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Frontline (NYSE:FRO)

Q3 2011 Earnings Call

November 22, 2011 9:00 am ET

Executives

Jens Martin Jensen - Chief Executive Officer of Frontline Management AS

Inger M. Klemp - Chief Financial Officer and Chief Financial Officer of Frontline Management AS

Analysts

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Gregory Lewis - Crédit Suisse AG, Research Division

David Epstein - CRT Capital Group LLC, Research Division

Damien Fortune

Joshua Katzeff - Deutsche Bank AG, Research Division

Fotis Giannakoulis - Morgan Stanley, Research Division

Justine Fisher - Goldman Sachs Group Inc., Research Division

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Michael Webber - Wells Fargo Securities, LLC, Research Division

Operator

Good day, and welcome to the Frontline Ltd. Quarter 3 Results Conference Call. [Operator Instructions] Today's conference is being recorded. At this time, I'd like to turn the conference over to Jens Martin Jensen, CEO. Please go ahead.

Jens Martin Jensen

Good morning, good afternoon, and welcome to our Q3 presentation. This presentation will follow our usual program with our CFO, Inger Klemp, going through the Q3 highlights and main transactions, financial review of the quarter and an update of our newbuilding program. After that, I will go through some market slides and market developments and where we see things going forward.

Before we start the actual presentation, I would like to mention that Q3 was an extremely difficult quarter, and I think must have been the eye the tornado. The ship values almost dropping 50% for 2000-built VLCCs and with one of the leading indexes trailing at negative earnings, a big part of the quarter. This has obviously taken the toll of Frontline, which the Q3 results shows and with the continued weak markets, we see ourselves in a very difficult situation. You could start the presentation Inger, please.

Inger M. Klemp

Thanks, Jens, and good morning, and good afternoon, ladies and gentlemen. As Jens said, I will guide you through the highlights and the financial review in the third quarter of 2011 and so far into the fourth quarter. Then we'll end with a run through of the newbuilding program. Then I would like you to move to Slide 4.

In September 2011, we agreed with Ship Finance to terminate the long-term charter parties for the single hull VLCCs, Titan Orion, Titan Aries and Ticen Ocean. Ship Finance simultaneously sold the vessels to an unrelated third party. Each charter party will terminate at the time the vessel is delivered to the new owners. At which time, Ship Finance will make compensation payments to the company for its termination of the charter party.

Expected compensation amounts and termination dates are $9.4 million in the first quarter of 2011 -- 2012, sorry for Titan Orient. $6.5 million in the fourth quarter of 2012 for Titan Aries. Then, $10.2 million in the third quarter of 2013 for Ticen Ocean. In October and November 2011, Frontline has entered into agreements to sell its 1993- to 1996-built Suezmax tankers Front Fighter, Front Hunter and Front Delta.

The sales resulted in a total net cash outflow of approximately $4.2 million after repayment of bank debt and a loss of $76.2 million, which has been included in the impairment loss recorded in the third quarter. Further in October 2011, Frontline agreed with Ship Finance to terminate the long-term charter parties between the companies for the OBO carrier Front Striver. The company made cash compensation to Ship Finance of $8.1 million, and we expect to record a loss of $9.3 million in the fourth quarter of 2011.

Obligations on the capital leases will be reduced by $10.7 million. Company is currently establishing the Orion Tanker pool with Nordic American Tankers Limited and expects it to be operational by the end of the year. This specialist Suezmax pool with 29 double hull Suezmaxes at the outset is expected to enhance customer service and reduce cost. During the fourth quarter of '11, the company will leave the Gemini pool.

And I would like you to move to Slide 5. Then I would do a quick run through of the financial highlights in the third quarter of 2011.

Frontline reported net loss excluding impairment loss of $44.7 million. This is equivalent to a loss per share of $0.57. Net loss includes an impairment loss relating to 5 Suezmax tankers built between 1992 and '96, and include losses of $27.1 million, $30.6 million and $18.5 million, which have been realized in the fourth quarter on the disposals of Front Fighter, Hunter and Front Delta, respectively.

Impairment losses are taken when the events and changes in circumstances occur that cause the company to believe that the future cash flow for an individual vessel will be less than it's carrying value and not fully recoverable. In such instances an impairment charge is recognized if the estimate of the undiscounted cash flow is expected to result through the use of the vessel and its eventual disposition is less than the vessel's carrying amount. The net loss including impairment loss was $166.2 million equivalent to a loss per share of $2.13. Frontline announces a net loss of $64.5 million for the 9 months ended September 30, 2011, to a loss per share of $0.83 excluding the impairment loss. And Frontline will not pay a dividend for the third quarter.

Moving then to Slide 6. Net loss excluding gains and losses in the third quarter of 2011 is about $25 million less than it was in the second quarter. And the decrease can mainly be explained by the income on time charter basis was about $37 million lower in the third quarter, leads to a decrease in TCE per day in this quarter.

Profit sharing to Ship Finance decreased about $2 million due to the decrease in TCE per day in the quarter, and also ship operating expenses decreased by $6 million compared with the preceding quarter and that was primarily as a result of a decrease in drydocking expenses of $3.6 million. We have drydocked 3 vessels in the quarter, the same number as we did in the previous quarter, but the drydocking will cost less. In addition, the running cost decreased mainly due to recent sales and lease termination. Now this charter hire expenses decreased almost by $1 million in the third quarter compared with the preceding quarter primarily due to the delivery of the Kensington on May 18. Finally, financial expenses have decreased about $2 million due to termination of leases.

Then moving to Slide 7. Frontline's double hull VLCC fleet excluding the vessels from spot index time charter earned in the spot market approximately $14,600 per day this quarter compared with $25,700 per day in the previous quarter. Including the vessels on spot index time charter, the VLCC fleet earned $12,600 per day for doubles. The average for the whole fleet was about $17,000 per day in the quarter.

The Suezmax fleet earned in the Gemini pool, $7,600 per day as a consequence of the formula for Suezmaxes trade outside the pool at somewhat higher TCE rates, we earned on average in the spot market approximately $7,800 per day. And the average for the whole Suezmax fleet was about $9,500 per day in this quarter. And the OBOs earned $38,200 per day in the quarter. This number show that sometime this quarter has bested the numbers of other peers with respect to the VLCCs, so earnings for the Suezmaxes were a bit disappointing.

Moving down to Slide 8. As you can see from the slide, we have average OpEx for the fleet of approximately $9,300 per day in this quarter, compared to approximately $10,800 per day in the previous quarter. The decrease is mainly due to the decrease in drydocking cost, $3.6 million, due to less cost of the drydocking but also lower on the expenses due to the recent sales and lease termination. We have drydocked 3 vessels, which is the same as in the second quarter as you can see from the graph on the upper-right hand side of the slide. As you can see from the graph on the lower-right hand side of the slide, off-hire days were 159 days compared with 211 days in the second quarter. This is mainly due to less off-hires related to drydocking. And we expect that we will drydock one VLCC in the fourth quarter of 2011.

Moving down to Slide 9. Total balance sheet is approximately $250 million lower than in the second quarter of 2011. The main items explaining the decrease are, first of all, restricted cash decreased by $91 million mainly due to repayment of the lease on the British Pride with $81 million and principal loan repayments of $8.5 million in ITCL. Sales for Front Hunter and Front Fighter were agreed in October, and as a result of that, the vessels have been classified as held for sale.

In accordance with the U.S. GAAP, the vessels were recognize at fair value resulting in an impairment loss of $57.7 million across both vessels. Book value decreased with $114 million on vessels due to the ordinary quarter depreciation and impairments recognized on the Front Alfa, Front Beta and the Front Delta of $53.7 million. Partly offsetting this was the transfer of British Pride from leased to owned asset. Book value of the vessels on the capital leases decreased largely as a result of the transfer of British Pride from leased to owned asset and also due to depreciation charge in the quarter.

The short-term part of the long-term debt has increased as a consequence of that debt, which is related to sold vessels are recorded as short term. The short-term part of obligations on the capital leases decreased as a consequence, so that British Pride was transferred from leased to owned vessel. Total long-term debt has increased with $41 million in the quarter as a consequence of drawdown on $72 million of newbuilding financing, partly offset by ordinary repayments in the quarter.

And then, obligations and the capital leases have decreased with approximately $100 million due to the termination of the lease of British Pride, with approximately $71 million and ordinary repayments of leases in the quarter. Then ITCL is included in the balance sheet with a total of $321 million of debt related to the 3 of the CalPetro Suezmax vessels are not consolidated in the balance sheet with $48 million.

And I would now like you to move to Slide 10. The average cash cost breakeven rates for the remainder of 2011 are approximately $30,200 per day for the VLCCs, $23,600 per day for Suezmaxes and $21,200 per day the OBOs. These rates are the daily rates our vessels must earn to cover the budgeted operating cost expenses to estimated interest expense, scheduled loan principal repayment, bareboat hire and the corporate overhead of the cost.

Moving down to Slide 11 and 12. After end of September, the total number of vessels in Frontline's newbuilding program are 2 Suezmax tankers and 5 VLCCs, which constituted a contractual cost of about $650 million. At the end of September, we have paid installments of $212 million on the newbuildings first, and the remaining installments to be paid for the newbuildings amount to $438 million. We expect payments of approximately $13.5 million in the remainder of 2011, $176 million in 2012 and approximately $250 million in 2013, respectively.

In November 2010, we secured pre- and post-delivery financing in the amount of $147 million for the 2 first VLCCs to be delivered from the Jinhaiwan shipyard. And as for the end of September, $22 million was drawn on that facility. The 3 remaining VLCCs and the 2 Suezmax tankers newbuildings will be delivered between late '12 and '13. The company has not yet established pre- and post-delivery financing. Thus, Frontline has invested $140 million of equity in the newbuilding program as of September 2011.

Moving down to Slide 13. In this graph we showed installments to be paid under the newbuilding contracts in the period 2011 to 2013, with a total of $438 million in the light blue column. In the dark blue column, we show the committed financing in the period 2011 to 2013, a total of $75 million and not included the assumed uncommitted financing of the newbuilding contract refinancing is not yet secured due to that the amount will depend on market value and leverage at the time we establish the financing.

Moving down to Slide 14 and 15. The number of vessels in the Frontline fleet as of the end of the third quarter is 67 vessels, including vessels on commercial management and the ITCL vessels and is compounded by 41 double hull VLCCs, 8 single hull VLCCs, 18 double hull Suezmaxes and 5 OBOs. Today, we have a contract coverage of 22% in 2011 and 13% in 2012. And the average net TCE rate for total fleet is about 42,400 per day in '11 and 47,300 per day in 2012.

And with this, I leave the word to Jens again.

Jens Martin Jensen

Thank you, Inger. We are now on Slide 16. I think the average Imarex rates, the TD3 Imarex rates of $35 per day in the third quarter says a lot about the quarter. We did well on a relative basis on the VLCCs, but as Inger mentioned, our earnings in the Suezmaxes was disappointing. I think the easiest way to describe the market situation in Q3 and at present is that there are simply too many ships around. This, combined with reduced crude shipments into America, which have reverted and unusual somewhat dullness, this makes the third quarter one of the worst quarters for a long time in the crude markets.

If we go to Slide 17, the development in the VLCC fleet. The orderbook is still there, but we have seen a continued slippage or delays to the deliveries. 48 ships has been delivered up to end of the third quarter versus our perceived number of deliveries of 57. That is a 16% slippage. No VLCCs has been ordered in the quarter, and we still have a very expansive orderbook to manage going forward. I will now work on that.

On Page 18, overview of the Suezmax fleet continued its slippage on almost 30%, and this is mainly due to 2 Chinese shipyards, which are still having difficulties in keeping up with deliveries. Again, this is positive for the fleet development, still the orderbook is quite large. If you look at Page 19, we estimate the newbuilding prices for a decent specification VLCC or Suezmax to be around $100 million and about $60 million each. No recent orders has been made but this figure may be slightly less, but I don't think a lot. If we go over to the crude, I mean, we saw the TC rates, the average market for 3-year time charter is now around $27,000 for VLCCs and around $21,000 per day for Suezmaxes. There's not many takers out there. This is where the market is now.

If you look at Page 20, which is giving us a pretty much, a good description of where the problem is right now, after the financial market collapsed in end of 2008, with the oil demand curve dropped dramatically and the supply of ships increased. In 2010, we almost had a serious situation, which was aided by the floating storage scenario, which we had in 2010. But as we can see now, demand has fallen down. Our ton mileage has fallen down, and we have a gap between demand and supply. If no ships are being ordered for the next 2 years and if the present demand picture is maintained, we could see a stabilization in supply and demand by end of 2013. But of course, as we have seen before, there could be changes in the tanker market.

If you look at Page #21, which is regarding the U.S. crude oil market, the imports to America has decreased, and this is combined with the weak economic in America and the increased domestic production, increased imports from Canada, and we expect further increases in the production in America. And unless the trading pattern changes, this will affect the tanker markets, the crude tanker market negatively especially the VLCCs.

Now we're at Slide 22. If you look a little bit at the VLCC orderbook and the total orderbook, which is on the graph, the average price per VLCC order in the remaining orderbook is around $131 million. If we then, say, a resale today is worth around $90 million, it says $99 million on the graph, which is probably a little bit optimistic, and we assume that you can get 70% financing of this $90 million, which is maybe a bit optimistic as well, we are looking at a minimum $70 million equity GAAP. And with earnings around or below even breakeven levels, this could be a huge potential problem going forward, and it may change the orderbook.

Now we're on Page 23. The general outlook in the tanker market is that oil demand is increasing, but the growth is slowing down. The U.S. crude oil imports as mentioned are declining and, thus, reducing the ton mileage situation. The orderbook is still large, but we do expect some changes going forward, as some of these were mentioned earlier in the presentation. Will there be a big VLCC order in China, there's been a lot of rumors and stories about that.

For sure, we don't need this right now. Regarding our sales Frontline, our fleet adjustment has continued and we have so far sold or terminated 11 ships in 2011, and we still have a few more to go. We have delivered 1 VLCC, and we will deliver further 3 VLCCs and 1 Suezmax in early December. Our newbuilding commitment, which has been reduced over the years still looks challenging. We are working on various solutions and scenarios to take the company through the next challenging period to position ourselves for hopefully being able to take part on some of the good opportunities, which are emerging in the market.

I think with that, we are ready to take some questions. Thank you.

Operator

[Operator Instructions] We'll take our first question from Jon Chappell from Evercore Partners.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Jens, first thing on the covenants that, you had mentioned in the press release that you've slipped out of compliance briefly in the third quarter, needed to prepay $13.3 million. Could you just remind us what the covenants are on your facilities? And given what asset prices have done that you've seen so far in the fourth quarter, are you anticipating a further cash requirement at year end to remain in compliance with those covenants?

Inger M. Klemp

Jon, with respect to the specific covenant, that has not been released by the company, so I cannot really remind you about them. With respect to your second question, as we say in the press release, with the development that we have seen on the asset value so far. We are in a situation that we most likely will bridge some kind of covenants at the end of the year.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Okay. And I mean, just to put a ballpark around, I guess, most covenants are typically 130%, 135%. I mean, is that in the ballpark or are they -- is that way out of whack?

Inger M. Klemp

They are lower than that, lower than 130% to 135%.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Okay. Got it. And then when you mentioned on this last slide that you're expecting to run out of cash in Q1 2012, if the market doesn't recover. Is that already taking into account that there's going have to be prepayment on the debt for the covenants? Or is that just based on a strictly operational basis?

Inger M. Klemp

We'll take it into account...

Jens Martin Jensen

We'll take it into account, yes.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Okay. And If we think about some of the remedies, you said, Jens, in your last comments about the newbuilding commitments, they may be challenging. Then you talked about the equity gap in the previous slide, you don't have the financing still for several newbuilds, is it possible that you could walk away from some of your newbuilding contracts to kind of help your liquidity longer term?

Jens Martin Jensen

Well, so far, we have not been a big believer on walking away and leaving money on the table. We have, in the last 2 years, restructured our newbuilding portfolio. We had canceled earlier 4 Suezmaxes and we have actually reduced the VLCC order book from 6 ships at $135 million each to 5 ships at $105 million. We have a constructive dialogue going on with the shipyards and there could be some more changes going forward.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Okay. And then also, as another potential remedy, I think this was addressed in the last conference call. But you do have these pretty above-market contracts with the Ship Finance, not just from the revenue side, but you also in the structure that was set up 7 years ago agreed to do the operating cost on those ships for $6,500 a day, which is obviously, it cost far more to run the ship right now. Is there any potential to restructure either the cost side or the time charter in side to those Ship Finance contracts?

Inger M. Klemp

I think with respect to the, let's say, the details of the solutions to this restructuring, I think we -- while there -- we have in the last, where we have the solution at the table.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Okay. And then final thing is also just after sales, you already mentioned you're redelivering 3 VLs and 1 Suez. When you look at your fleet, obviously you've called most of the single hulls already, has it gone to the point where you may want to dispose some of more modern assets as well?

Jens Martin Jensen

Well, what we have, I believe, earlier in the year, when the market was under pressure is to try and disinvest in what we call the non-core fleet, that is ship that is in the spot market or single hull and that is some of the older tonnage. So we have sold out some of the OBO carriers, which came off charter, 3 of the single hull or the remaining VLCCs, and now we are working on the older double hull Suezmaxes which in this market, even modern Suezmaxes are making almost less than operating cost and then we have thought this is a better time to sell the ships now.

Operator

We'll take our next question from Greg Lewis from Credit Suisse.

Gregory Lewis - Crédit Suisse AG, Research Division

I guess, my first question is in thinking about some of the fleet, when we think about some of the VLCCs, I mean, is Frontline simply at a point right now where there are no options for those vessels in terms of looking at conversions into other types of assets? I mean -- or is it something where as part of the solution, it could be Frontline looking to lock up some of its assets on -- whether it's a -- like floating storage contracts, FPSOs or is the money simply not available and it's something where these assets are going to have to be sold?

Jens Martin Jensen

Well, we have some ships on FSOs, floating storage, which is of course a rather simple operation. And from time to time, we are looking at the FPSO projects. But I think right now, we have capital expenses here required for this and the risk of doing so is not where we want to go right now. As you know, we have done before heavy lift conversions. We have been in the FPSO business. So we have done that before. But I think right now, we are focusing on doing something else with the ships than stepping into that market again.

Gregory Lewis - Crédit Suisse AG, Research Division

Okay, great. And then just real quick, in the press release, you mentioned the current market environment and what that means in terms of potentially seeking or restructuring solution. When we think about the current market rate, is that something where -- I mean, the strength in the market, there has been some strength in the market over the last week. I believe spot VLCC rates are now over $20,000 a day. I mean, clearly, that's still below your breakeven levels. But now, is that still a weak market that's going to lead to a potential restructuring or was this sort of weak market, is that sort of sub-$15,000 a day VLCCs?

Jens Martin Jensen

Well, it's a more compounded scenario. One thing is, of course, the rates that are weak and below our breakeven, but at the same time the pressure of asset prices and then, where you can finance your newbuilding program. It's a combination of those, which we are trying to address and restructure the company, first to be able to operate in this market but also to position ourselves to hopefully be able to be there when the market comes around again.

Gregory Lewis - Crédit Suisse AG, Research Division

Okay. So it's -- in other words, rates are one part of it, but in other words, if we sort of hit a floor in asset prices then that probably goes a long way in enabling you to potentially -- should we think about it, if the asset price is stable at these levels, that potentially enables you to avoid doing some sort of capital injection?

Jens Martin Jensen

Well, I don't want to exclude anything right now. I think, of course, we have seen asset prices falling a lot especially for the older ships, more modern tonnage has also fallen, so it depends. I guess some people are saying that we have seen maybe the floor of some of the older ships but then, I think, we have to follow the development a little bit more close before we finalize our discussions.

Operator

We'll take our next question from Justin Yagerman of Deutsche Bank.

Joshua Katzeff - Deutsche Bank AG, Research Division

This is Josh Katzeff on for Justin. I was wondering if you can maybe help us drill down into Q1 and maybe some of the CapEx or debt repayments that are going or be going on in that quarter. I mean, we saw the full year guidance just with your expectation of potentially running out of cash in Q1, if you could help us a bit better with that.

Inger M. Klemp

You mean to break up the number that we gave for 2012?

Joshua Katzeff - Deutsche Bank AG, Research Division

Yes.

Inger M. Klemp

I think as far as I can remember, what we have in the first quarter is approximately $38 million in CapEx.

Joshua Katzeff - Deutsche Bank AG, Research Division

And then debt repayment, debt/capital lease?

Inger M. Klemp

The capital lease is evenly spread doing during the year. It doesn't really vary between quarters. But if you look into the yearly repayment of the capital leases on the 2010, for instance, you have the annual amount which you then can spread evenly on each quarter. The only thing which doesn't exactly spread evenly is in a way the repayment of bank debt. That is a bit less in the first and the -- sorry, it's more in the first and the third quarter, a little bit less in the second and the fourth quarter.

Joshua Katzeff - Deutsche Bank AG, Research Division

Got it. And I need to know, when I look at your breakeven rates and -- because there have been a bunch of asset sales, the breakeven rates haven't really, I guess, moved that much lower. Should we expect maybe a bigger decline in Q1 as some of these December sales hit? Or are they going to be spread despite all these sales?

Inger M. Klemp

I don't think in a way that the breakeven rates will change so much based on the current setup. I mean it will change from quarter-to-quarter if we have more drydockings in one quarter than we have in another one. But apart from that, they will be pretty stable based on the current setup.

Joshua Katzeff - Deutsche Bank AG, Research Division

Got it. And I guess if you can, Jens, maybe if we could talk about the decision to pull out of the Gemini pool instead of the Orion pool and kind of maybe your expectations for this pool?

Jens Martin Jensen

I think we have been in the pool, which actually work quite well, and we are very happy with our 2 partners in the -- 2 other partners in the Gemini pool. We were 4 owners in that pool, as you know. But I think, unfortunately, we have come to the conclusion that maybe to be large is not always the big thing and that unfortunately consolidation, I would say, in the Suezmax market had not worked the way we had hoped. We almost had 50 ships in the Gemini pool, and we are still not able to push the market. It just goes to show that, that segment is very diversified. So we'll come to the conclusion that we will maybe try and step back a little bit, and work closely with one of the other pool partners, which is also based in Norway. And try and step back a little bit and see how that works in this market situation. Going forward, this may change, of course. But right now, we have assessed that it's probably better to do that.

Joshua Katzeff - Deutsche Bank AG, Research Division

Are you going to open up the pool to other partners?

Jens Martin Jensen

I like begin with, we just want to make the pool work and have as little disruptions to our customers and clients as possible. I would not say that we will not be taking other people in. But in the beginning, we would just like to get the show on the road, so to speak.

Operator

We'll take our next question from Omar Nokta from Dahlman Rose.

Damien Fortune

This is Damien Fortune on for Omar. I just wanted a little bit more clarity on the debt drawdowns that you have available for the 2 VLCCs being delivered in the first half of next year. Would you mind giving quarter-by-quarter the financing that you're going to be drawing down?

Inger M. Klemp

Quarter-by-quarter, I'm not sure. But for this fourth quarter, we have been giving you the number of $13.5 million. That's again from the graph. And the remaining part will be during 2012. It could soak from one quarter to another. So it's a -- I don't really think it's any use in trying to flip back in the different quarter.

Damien Fortune

Okay. And just to clarify, the CapEx, you said was going to be evenly spread over the year for 2012?

Inger M. Klemp

No, I didn't say that. I said that the lease repayments will be evenly spread.

Damien Fortune

I'm sorry. So fair to assume that the CapEx is in, do you have a quarter-by-quarter breakdown for that?

Inger M. Klemp

No. Not apart from what I just mentioned. I think we can leave it with that.

Operator

We'll take our next question Justine Fisher from Goldman Sachs.

Justine Fisher - Goldman Sachs Group Inc., Research Division

How much do you think you would have to renegotiate down your rates to Ship Finance in order for those contracts to be sustainable for Frontline?

Jens Martin Jensen

We can't give a specific information on that. It's, of course, a quite complex deal we have with Ship Finance, but I can't give you any specific details on that.

Justine Fisher - Goldman Sachs Group Inc., Research Division

And this is something that you also expect to complete by December 31 this year?

Jens Martin Jensen

Well, we have a timeline which we have made, which include a lot of the things that has to fall in place, but we expect and we hope to be finished by this by end of the year.

Justine Fisher - Goldman Sachs Group Inc., Research Division

And is there a threshold that which you would revert to taking an equity infusion from your Hemen Holding? I mean, how long -- if you don't reach an agreement on various other aspects of your financing by December 31, would you then just take the equity infusion? Or how should we think about the timing and the likelihood of that versus your other options?

Inger M. Klemp

I think as I said earlier on here, I think that the details surrounding the solutions, they will have to come and to have the solution at the table. I think it's a bit premature here now to discuss timing, what if and what not, if we can't do it, what if? That sort of questions. I think we, first, we have to come up with a solution and then we can discuss.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Okay. And then just one last question, can you remind us as to how the calculation is made to decide whether or not you pay Ship Finance when the charter is terminated or they pay you when a charter is terminated. Just because if there are additional terminations going forward, it would be helpful if we could forecast, which way the payment would go because I think that even in this quarter, there were some that went one way and some that went the other way.

Inger M. Klemp

Were you talking about the compensation or whatever we get ? It's the difference between what type of lease termination we're talking about. For instance, these 3 VLCCs, the single hull VLCCs that we terminated now recently, where we, I guess, the compensation from Ship Finance. Those vessels are operating leases today. They were used to be capital leases as long as they were budget deficit and did not have to come to their phase update in 2010, because single hull vessels actually was phased out in 2010 according to the rules. At that point in time, these leases were actually fully repaid to Ship Finance. We have paid down everything. So the only thing we have then was a option to extend the very low rate as you possibly know of $1,000 per day as a variable rate. And that is why Ship Finance has to pay out the cash compensation, when these vessels are then sold today because it's a very valuable option that we hold them.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Okay. And so for other vessels that have not -- where the lease hasn't been terminated like OBO, you would end up paying Ship Finance some sort of termination fee because they're still on the charters that were signed years ago.

Inger M. Klemp

That's the most likely situation, yes.

Operator

We'll take our next question from Michael Webber from Wells Fargo.

Michael Webber - Wells Fargo Securities, LLC, Research Division

Just wanted to follow up on an earlier question regarding the $140 million in equity you guys have on the newbuilding. It seems like your guys are kind of leaning more towards pushing those out or finding other solution outside of walking away. I guess I'm just curious, how many vessels have actually had steel laid on them there? I think a number -- a couple of 2013 deliveries, with a couple in 2012. And just to kind of, to try and to figure out whether or not you could actually maybe catch a bid for some of those slots. Obviously, they're pretty significant haircut. But is that something we should be thinking about? And then I guess how many have steel laid?

Jens Martin Jensen

I think what we said in the Q2 presentation, that the newbuilding program at the VLCC building out is 4 to 5 months delayed. So not so much steel has been laid.

Michael Webber - Wells Fargo Securities, LLC, Research Division

Okay, fair enough. In your release, in the strategy and outlook section, you mentioned that certain assets have already been sold. I just want to clarify that you're just referring to the assets that are already mentioned in the release and they're not -- I guess, it's not referencing pending asset sales.

Jens Martin Jensen

The ones we are mentioning is the one we have already sold, and we have at least 2 more older Suezmaxes, which we are trying to sell during the rest of the year. And of course, when these sales are done, we will report that to the market.

Michael Webber - Wells Fargo Securities, LLC, Research Division

Got you. All right. Now that's helpful. And I guess as another follow-up Ship Finance, and just to be clear, there a number of different, I guess, alternatives in terms of restructuring and restructuring these Ship Finance contracts or one them. Are those conversation actually started yet? And I guess when you guys think about vessel sales and discussions to your lenders, which are obviously ongoing and potential equity, where does the restructuring of those contracts kind of fit within that scheme in terms of kind of palatable options especially considering how important Ship Finance is as a vehicle to kind of be in the entire Fredriksen umbrella.

Jens Martin Jensen

Well, I think, we are in the same building, and we drink from the same coffee machine. We have a, let's say, discussions about the tanker market in general and our interlock relationship, I think that's a process that is always ongoing. We are selling ships, and we are terminating ship mostly together. So I think we have a constructive dialogue. I can't really say more than that.

Michael Webber - Wells Fargo Securities, LLC, Research Division

Okay. All right. That's helpful. Just one more on, I guess, the Gemini pool and you kind of went through your thought process there. In terms of actually pulling those assets out of that pool, should we expect any sort of actual impact on your Q4 rates? And should any impact on your operational results at all?

Jens Martin Jensen

No. It will be a smooth transition. When we went in to Gemini, it was a very smooth transition, it's very good partners in the pool and we expect that. It maybe a little bit double work for our accountants. But as we'll be exiting the pool in the middle of a quarter, but there should not be any disruption or anything like that to either Gemini or ourselves going forward.

Operator

We'll take our next question from Sal Vitale from Sterne Agee.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

I have a question, just a clarification, I guess, first on the third page of the release under the market section where you, I think, it indicates present market indications are about $12,000 for fourth quarter for VLCCs and about $17,000 for Suezmax. That's a little bit below the current rates as reported by Clarkson. Are you saying that -- is this your forecast for the rest of the quarter? Or could you just provide a little clarification there please?

Jens Martin Jensen

No. I think we don't normally give a forward guidance. We use certain indexes to describe where the market is on the day when we make this presentation. There's, of course, big fluctuation in oil prices. There's different ways of how people actually calculate the daily returns. We see some do it with a slow steaming, some do it on full bound voyage basis into the Atlantic and back again. I think we're just coming with a snapshot, where we believe the spot market should be right now. It could be a little bit higher but then that's the number we normally put in.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Okay. And then I guess, just looking through your slides here and I see what your -- the causes of the current market weakness and you mentioned supply, and you also mentioned reduced imports to the U.S. I guess, if we hold the current supply forecast constant, maybe in terms of -- could you provide any data in terms of how many million barrels a day or number of VLCC trips that -- from, say, the Persian Gulf to the United States. What do we need to see in 2012 to get the market that up to a rate that's, say, above $40,000. And I'm talking about VLCCs here.

Jens Martin Jensen

You probably need to tie our 50 ships in some kind of employment, so that will be at least 2 million barrels a day increase import long-haul into the America.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Okay. And then just the last question. In the press release you made mention of the potential for an equity contribution. And I've read a news release this morning, where it indicated, the potential for as much as $300 million to $350 million equity contribution. So I'm just trying to get a sense, I guess the first question is, what do you think the likelihood is at this point that some equity contribution would need to be made? And then, what it really need to be as much as, say, that $300 million level?

Jens Martin Jensen

I saw that quote also, I assume that's what you saw on TradeWinds, where actually...

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Yes, yes, correct.

Jens Martin Jensen

They quoted my name. I have not spoken to TradeWinds today and I will obviously have to cease my subscription. But we will not -- estimate or come up any guess now, how much we actually will be needing. I think it depends on the -- which solution we are going for and how these alternatives are working out. I think the number mentioned in that newspaper, online newspaper has not been mentioned from us.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Okay. so you're saying, you're basically misquoted, and I guess the number would probably be significantly lower than that level?

Jens Martin Jensen

I would say they have been misquoted since they have not spoken to me. I have not mentioned that number, and I think it's pure speculation from their side.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Okay, that's helpful. And then, I guess, what do you -- do you think the number would be something closer to, say, $150 million, $150 million or something less than that?

Jens Martin Jensen

I can't really say.

Inger M. Klemp

It is too early to comment on that. As we have said earlier, I think we need to see the solution first and which direction this will lead to.

Operator

We'll take our next question from Fotis Giannakoulis from Morgan Stanley.

Fotis Giannakoulis - Morgan Stanley, Research Division

I want to ask about your largest bank facility, the $420 million. This is a facility that at the end of last year you had $363 million. After the sale of these vessels, has this facility changed? Has there been any repayments on the outstanding amount? And can you give us, if possible, the current outstanding? And what is the average age of the vessels that are placed as collateral on this loan?

Inger M. Klemp

You are specifically asking about -- which facility are you asking about?

Fotis Giannakoulis - Morgan Stanley, Research Division

I'm asking about your largest bank facility, the $420 million.

Inger M. Klemp

Okay. I don't think we can give anymore specificity about that specific, if that's what you're asking. And so apart from what we have given the accounting numbers for the third quarter, where you can see the bank debt towards the total debt of the company. So sorry, about that.

Fotis Giannakoulis - Morgan Stanley, Research Division

Okay, that's fine. Also you mentioned earlier that you are in the process of finding buyers for 2 of your Suezmaxes. I understand that you have right now 5 Suezmaxes, which are above 15 years old and there are also some VLCCs mainly on operating leases. Are there any chance or any thought of a disposal or termination of the contracts for the remaining older assets? And in these assets, who has the option? Would you be able to sell these assets or disposed these assets without consent of Ship Finance? Or is this something that will have to be a mutual agreement.

Jens Martin Jensen

As mentioned in the press release, we have already sold 3 older Suezmaxes, the Front Fighter, Front Hunter and Front Delta. These are entirely owned by Frontline. We have 2 more Suezmaxes around the same age, which we are trying to sell. They are on our books, owned by us. So we don't have to have any consent to sell those. We don't have any other VLCCs out for sale now at present.

Fotis Giannakoulis - Morgan Stanley, Research Division

Including the ones that are in operating leases?

Jens Martin Jensen

I'm not sure. Which ship you are referring to?

Fotis Giannakoulis - Morgan Stanley, Research Division

I'm talking about the Kensington and the Hampstead?

Jens Martin Jensen

Well, the Kensington and the Hampstead, yes, they are owned by Knightsbridge, which we are the commercial managers for. I don't think they have made up their mind and I expect that they want to sell those ships. One of those ships is chartered to us and the other one is in the spot market. I don't think they have decided to sell those.

Fotis Giannakoulis - Morgan Stanley, Research Division

Okay. And can I ask you, is there on your convertible debt, the $225 million convert. Is there a flexibility from the company to buy back this debt or part of it?

Inger M. Klemp

What do you mean by flexibility?

Fotis Giannakoulis - Morgan Stanley, Research Division

I mean, if you have the option to redeem this bond?

Inger M. Klemp

There's always the possibility that we can buy back bonds in the market, if that's what you mean. Everyone can do that.

Fotis Giannakoulis - Morgan Stanley, Research Division

Okay. And I assume this is something that you might be considering or it might be a part of the entire restructuring process that you are evaluating right now, is that correct?

Inger M. Klemp

Every possibilities are alternative, if that's what you would like to hear. But we have nothing to discuss in detail here now.

Operator

We'll take our next question from David Epstein from CRT Capital.

David Epstein - CRT Capital Group LLC, Research Division

I wanted to know if the delays at the shipyards potentially give you any sort of out from your commitments.

Jens Martin Jensen

Well, if the delays are much more extensive than the ones I mentioned, of course, there's always a possibility. But not at present, no.

David Epstein - CRT Capital Group LLC, Research Division

Okay. And then just a macro question, do you have a view on what particular demand driver there might be sort of waiting in the wings other than the oil curve driving some offshore storage that might pick up the mantle from declining demand from the U.S. because we're producing more in the U.S.?

Jens Martin Jensen

I think, of course, the biggest issue right now is, of course, the weak economic situation in America, if I may say so, and in some European countries as well. And we need that to be stabilize. Of course, these various pipeline discussion in America, are not going from Canada to States. That could, of course, change the tanker market. We have seen very strong oil demand from China, which is continuing. We have some of the big economies in Asia still going ahead.

Of course, we have Brazil, which has a huge oil program as well. And if this will go long haul or where it will go, it remains to be seen. There's, of course, speculation, there will be a big storage farm off Brazil for all this oil, they will not bring ashore. So there's various thing that can happen in the market. But for sure, something needs to happen to absorb the oil supplier ships. But it's difficult to say right now, which of these potential triggers it can be.

David Epstein - CRT Capital Group LLC, Research Division

So the Canadian pipeline don't happen, that just sort of allows us to maintain the status quo, correct? And for any reason they do happen, that's potential downside, all else equal?

Jens Martin Jensen

Well, I guess, the best thing that could happen to the tanker market is that they build this pipeline over to the West Coast and then they put the oil to China. But that will probably be unlikely. But I'm sure that other domestic production in America can cover this. So there could be a status quo, yes.

Operator

[Operator Instructions] We'll take our next question from Robert Wright from Financial Times.

Robert Wright

It's a fairly simple question. I'm sure a lot of people when they saw the reference to Hemen Holdings in the release will have thought of a way that Hemen Holdings stepped in, in early 2009 with Golden Ocean. Would you anticipate that any deal would have similarities to what Hammond Holdings did with Golden Ocean at that time? Or do you think there are significant differences?

Jens Martin Jensen

I think -- I can't really comment on the Golden Ocean scenario. But I can, of course, say that Hammond Holding has been building up Frontline from scratch to a period, which is not so much dissimilar to where we are now in the low market and the consolidation was done on buildup. That is probably what Hammond has foreseen, that this could be an interesting scenario again. But of course, right now, you have to show up the company and see where we are going from here.

Operator

There are no further questions in the queue. That will conclude today's question-and-answer session. I'd now like to turn the call back over to Jens Martin Jensen for any additional or closing remarks.

Jens Martin Jensen

I would like to say thank you for everybody to dialing in and listening to our presentation. Obviously, we have some interesting times ahead and I'm looking forward to our next presentation, where we can discuss what happen. At the same time, I would like to thank everybody in Frontline for their good work in a very difficult quarter. Thank you.

Operator

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

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