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Frontline Ltd. (NYSE:FRO)

Q1 2008 Earnings Call

May 22, 2008 9:00 am ET

Executives

Jens Martin Jensen - Interim CEO and VP S&P

Inger Klemp - CFO

Analysts

Jon Chappell - JPMorgan

Operator

Good day, and welcome to the Frontline first quarter 2008 results presentation conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to your speaker today, Mr. Jens Martin Jensen. Please go ahead.

Jens Martin Jensen

Good morning, and welcome to Frontline Q1 2008 financial presentation. My name is Jens Martin Jensen; I am the interim CEO of Frontline. I am 44 years old, I am married and I have five children. Until last week, I was working for the company in Singapore. The program for this presentation will be that our CFO, Inger Klemp, will go through the financials and the highlights of the first quarter. Thereafter, I will be talking a little bit about the market. After that, we will be taking your questions. Thank you. Inger, please.

Inger Klemp

Okay. Thanks, Jens. Hello, good morning. I will guide you quickly through the major transactions and the financial highlights in the first quarter 2008. So please would you move to slide four.

We invested $20 million in Navig8 in February 2008. Navig8 controls approximately 30 vessels including newbuildings, and are actively trades the time-charter fleet. The investment should be considered as purely financial from Frontline's point of view, but gives also Frontline at the same time a foothold in the clean petroleum product market.

In February, we spun off 17.5% on ITCL to the Frontline shareholders, and we listed the company on the OTC exchange in Oslo. In March, Frontline announced that together with companies indirectly controlled by Mr. John Fredriksen, our main shareholder, it had 9.7% holder in OSG, and on May 20 we filed a Schedule 13D saying that companies indirectly controlled by Mr. John Fredriksen had reduced their holding to approximately 245,000 shares. The aggregate holding as of May 20, for Frontline and companies, then indirectly controlled by Mr. John Fredriksen amounts now to 1,794,900 shares, corresponding to 5.2% ownership.

In April 2008, we announced that we had entered into contract with Zhoushan Jinhaiwan Shipyard in China for delivery of four VLCC's newbuildings for delivery in the second half of 2011. The contract price for these vessels will be $135 million each. In May 2008, we declared options for further two similar VLCC newbuildings at the same yard and at the same contract price for delivery in the first half of 2012.

The single hull Suezmax Front Maple was sold in January 2008 by Ship Finance and the charter with Frontline has terminated. Frontline has recognized a gain in the first quarter of 2008 of approximately $17.1 million related to the termination of that lease.

Further, inline with our strategy to reduce exposure to single hull tonnage, Frontline has in the first quarter of 2008 agreed with Ship Finance to terminate the long-term charter party between the companies for the single hull VLCC Front Sabang and Ship Finance has also leased the vessel to an unrelated party. Frontline has received a compensation payment of approximately $25 million in the second quarter of 2008 for the early termination of the charter party, and that will be recognized in the second quarter of 2008.

In May, we received the settlement from Bocimar in the amount of $16.6 million, which will be recognized in the second quarter of 2008. This relates to a guarantee that Frontline made to Golden Ocean in connection with the spin-off in December 2004, which we later then paid to Golden Ocean and we have now been settled by Bocimar for this amount. This was something which was related to the charter party that Bocimar had at that time. The third heavy lift vessel, Front Comor, converted by COSCO was redelivered to Dockwise Limited in May, 2008.

Please turn to slide 6. It is a pleasure to present the strong first quarter result for 2008. Frontline reports net income at $221 million and earnings per share of $2.95 in the first quarter of 2008. This is including a sale of assets and securities in a total amount of $37 million.

As you can see from slide 7, this relates to $18 million gain on the spin-off of 17.5% of the Company's shareholding in ITCL, a $3.5 million gain on the on the forward contract to purchase shares in Overseas Shipholding Group, and $17.1 million gain relating to the termination of the lease for the Front Maple. In addition to that we have offsetting item of $1.6 million related to increased delivery costs for delivery of Front Target.

The net income excluding gain was $184 million in the first quarter, and the earnings per share was $2.46. On the basis of that we announced dividend of $2.75 per share for this quarter.

Further, based on transactions made in the first and second quarter, I have also mentioned some accounting effects in the second quarter 2008. If you look into slide 7, you can see that as mentioned the settlement from Bocimar in the amount of $16.6 million will be recorded in the second quarter. We had terminated the charter on the Front Sabang and we record a termination payment in the amount of $24.6 million in the second quarter.

Lastly, we have delivered Front Comor converted to a heavy lift vessel to Dockwise in the second quarter, and we expect to deliver Front Traveler during the second quarter of '012. The estimated gains in this connection together with deferred gains related to transactions will amount to approximately $106 million. Thereof, $73 million will be contingent on delivery of the last heavy lift vessels to Dockwise.

Please move to slide 8. Net income excluding gains is $127 million higher during the fourth quarter of 2007. The main reason for the improved result is a stronger stock market, which has resulted in an increase in results on a time charter basis. As a result of the stronger market, we have recorded a profit share expense to Ship Finance of $33.6 million in the first quarter, which is $18 million higher than in the fourth quarter.

Total operating expenses in the first quarter compared to the fourth quarter have decreased by approximately $6 million, and that is mainly related to that we did not drydock any vessels in the first quarter.

Charterhire expenses have increased by almost $20 million in the first quarter compared with the fourth quarter of 2007. This is mainly a consequence of chartering in six vessels from Nordic American Tankers under a floating rate time-charter agreement. These six vessels are also included in result on time charter basis with $19.8 million and about 450 trading days.

The administrative expenses in the first quarter reduced with approximately $5 million compared to the fourth quarter 2007, and this is mainly as a consequence of accruals made in the fourth quarter 2007, and also some reversal of this cost in the first quarter of 2008. The company recorded interest expense in the quarter of $48 million, of which $13.6 million relate to the ITCL.

Moving to slide 9. The VLCC fleets earned in the stock market approximately $105,000 a day for double hull vessels, and $39,600 per day for the singles. It gives an average spot earnings of $90,800 a day. The average for the whole fleet was about $92,400 per day in the quarter.

Since that fleet earned in the stock market approximately $53,700 a day for double and $44,600 a day for single, but an average spot earning of $53,100 per day. The average for the whole fleet was about $51,600 per day in the quarter, and the OBO's earned $43,200 per day in the quarter.

The ITCL vessels are not included in these numbers. The TCE numbers show that Frontline has outperformed the competitors which have announced the numbers in the first quarter of 2008. At the same time we have outperforming the market.

The results also showed a continued differential in earnings between single and double hull tonnage and the differential is about $65,000 a day for VLCC's. However, this only relates to one vessel and it is not also $100 per day for Suezmaxes in the first quarter.

So then moving to slide number 10. As I mentioned, we did not drydock any vessels in the first quarter of 2008, and that is three vessels less than in the fourth quarter 2007. So as you can see from the slide, we had an average operating expense of approximately $8,300 per day in the first quarter of 2008 compared to approximately $9,500 per day in the fourth quarter 2007. We also have less off-hire days in the first quarter than we had in the fourth quarter, again related to that we had no dockings in the quarter.

Moving to slide 11. The total balance sheet is approximately $13 million less in the first quarter than it was in the fourth quarter 2007. The book values of newbuildings have increased with installments paid in the quarter. Long-term assets have increased with investment to navigate the $20 million. Vessels under capital lease have decreased to net approximately $62 million as a consequence of termination of one lease and ordinary depreciation in this unit.

Short-term debt is higher than in the fourth quarter and that is mainly a consequence of that, the tax lease related to one of the ITCL vessels British pioneer. It is classified as a short-term lease since the maturity of the lease is less than 12 months. The opposite of that is of course our long-term debt distributed equally. Minority interested books with $5 million, and that is relating to the 17.5% in ITCL not owned by Frontline.

Moving to slide 12. The cash cost spread even rates are approximately $31,500 per day for lease and $23,500 per day for the Suezmaxes. $24,200 is the cash cost for the breakeven base for the OBO's. The cash cost breakeven rate does not allow for the contract coverage that the company has. Assuming that the contract coverage is used to subsidize the spot vessel, we will need a lower breakeven rate for the spot vessels.

Moving to slide 13. Following the recent ordering of the VLCC newbuilding contracts in April 2008, Frontline has now 10 VLCC newbuildings and eight Suezmax newbuildings on order. This confirms our position as a leading operator of quality Suezmax and VLCC tonnage.

The newbuilding program is developing according to schedule; however, we expect that the eight Suezmaxes built at Jiangsu Rongsheng Heavy Industry yard in China will be slightly delayed by approximately one month.

The total contractual cost of the newbuilding program is approximately $1.8 billion The current market value of these newbuilding contracts are estimated to be at least several hundred million higher than the original contract prices. In attempt to finance the newbuilding program with 80% debt either on a running basis or after we had invested 20% equity. As of March 31, 2008, the Company has paid $136 million of the contract price and expects to pay approximately a further net of $93 million in the second quarter of 2008.

Moving to slide 14 and 15. The number of vessels in the Frontline fleet is 72 vessels. That includes the vessels on commercial management and ITC vessels as well. This is compounded by 38 double hull VLCCs, seven single hull VLCCs, one Suezmaxes single hull and 18 double hull Suezmaxes together with eight OBOs that we have.

We have a contract coverage of 39% in 2008 and we have 30% in 2009. The average time charter rate for the total fleet is $41,400 a day in 2008 and it's $42,000 a day in 2009.

With this, I leave the room to Jens again.

Jens Martin Jensen

Thank you, Inger. I think we are now on slide number 16, which has to do with the market update and earnings. As you can see from the red graph, first quarter 2008 was a very volatile quarter, but at the same time, the average was quite firm. As Inger said, the earnings from VLCCs was around $100,000 a day and Suezmaxes around $50,000.

This market really kicked off at the end of 2007, when the Saudi producers start giving a huge discount to mainly U.S destinations, which gave about a long haul turn mile which started the market. Subsequently, we have seen the Chinese oil imports rising quite a lot, and the increased activities for the East.

At the same time, we have seen big new movements from mainly Venezuela East, where before we would have seen two, three shipments per month, now we are around 12, 15 which, of course, is again very positive for the long haul market. We have put in a little bit about stock building. We believe that China has been adding extra imports, maybe to build up some stocks before the Olympics should they decide to maybe, use a little bit less coal for pollution reasons.

The strikes at Lavera again happened around March this year. The French people are normally very good at striking around their holidays and they have done this for the last 10 years in a row now. However, this has been very positive for the Suezmax market.

At the same time, we have seen quite unusual storage activities in Iran. Right now, there seem to be at least 12 VLCCs storing in high sulphur crude, which they have not been able to sell in the market. Normally they sell quite a big volume to the Far East buyers and India. There seem to have been a pricing disagreement between these parties. So this has also been positive for the market.

The fleet growth, everybody had predicted that the fleet for 2008 will actually grow by 8%. However, we will show you on our latest slide that actually, we are coming out this year best with the negative growth maybe even actually losing tonnage.

As Inger mentioned, there has been quite a multi-tier market, single-hull versus double-hull. It is now actually a four-tier market with small and largest single-hull, old and modern double-hull. This is also giving quite irregular trading patterns and if I can add to -- probably that means that the market has been tighter.

Finally, we have seen quite forward fixing than what we had seen before, and what we are seeing now is actually fixes being done for end of June, which will mean that these results will come into the third quarter, so even our third quarter has started quite well this year.

If we go to slide number 17 which has to do about the general outlook and oil demand. The top curve looks a bit dramatic, but actually China came out with the first quarter the GDP increased at 10.5%, had it not been for the bad weather and mainly in the southern part of China, expectation would be have been up to 13%. Of course, we have seen a slowdown on the US side and in Europe. However, overall it is a very positive growth demand.

Actually the next slide which is number 18 is my favorite slide. I think any time government should have a copy of this thing on the wall in their office which will show what is happening; when you make money oil will be consumed. This is a graph showing what the oil use per day per person is in relation to the GDP, obviously, the biggest oil consumer has been America for quite sometime with about 25 barrels per person per year.

We are not saying that China will ever reach the same standard as the US market. However, you will be quite happy if you see China, which is about 2 barrels now per person just moved up to Thailand that would be about 5 barrels per person. There are 1.2 billion people in China. That is quite a lot of oil that needs to be transported.

To put a little comment on that, the bottom line that we have put in, in America every thousand people own 1023 cars. In China that number is 9. In Q1 a level in China, the car sales increased by 20%, and 1.8 million cars were sold in Q1. This is very positive obviously for crude and refinery.

On graph or in page number 19, we have just mentioned the oil price of course everybody knows what is happening to the oil price. Then a little comment on the bottom regarding the bunkers, we are of course lucky that the market is more spot related and we are being compensated in the strongest spot market for bunker cost, like the airlines and all are industry is with enough they are always catching up to this factor. However, we are actually, for us it's okay for the time being.

Now on the other slide, it is about the oil price which for the last ten years has been in contanoo, meaning it could make sense to store oil as the oil prices will always grow up. Now the oil price has actually been backwardating going forward. However, it seems to be that oil prices are coming almost back to contangos, and this could be meaning that we will have a little bit oil storing again.

Regarding the VLCC fleet. Coming into 2008 and looking back a few years and look like the fleet growth in 2008 would have been around 6%. However, actually with various conversions, scrapping, and the utilization into all that other ships, we actually see now the fleet going out of 2008 will be minus 1 VLCC. Four VLCCs are tied up in various projects 17 has already been converted and 23 are in the process of being converted.

The same is happening for the Suezmaxes which is on page or slide number 21. Again beginning of the year going back, it looks like a 4% growth, but this is actually also coming out at a flat growth.

Just going back to the VLCCs. If you look for the next two years in 2009 and 2010, we will have around 120 ships being delivered, all going well. Then we come out at the end of 2008, there will be around 100 single hull VLCCs left. This is almost the same as the newbuilding program. So we think since these ships will have to be phased out from the oil's trade or converted into other non-oil trading business that we will actually see a rather undramatic fleet growth.

The Suezmax it is the same. We do not have so many single hulls ships left in comparison to the fleet. However, what we see in Suezmaxes is that many of these ships are built at green field yards; one of them is Rongsheng, where we have efforts of building eight ships. We had thought, we had mentioned in our report is that our first ship will actually be little bit delayed. So that will only come into 2009. We believe that the ships will of course be delayed, so it will be delivered but there will be a delay throughout all these new yards and we will see all of them being stretched out. So the impact of these newbuildings will not be as strong as feared.

Slide 22, sorry, is showing exactly, what has happened with the fleet in 2008. There has been a convergence into VLCC last oil carriers' dry bulk ships and we have actually had three ships also just sold for pure scrapping demolitions. Same story for Suezmaxes, we have seen conversions to bulk carriers at PSO and FSOs.

Now we are on slide number 23. Newbuilding prices at present is around $155 million for VLCC, and for Suezmaxes is around $95 million. Our average newbuilding cost follow VLCC is around $120 million and for Suezmaxes is around $72 million. So, we have quite a big potential upside on the assets in our ships if we want to sell them off or do otherwise with them.

The little graph next to the newbuilding prices shows the development of the time-charter market. Right now you could fix the VLCC for three years at around $60,000 and Suezmaxes for around $40,000. However, it is more interesting as we see now Asian oil companies fixing VLCC's here for 2011 delivery at low 50's. So, there is potential to lock in our newbuildings should we want to do so at quite healthy rates which will give us a good return.

On slide 24, about prospects, we believe that the prospects for Frontline are pretty good. We are quite a trim company; we are only 50 people throughout. We are a very low cost operator as we have been since the beginning of the company. We have a very well priced fleet, and we have a well priced newbuilding program. We have a certain contract coverage, but at the same time we have room to enjoy the spot market. We have very low cash breakevens like Inger said, and as always, we are always looking for new deals to make a fast buck.

If you look at the market in general, the order book, as we do not think the concern is as big as other people think, we think that there will be lesser impacts, there will be delays. Greenfield yards, there will be much quicker phase out into other trades.

Other thing which we have not mentioned in here is actually the utilization of the present fleet. If you look at drydocking at VLCC, two to three year ago, it would take around 15 to 20 days. Now the same process will take 30 to 50 days, almost doubling in time. This is mainly due to that all these repair yards are so stretched with conversion work, even some are taking newbuildings. So it is difficult and that could be utilization of a fleet town.

We have seen new players coming in; consolidate the market, in a time when he is TMC We have taken 20 new VLCC's on job and this has helped positive in the market also, we see a better consolidation of the fleet.

Finally, of course with the high oil price being experienced now, we have seen many countries are trying to pressure OPEC to produce more oil. The American President was successful last week in getting the Saudi Arabians to increase their output and thus, we think this could help more.

So overall, we are quite happy. The first quarter was great so far and what we have done in the second quarter is very good and third quarter is looking good as well. Thank you.

With that, we are going to go onto the Q&A session. We have put a picture of an animal feeling, at least what I feel, I should say, and as a quote from one of the great tanker builders in the world who will soon retire. I think we are ready to take your questions now. Thank you for listening.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Our first question will come from Mr. Jon Chappell from JPMorgan. Please go ahead.

Jon Chappell - JPMorgan

Thank you, good afternoon. Jens and Inger, Frontline has historically sold vessels, sell and purchase market has been very good to you, and you mentioned both, the press release and in your comments that your newbuildings could get much stronger prices in the current market to what you paid for them. What is your plan with the newbuilds, especially as you add more VLCCs and exercise some options? Do you think the Frontline will essentially; ultimately take deliver of all those assets? Or do you think that both ?

Jens Martin Jensen

Well, if I have may reply, when we started to enter into a more aggressive newbuilding program, it is of course to replace our second house fleet and we have so far, so loud around 5 or 6 VLCCs and of course 7, 8 Suezmaxes, which has been sold to conversion into heavy lift. So our main idea right now is to replace our remaining single hulls with double hulls, but of course, at the same time as you say that is a quite a big potential in these values of the ships and maybe it is the right decision to sell out, capitalize on the market. And maybe challenge that we are constantly monitoring this process and we are looking at all possibilities. Thank you.

Operator

(Operator Instructions). As we have no further questions, I think we have another question from HBK. Go ahead.

Unidentified Analyst

Hello, I was wondering what is the net cash impact from the heavy lift vessels you will deliver to Dockwise will be in the second quarter?

Inger Klemp

Well, we have not the given specific information about that, but obviously we will deliver the two large vessels as per the plan the second quarter. One is already delivered, and the second one will eventually be delivered towards the end of the quarter. We will then have a book gain in connection with that, which is calculated approximately $106 million, whereof, $73 million will be contingent upon the delivery of last heavy lift vessel.

The gain is calculated on the basis of both the gain related to each of the vessels delivered, but also it is calculated on the basis of deferred gain, which we have not been able to record until we are delivering the last vessel. That is why last vessel, we have come to $160 million.

However, this is a book gain to start with. At the same time, of course, when we are delivering these two vessels to Dockwise, we will receive $80 million in total, repayment of the seller's credit which we extended to Dockwise in connection with the sale back in March 2007.

At the same time as well, we also will have of course some correlation costs which we also have paying and that we will do. So, the effects will be the balance of that.

Unidentified Analyst

Roughly how big is the net cash effect?

Inger Klemp

Related to that quarter. Well related to the delivery of those two vessels, I would say, maybe $30 million if we think if that is credit left there with still the remaining expenses.

Unidentified Analyst

Yes. Okay. Or I should see you or when do you plan to report first quarter numbers?

Inger Klemp

We have not set the date yet, but it will be within May.

Unidentified Analyst

Okay. Also in the balance sheet, you said that newbuildings is $199 million. In this presentation, you said that you have paid them $146 million for the newbuildings. What is the difference?

Inger Klemp

What is the difference between 199 and the installments paid?

Unidentified Analyst

Yes

Inger Klemp

Okay. We have some payments made on heavy lift in this well, as you know the conversions.

Unidentified Analyst

Okay. Thanks a lot.

Inger Klemp

Okay.

Operator

Now we have another question from Jon Chappell from JPMorgan. Please go ahead.

Jon Chapell - JPMorgan

Thanks. My line was cut off last time.

Jens Martin Jensen

We are sorry.

Jon Chapell - JPMorgan

I hope you heard my first question I did not hear the answer tough.

Jens Martin Jensen

It was a very good answer, I could say that. Do you want to hear again?

Jon Chapell - JPMorgan

Please. I never heard.

Jens Martin Jensen

Yes. I think your question was about potential asset gain if we were to sell this newbuildings. As I mentioned that I mentioned that when we order these ships, it is the cost to replace the single hulls as they phase out or get soon out. However, we are always looking for opportunities.

Sometimes it is good to sell and make a profit, maybe chatter against it. So we are constantly looking at what to do and we will not exclude that we will sell some of the ships. However, as of now, we have not decided that yet.

Jon Chapell - JPMorgan

Okay. You will forgive me if these all questions were asked because I did not hear anybody else's question. Just question on the Nordic American tanker chatter, and what is the length of those contracts and as far as the accounting is concerned is it a loss between revenue and Charterhire expense, or they are basically the same number?

Inger Klemp

Accounting wise, the Charterhire expense and revenue is approximate the same number, yes.

Jon Chapell - JPMorgan

Okay.

Jens Martin Jensen

The duration is one. It is a renewable rolling one-year deal.

Jon Chapell - JPMorgan

Okay. Finally Inger is there an updated drydocking schedule for the second quarter through the fourth quarter this year?

Inger Klemp

No. However, for the second quarter I think will drydock three vessels. Jens, I do not remember actually, unions?

Jens Martin Jensen

No, but of course in this high market we are trying differ as much as possible. We have three dockings under way, and this will be done in the second quarter, and we are not finalized the planning for the third and the fourth quarter yet. However, this has to do with of course stock availability and when we see the right timing to do it.

Jon Chapell - JPMorgan

Alright. The vessels in the second quarter are those days leased or are still as our?

Jens Martin Jensen

Both.

Inger Klemp

Both are.

Jon Chapell - JPMorgan

Okay. That is all I had. Thanks Jens and Inger.

Jens Martin Jensen

Thank you.

Inger Klemp

Okay.

Operator

(Operator Instruction). Sir, we have no further questions and I would like to turn the call over back to Mr. Jensen.

Jens Martin Jensen

Yes. Thank you very much for tuning and listening in. The Q1 has been a very quarter for the Company. We feel we are strongly in to the second quarter. We are quiet far into the second quarter. Things are looking very well. We are very optimistic about going forward in the market. We know that in most financial volume in a bit of turmoil.

Of course, the higher oil price is potentially looking at dampen certain countries. At the same time, we believe that there could be further reduction of oil coming out of Opex. We see a big productions potentially coming out of West Africa and as well as, in the Mediterranean and these we will be going to each destination. So we are quite confident going forward. Thank you. Thank you for listening. Thank you.

Operator

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

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