the profit sharing district finance (ph).

Minority interest is booked with 7 million related to the 17.5% united sales, not owned by Frontline. Equity has increased in the quarter with the difference between net income and dividend paid in the quarter. Lastly, sale is included in the balance sheet with a total of 633 million of debt and obligations on the capital lease. Debt related to three of the CapEx-received (ph) vessels are not consolidated in the balance sheet with $67 million.

Moving down to slide 10, cash cost break-even rates. The cash cost breakeven rates are approximately to 32,100 per day for VLCCs, 25,200 per day for Suezmax, and 27.400 per day for OBOs.

The cash cost breakeven rates have decreased for VLCCs from the previous quarter, mainly due to less drydockings budgeted in 2009. The cash cost breakeven rates for the OBOs had an increased due to roughly planted drydock six of the OBOs in 2009.

The cash cost breakeven rates does not allow for the contract coverage the company has, and assuming that the contract coverage is used to subsidize the spot vessels we will need to lower breakeven base for top vessels.

Moving then to slide 12 and 13; we have nine VLCC newbuilding contracts, and eight Suezmax newbuilding contracts after we just delivered our first VLCC newbuilding in January of 2008.

The total contract cost on the newbuilding program is approximately $1.8 billion. So far, we have paid $428 million, which is up from $393 million at the end of the third quarter. Remaining installments to be paid for newbuildings amounted $1.4 million. We expect the payment scheduled to be 350 million in 2009, 621 in 2010, 342 in 2011, and 64 million in 2012.

As previously informed, the company have established a long-term pre and post-delivery refinancing of 420 million. Financing 80% of the contract price for the first two VLCCs from Waigaoqiao and first four Suezmax tankers from Rongsheng.

As for the end of fourth quarter 2008, we have drawn $138 million from that facility, and expect to do a further $224 million in 2009, and the remaining in 2010.

Further, we have established short-term pre-delivery financing of $129.6 million, financing 80% of the contract price, first installment on the six Jinhaiwan vessels. This facility is maturing in June 2009.

Indications on obtainable financing in today's credit markets for unfinanced newbuilding contracts are minimum $60 million for VLCC, and $45 million for Suezmax. With the contract with us, we have the banks lately indicate that that could be somewhat conservative.

Moving then, and going down to the graph on slide 13. In this graph, we have shown the installments to be paid on the newbuilding contracts in the different years, in the light blue columns. In 2009, we have also included the repayment of the short-term pre delivery financing or the $129.6 million.

The dark blue column includes the established financing. The estimated financing obtainable from the newbuilding contracts, not yet financed. And the fixed contract revenues above cash cost breakeven rates.

Based on this, the company expects a maximum of $300 million in additional funds will be needed to complete the full financing of the company's newbuilding program in 2009 to 2012.

The number is lower what we presented on our third quarter presentation due to the more fixed revenues from contract coverage. And if the credit market doesn't improve before 2012, this may have to be funded from operational earnings. Such a solution might then reduce the dividend capacity temporarily (ph).

Moving to slide 14. This slide shows the difference in newbuilding contracts with estimated delivery date. And also installments paid on contract price.

Frontline's newbuilding program is developing according to schedule. However, we expect that the eight Suezmax vessels at Rongsheng shipyard will be delayed in the range of five to nine months period, compared to original schedule.

Moving to slide 15. The number of vessels in the Frontline fleet is 83 vessels at present, inclusive of the vessels on commercial management and outer sea vessels.

It is compounded by a 39 double hull VLCCs present single hull or double side VLCCs; one single hull Suezmax, 28 double hull Suezmaxes and eight OBOs.

We have a contract coverage of 39% in 2009 and 24 in 2010, and the average net TC rate for the total fleet is about 43,500 per day in 2009, and 45,600 per day in 2010. In addition to the fixed date contract coverage, we also have an additional TC coverage on floating income in 2009.

With this, I'll leave the word to Jens again.

Jens Martin Jensen

Thank you, Inger. We are now on slide number 17: earnings.

Despite operating costs, the economic crisis, decrease in oil demand and high crude oil stocks, Q4 was actually not that bad.

The market average earnings according to Imarex TD3 for VLCCs were 61,500, and 66,000 for Suezmaxes. The main taxes keeping the market at healthy positive levels was the oil storage effect, increased delays in the Mediterranean and the Caribbean, which result in a lower fleet utilization, less newbuildings being delivered compared to our original schedule. And increased activity ex Waf (ph) activities on the Suezmax side. Present earnings for VLCCs is around $50,000 per day, and around $37,000 per day for Suezmaxes.

Now, we have slide 18. As mentioned, one of the factors that benefited the tanker market is basically the VLCC market positively, was oil storage. This is due to the oil price in Contango. The full lot price is higher than the second price.

At present, at Contango for crude oil, three months forward is about $3.5. And if you look at the calculations seen from the charterers' perspective or the oil companies' perspective that means that they should still be able to breakeven on the investment paying up to $63,000 per day.

Time charterer; this is including financing costs for the oil they've purchased. The oil is... this movement, Contango movement is still in place as we speak now.

Slide 19, VLCC fleet and order book. In Q4, only two VLCCs were ordered, where six were actually cancelled. And we expect further cancellations in the periods going forward due to this financial crisis. The order book for VLCCs is still quite large. But as mentioned in our last quarterly presentation, the fleet growth in 2008 was very limited. And if we take the combined order book for 2009 and 2010, which is about 125 to 30 ships, and we look at the remaining single whole fleet, which is about 110 ships, we would actually end up with a rather modest fleet increase over the next 24 months.

It's over it's obviously, when we will these single hull ships to be phased out. As we have tried to show that on the slides that you can see, if 20 ships are phased out this year, 70 ships in 2010, and we still keep 20 single hulls trading in 2011. That means in the 2010 we will basically have slower fleet growth.

Now over to the Suezmax fleet on slide 20. Due to the various conversion projects last year, mainly to dry bulk, dry cargo ships, the Suezmax fleet actually decreased in 2008. As shown on the VLCC profile, the single hull factor on the Suezmax side is not the same as we have seen on the VLCC. The number of single hull ships is rather smaller compared to that.

However, more interesting if we go on to slide 21. 50% of the ships, the newbuildings in 2009 in the Suezmax segment is being built at Greenfield yard. And as Inger mentioned just before, we are also building in one of these Greenfield yards, and we have seen deliveries being delayed for five to nine months. So the order book for Suezmax will also be changed quite dramatically.

Now, we are on slide 22. It's difficult to pinpoint exactly where the newbuilding prices is to today for VLCCs and Suezmaxes. Only one thing is for sure that they are less than they were six months ago. We had used the Clarkson index, which they assume that VLCC newbuilding price is around 140 million, and round 80 million for Suezmax. The small dots is where our newbuildings are priced at.

The graph on the right hand side, three months time charter VLCC around double hull is around $47,000 a day. And for Suezmax for three years around 37,000. And they still have held 11 into our company above our breakeven levels.

That's in a few question and the vision media regarding our OBO fleet, so we have made this in at the topic of this presentation. We have eight OBO Suezmax ships. They are all in dry cargo mode. These ships are fixed on time charter with the earliest of the ships being redelivered potentially in 2010 and the last one being delivered, we deliver in 2014 April.

The rates for these ships are in the range from 37,000 a day up to 66,500 a day. These ships are being used in the iron-ore trade from mainly Australia and Brazil to China. The latest spot fix just for these kind of voyages from West Australia to China is around $10.50 per ton, which equates to 33,000 a day.

So we are neither at the top or the bottom on this graph, and we believe our time charters at securable healthy level and the risk of default, we hope, touch wood, it will not happen. If you go in the outlook section on slide 24, the order books in the VLCC and the Suezmax segment is large, however, the final outcome, they find the levers will likely not be what we are seeing in paper today, there will surprises in the order book going-forward.

The OPEC reduction, yes, has taken place in Q4, and potentially there could be a further cut in the oil production. But this has opened as we discuss before, the Contango scenario, which is benefited possess in Contango earnings. The macro economical data is weak at present. However if you look at the various world stimulus packages or the countries and world have come up with and if you look especially at the two largest crude oil importing countries mainly the U.S.A. and China, those countries will focus a large domestic infrastructure projects to create jobs.

All of these projects will be commodity and energy consuming, which must be positive for shipping in general. Further more, China will be giving that extra stimulus package benefiting the oil refineries with some part of last year ran at negative refining margins. The single hull factor as we have discussed, we're not into the last two years, where you can trade and about 150 ships combine Suezmaxes and VLCCs heading for face out during the next period.

We are now ready to take some questions, but before we do that we have put a little slide, which we found in Financial Times at beginning of February showing there is not only tanker (ph) and so we are hoping for increased oil prices, so we will remain in a Contango scenario if you look at some of the oil company as mentioned what the oil prices of 35 and 70 will do to their balance sheet respectively in 2009.

Moderator, we're ready to take the questions now, thank you.

Question-and-Answer Session

Operator

(Operator Instructions). We'll now take our first question from Mr. Jonathan Chappell from JPMorgan. Please go ahead sir you're line is now open.

Jonathan Chappell - JPMorgan

Thank you, good afternoon. Jens, I was hoping you can give a little bit more insight on the thought process and the chartering of the Genmar Phoenix and the Genmar Harriet G. If the numbers that we've seen in the brokerage reports are correct, you basically lost and loss on those ships given the time charter expense you are paying to General Maritime. Was that just a function of just trying to get the best thing you can get right now in the market. You are a little bit concerned about where the spot market might be heading in the second and third quarters?

Jens Martin Jensen

The numbers being reported in the various billboards are (ph) incorrect. We have fixed both ships out in time charter for the remaining period, and the rate is of a floating nature, but it's not as any levels being mentioned.

Jonathan Chappell - JPMorgan

Okay. So it's completely dependent on where the spot is at that time?

Jens Martin Jensen

To some extent.

Jonathan Chappell - JPMorgan

Okay. So you just guaranteed utilization, but basically keep the opportunity to maybe make a profit; got it. Also on the Suezmaxes at the Rongsheng yard, five to nine months delivery delay. Is there any parts of the contract in place, where you could back out of those ships... back out of those contracts if the delay reaches a certain period of time? And would you be interested in potentially backing out of some of those contracts?

Jens Martin Jensen

Every shipbuilding contract has a MX period, where a ship can be delayed. And then of course, it's up to the owner to consider if they want to cancel. But I think it's before we go into that discussion, it's important to remember that while we order these ships, during the last two years, we have actually sold 10 single hull Suezmaxes, and we need replacement. So, we are aware that the ships are being delayed. And we are in a, I will say, constructive discussion with the shipyard. So, to discuss on cancellation is pretty immature.

Jonathan Chappell - JPMorgan

Okay. Final question and then I'll turn it over, regarding the OSG write down. Do you still own the same percentage of OSG shares that you did during the fourth quarter? So, is there a potential for a further write down in 2009?

Inger Klemp

We still own the same number of shares, yes.

Jonathan Chappell - JPMorgan

Okay. And is that roughly... do you have the share count handy, Inger?

Inger Klemp

It's approximately 1.4 million shares.

Jonathan Chappell - JPMorgan

Okay. Thank you very much Jens and Inger.

Jens Martin Jensen

Thank you.

Inger Klemp

Not at all.

Operator

Thank you. We'll now take our next question from Anders Rosenlund from ABG. Please go ahead. Your line is now open.

Anders Rosenlund - ABG Sundal Collier

Thank you. Could you breakdown the almost $300 million in short term debt on the balance sheet?

Inger Klemp

In 2009?

Anders Rosenlund - ABG Sundal Collier

Yes.

Inger Klemp

On the balance sheet? Okay.

Anders Rosenlund - ABG Sundal Collier

Because I know a sum that's a sum that's related to ITCL now (ph), is there anything else for fees down that you mentioned?

Inger Klemp

You are thinking about all the current liabilities then?

Anders Rosenlund - ABG Sundal Collier

Short-term interest paying debt. Which I guess is maturing in the next 12 months?

Inger Klemp

Short-term interest bearing debt is more than $360 million. I don't know what number you are referring to? I mean, if you look at the balance sheet in the presentation, you have current liability number of $715 million, is that what you are thinking over?

Anders Rosenlund - ABG Sundal Collier

I am thinking of is under short-term debt in current portion of long-term debt, as of December 31, which is 297.999 million.

Inger Klemp

Short-term debt, yeah, the count for long-term debt, the $298 million in the balance sheet. You want a breakdown on this; is that what you're thinking over?

Anders Rosenlund - ABG Sundal Collier

No. I am thinking some of that is related to ITCL, isn't it.

Inger Klemp

It is. Just a moment, I'll see if I have a numbers under here.

Anders Rosenlund - ABG Sundal Collier

That was 54 million as of Q3. So, has that changed?

Inger Klemp

It's a bit lower, because it's now $53.5 million.

Anders Rosenlund - ABG Sundal Collier

Okay, great. And so, the rest or the roughly 250 million that's retirement of different slows in addition, or and of that 250 million, you have 130 million, which is the short-term debt, which is maturing in June. Is that correct?

Inger Klemp

Yeah. So, that is included of course. And then, you have this 53.5 million on market sale, and then remaining is ordinary installments that we have.

Anders Rosenlund - ABG Sundal Collier

Okay. So, no balloon payments?

Inger Klemp

No, not apart from the $129.6 million facility that's mentioned.

Anders Rosenlund - ABG Sundal Collier

Okay. Great, very good. Thank you very much.

Jens Martin Jensen

Thank you.

Operator

Thank you. (Operator Instructions). We'll now take our next question from Ron Enrique from Bloomberg (ph). Please go ahead; your line is now open.

Unidentified Analyst

Hello. I am just wondering if could elaborate a little bit on how much you are looking for long-term time charters or if there is any kind of proportion that you are seeking anything at all just sort of explain how your strategy might have changed?

Jens Martin Jensen

Well, if you look at our slide on page 16, as Inger mentioned, we have 39% of our fleet, which is fixed on a fixed time charter. Apart from that we have up to around 50% of the total fleet, which is a related to various market mechanisms that is minimum higher, there is indexes. So we actually have around 50% of the fleet being employed now on various charter and we are looking to expand further, but also we need to have some spot presence to satisfy the customers we have at Rongsheng, (ph) but we are looking at if there is good possibilities to time charter out a few more ships.

Unidentified Analyst

Has that 39% and 50% changed over the past year?

Jens Martin Jensen

We have increased out total utilize, I mean employment with almost 10% during the last quarter.

Unidentified Analyst

Right. So you put 10% more on long-term chart you mean either with this kind of marking minimum mechanism or fixed rate going forward, yeah. Okay, thank you very much.

Jens Martin Jensen

Thank you.

Operator

Thank you. And there are no further questions. I would like to turn the call back over to you for any additional or closing remarks.

Jens Martin Jensen

I would just like to say thank you for everybody for dialing in. 2009 will be an interesting year, and we are looking forward to update you all in that process in the quarters depends. I would like to thank you everybody in Frontline for a very good year 2008, which as Inger mentioned was the second best ever in this company's history. Thank you for dialing in. Thank you.

Operator

This concludes this conference, you may now disconnect.

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