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Frontline Ltd (FRO -1.01%)
Q4Â 2019 Earnings Call
Feb 27, 2020, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen thank you for standing by and welcome to the Q4 2019 Frontline Limited Earnings Conference Call. [Operator Instructions].
And I would now like to hand the conference over to your first speaker today Robert Macleod. Thank you. Please go ahead.
Robert Hvide Macleod -- Chief Executive Officer of Frontline Management AS
Great. Thank you very much. Good morning everyone and good afternoon. Thank you very much for dialing in to Frontline's fourth quarter earnings call. Frontline's solid performance in the quarter was driven by increased tanker demand due to growing Atlantic-to-Asia trade tighter available fleet capacity and the IMO 2020 implementation. Just a few short weeks into 2020 the market strength started revising reverse sorry as issues were experienced in Libya Venezuela and Nigeria and there were also attacks in the Middle East. Then these sanctions were lifted on the cost of fleet. To make matters much worse the coronavirus appeared immediately impacting on world trade oil demand and the freight market. The VLCC segment is weak as ton miles demand has decreased while our Suezmaxes and Aframaxes two segments where frontline has significant exposure are enjoying better earnings on a relative basis.
The start to this year has been extraordinary. It has actually felt a bit like a horror movie at times to be honest. But importantly we are making money in today's freight environment having a modern and well-run fleet is key. Please let's move to slide three and look at the highlights from Q4. Net income was $108.8 million or $0.55 per share. Certainly a solid quarter and the $8.7 million profits related to the Trafigura deal is not included as net income. We declared a $0.40 dividend. The last dividend was $0.10 and was paid for Q3 of 2019. VLCCs made $58000 in Q4 and we have booked 83% at $90000 for Q1. Suezmax has made $38000 in Q4 and we have booked 75% around $72000 for Q1. LR2s made around $30000 in Q4 and we have booked 72% at $36000 for Q1. The 54 $554 million ICBCL sale-and-leaseback is in the final process of being signed and will facilitate the closing of the 10 Suezmaxes we are acquiring from Trafigura. Before going into more detail about the tanker market.
I would like to hand you over hand the call over to Inger. Please Inger can you take us through the financials?
Inger Marie Klemp -- Chief Financial Officer of Frontline Management AS
Yes. Thanks Robert and good morning and good afternoon everyone. Let's then turn to slide four and look at income statement. Frontline achieved total operating revenues net of wage expenses of $224 million and EBITDA adjusted for certain noncash items of $163 million in the fourth quarter for 2019. Frontline reported net income of $108.8 million equivalent to $0.55 per share and a net income adjusted for certain noncash items of $106.9 million equivalent to $0.54 per share in the fourth quarter. The net income in the fourth quarter excludes the $8.7 million of net cash received and accrued profit share in relation to the five charter-in and charter-out agreements with Trafigura that have been treated instead as a reduction of the acquisition cost of the vessels. Noncash items this quarter consisted of $0.8 million unrealized gain on marketable securities a $1.1 million loss related to our interest in FMSI and also $2.2 million gain on derivatives. The fourth quarter shows an increase of $120 million against adjusted EBITDA of $43 million and an increase of $106.9 million against adjusted net loss of $10 million in the third quarter of 2019. The increase in net income in the fourth quarter is explained by an increase in sort of time contract basis due to the higher reported TCE rates in the fourth quarter compared to the third quarter. Let's then look at the balance sheet slide five.
The main changes to the balance sheet as of the end of December 2019 compared with September 30 2019 relates to first an increase in cash and cash equivalents of $68 million which is the net effect of capex payments prepayment of debts drawdown of debts cash flow from operations and proceeds from issuance of shares under the ATM program. An increase in other current assets of one of $62 million explained by an increase in receivables and inventories. An increase in short-term part over some debt of $310 million related to debt maturities of the $500.1 million facility in December 2020 which is expected to be refinanced. An increase in equity of $130 million mainly due to the net income for the quarter shares issued in relation to the ATM program of cash dividends. As of December 31 Frontline has $343 million in cash and cash equivalents including undrawn amounts under our unsecured loan facility marketable securities and minimum cash requirements. Our remaining newbuilding capex requirements as of December 31 amounted to $302 million related to one Suezmax tanker and one VLCC which are both expected to be delivered in May 2020 and four LR two tankers which are expected to be delivered in January March and October 2021 and January '22 respectively. We estimate approximately $234 million in debt capacity for these newbuildings. As Robert said we are in the final process of signing the $554 million sale-and-leaseback agreement with ICBCL to finance the cash amount payable upon closing of the 10 Suezmax tankers on March 16 2020. The lease financing has a tender of seven years carries an interest rate of LIBOR plus a margin of 230 basis points has an amortization profile of 17.8 years and includes purchase options of strong plans throughout the period with the purchase obligation at the end of the term. In November 2019 the company signed a senior secured term loan facility with Credit Suisse for an amount of up to $42.9 million to part finance the Suezmax tanker resale under construction at Hyundai. The facility must choose five years after delivery carries an interest rate of another custom margin of 190 basis points and has a maturity profile of 18 years.
Now in February 2020 we obtained a commitment from Credit Agricole for a senior secured term loan facility in an amount of $62.5 million to part finance the VLCC resale. The facility which is subject to fund documentation will mature five years after deliver date carries an interest rate of LIBOR plus the margin of 190 basis points and has an amortization profile of 18 years. The average margin of bank debt is LIBOR plus 185 basis points at the end of the year 31st of December and will be LIBOR plus 195 basis points following the new borrowing of $659.4 million which I mentioned. Let's then take a closer look at cash breakeven rates and opex on slide six. We estimate the average cash cost breakeven rate for 2020 of approximately $22700 per day for the VLCCs $19700 per day for the Suezmax tankers and $15600 per day for the LR2 tankers. The fleet average estimate is about $19400 per day. These rates are the all-in daily rates that the other vessels must earn to cover the budgeted operating costs and dry dock estimated interest expenses TC and bareboat hires installments on loans and G&A expenses. For every $1000 per day in achieved rates in excess of our cash breakeven translates to approximately $22.8 million in incremental cash flow after debt service per year or $0.11 per share which shows the high importance of maintaining below cash breakeven rates. In the graph that we have shown on the right-hand side of the slide we have shown the incremental cash flow after debt service per year and per share assuming $10000 $20000 $30000 or $40000 per day in achieved rates in excess of our cash breakeven respectively. As an example with a fleet average cash cost breakeven rate of approximately $19400 per day an average fleet TCE rate of $49400 per day. Frontline would generate a cash flow per share after the service of $0.0339.
With this I leave the word to Robert again.
Robert Hvide Macleod -- Chief Executive Officer of Frontline Management AS
Thank you very much Inger. It's great to see the earnings potential we have and the recent financing just shows the position that Frontline is in. So it's very encouraging. With that let's move to slide seven please. I would like to explain why our long-term view of the market is unchanged. But let's talk about the virus first. The negative market effect created by the coronavirus is certainly strong and has hit oil demand head on. The impact on demand will play out over time and forecasts are very varied. We believe that demand will return and increase in 2020 year-over-year as we see the current situation as temporary rather than permanent. But we are obviously not in a position to predict when things will turn but we are cautiously optimistic that the virus will be contained sooner rather than later. Once this happens we are hopeful that we will return to a market where oil demand is healthy U.S. Gulf to Asia volumes continue to increase IMO 2020 plays an important role the fleet growth continues to slow. Sentiment as we all know is a strong tool. It is extremely negative now but it will turn.
Next please. Global fleet capacity growth is slowing. Fleet growth is an important driver of long-term earnings in the tanker sector. And investors have repeatedly been disappointed in the past as overordering quickly destroys up cycles. There are currently virtually no tanker orders being placed. And while this can quickly change the last time we saw the order book at present levels was back in 1997. We expect vessel off-hire to have a material impact on fleet capacity this year as it did in 2019. There are 137 VLCCs or 17% of the fleet due for dry dock in 2020. For Suezmaxes the number is 109 or more than 20% of the fleet. Importantly any off-hire related to scrubber installations is not included in this number. Dry dock gains cannot be postponed and global shipyards entered 2020 with the busiest schedule seen since 2007. The shipyards are even more stretched now due to the coronavirus locking workers and suppliers. This is bound to have a very positive effect on supply throughout 2020 and probably also into 2021. Let's look at next one slide nine. And believe it or not IMO 2020 actually did happen. Throughout last year the shipping and investment communities were focused on IMO 2020 and rightly so. In our opinion the impact of IMO 2020 has been overshadowed by other events recently but the effects are real and will remain a factor for quite some time. IMO 2020 has created a huge spread in owners' fuel-related costs.
As an example a modern VLCC with a scrubber will be earning $30000 a day at the same time as a large portion of the VLCC fleet will earn around their daily operating expenses. Frontline as you know has a very modern fleet with an average age of around four years giving us a tremendous advantage in the current fuel price environment. And as I mentioned early on in the call in the introduction we are at current rates still running at a profit. In conclusion slide 10 please. The company's potential in strong markets has been demonstrated in the fourth quarter results and through first quarter guidance. Frontline's position in the market is unquestionable and the fleet is the best we've ever had. Our breakeven levels are also at historically low levels. But for now the market headwinds remain strong. And we do not foresee any significant improvements until the virus has been contained. However when the virus is contained and a negative headlines to subside the tanker market could well reenter the strong earnings environment we entered in the fall of 2019.
With that operator I would like to turn to questions please.
Questions and Answers:
Operator
[Operator Instructions] The first question comes from the line of Jon Chappell from Evercore. Your line is now open.
Jon Chappell -- Evercore -- Analyst
Thank you. Good afternoon, Robert first question. You mentioned both in the presentation and in the earnings release that just given the uncertainty today and despite the long-term favorable outlook you're being cautious. So I assume cautious means not buying any new ships even though the market may bring asset values back a little bit. But how does that translate that into the dividend policy? It looks like about a 75% payout ratio for 4Q the 1Q to date rates are even stronger understanding that there's going to be a tail off for the remainder. Do you think that the Board becomes much more conservative with the payout just until there's a little bit more clarity on the demand side? Or would you expect a similar type payout of the first quarter results?
Robert Hvide Macleod -- Chief Executive Officer of Frontline Management AS
Again in terms of being cautious I think to take that first. I think cautious also means that we're extremely prudent in what we do on the chartering side. We're extremely focused on the running the company as best we can. Obviously what we do on the day-to-day fixing is extremely important. So this is we are laser-focused when it comes to that. You can see how we start in 2020. And unfortunately with the very high-quality fleet. We are still running in the black. In terms of dividend you did see that we pay the $0.10 in Q3 despite the loss in the quarter and we followed up with a $0.40 for Q4 today. So the second half of 2019 if you look at the payout ratio is looking it's looking very very good of course. So coming into Q1 we are off to a much better start here in Q1 than what we made in Q4. So I think the Board would now see how the well develops between now and the Q1 release and our board meeting here in May. So I think it all depends on how things pan out. If this sort of crisis in terms of the virus if this continues throughout then I'm sure the Board will have a very good thing. But if this is temporary and the world is going to a better place and getting back to normality then I think the payout will be decent. And Q1 so far is looking very good.
Jon Chappell -- Evercore -- Analyst
Okay. Great. Just my follow-up question for Inger. Looks like the short-term debt moved up pretty significantly in the December 31 balance sheet. I think there was a bullet point that wasn't addressed in the presentation saying that's part of the bigger facility and you expect it to be refinanced. How soon can you refinance that so we kind of see that debt level move down from the current liabilities back to the long term?
Inger Marie Klemp -- Chief Financial Officer of Frontline Management AS
So we deliberately haven't really looked into that yet. So we don't have any concerns about that at all in a way. So but I think we will plan to dig into that now in the next quarter in a way I guess. So next time we sit there and talk I guess we probably have something in place.
Jon Chappell -- Evercore -- Analyst
Okay. Great. Thanks again. Thanks, Robert.
Operator
And your next question comes from the line of Randy Giveans from Jefferies. Your line is now open.
Randy Giveans -- Jefferies -- Analyst
Howdy, Robert and Ingo How are you?
Inger Marie Klemp -- Chief Financial Officer of Frontline Management AS
Im fine. How are you?
Randy Giveans -- Jefferies -- Analyst
Great. So two questions for me. First on looking at your share count and share issuances obviously in 3Q and 4Q when the shares are trading at large premiums to NAV that made sense. In 1Q with the latest Trafigura acquisition shares still outstanding. But going forward now that your shares are back below NAV and pretty meaningfully in our view how do you view share repurchases at this point either in kind of a complement to the dividend or instead of the dividend?
Inger Marie Klemp -- Chief Financial Officer of Frontline Management AS
Sorry we didn't completely catch the question. Are you talking about repurchases or issuances?
Randy Giveans -- Jefferies -- Analyst
Yes the latter. Now that the stock's well below NAV going to share repurchases in addition to the dividend or in lieu of the dividend.
Robert Hvide Macleod -- Chief Executive Officer of Frontline Management AS
We are It's something that we are watching very carefully how things are developing of course because that is the real alternative.
Randy Giveans -- Jefferies -- Analyst
Okay. And then can you give some updates on your scrubber installations? How many have completed? How many are coming? And then if you have any kind of plans for further scrubber additions now that we're seeing kind of the spread tighten a little bit but kind of be a little more stable.
Robert Hvide Macleod -- Chief Executive Officer of Frontline Management AS
So at the moment we have 26 vessels sailing with scrubbers in operation. We have a further six due for installation over the next most of the next quarter but partly Q3 probably as well given our view on various delays in the yards it might be Q3. That will bring us to 50% of the fleet. And to be clear on the 50% there's overweight on Suezmaxes and VLCCs and under way from LR two. So we view this econo simple the bigger the ship the more that makes sense. We have not made any decisions on doing scrubbers on ships outside of their docking schedule. It is something that we consider and we're monitoring given our ownership in Clean Marine. We have superior access in both in timing and price for scrubbers. But the answer is 26 at the moment six scheduled and monitoring further.
Randy Giveans -- Jefferies -- Analyst
Perfect. And then one quick question 5-second answer is all you need. LR2 is any of those switching to dirty or have switched to dirty in the recent month or two with the large differentials between the crude tanker rates and the products?
Robert Hvide Macleod -- Chief Executive Officer of Frontline Management AS
11 clean seven dirty one gone dirty over the last eight weeks.
Randy Giveans -- Jefferies -- Analyst
Excellent. Thank you so much.
Operator
And your next question comes from the line of Greg Lewis from BTIG. Your line is now open.
Greg Lewis -- BTIG -- Analyst
Yes, thank you and good afternoon. Rob could you talk a little bit about what you're seeing in the rate market for these? I mean clearly it was it's been a tough month. But it looks like over the last week you've seen some stabilization and a little bit of uptick in the V market. Kind of just any kind of color you can provide around that? Was that just a shift in sentiment? Pickup in volumes? Any kind of color would be helpful.
Robert Hvide Macleod -- Chief Executive Officer of Frontline Management AS
So the V market as we all saw OK was completely shot to pieces right? And then slowly started picking up about two weeks ago. I think it reads to lower bottom. Around the world's got 40000 which was the high 20000 30000 for our best ships and opex for 2/3 of the world fleet. This week we've seen quite a lot of under-the-radar activity. The first ships to be taken out in the weak market are the weaker links and the older ships. So they've been picking off. And then suddenly we're seeing actually today and yesterday that the list isn't looking that bad in the Middle East. So now the modern ships are starting to sniff but the world's got 50. And then you're getting your best ships might be it probably starts with a four but I'm not saying it's just sort of it's so vulnerable out there. It could well be down five points by the time we've done the call. But overall I see the V market as finding its feet and slowly getting a little bit better. We're seeing quite a few light swing jobs which takes up some capacity in the Far East. But over on the Aframaxes and the Suezmaxes they kept up a lot better. So that is the reason why our numbers are still if we fixed all our ships today we'd still be in profit. It's because of our Suezmaxes and Afras. Because stand-alone the leases are not great. But hopefully we've seen the worst and we start improving from here. The FFA or the ships' market is also indicating that but only time will show. It seems that the world is getting one shock after another. But surely there must be some good news soon.
Greg Lewis -- BTIG -- Analyst
Okay great. And then just one more for me. One of your competitors added a couple of VLCCs in the newbuild market. I know Frontline always tries to be acquisitive when it can. I guess two things. One is I mean clearly the turmoil that we've seen over the last month or I guess early since early mid-January. Has that dampened the appetite for buyers and sellers to come together for sales? And really what I'm trying to understand is are there still tankers whether it's Suezmaxes or Vs or even I guess LR two,s that Frontline is actively looking at in terms of potential acquisitions? Or to your points about taking a cautious tone and say we're entering March and really don't expect us to be out in the market looking to acquire tonnage until we see maybe some more stability later this year?
Robert Hvide Macleod -- Chief Executive Officer of Frontline Management AS
We're always monitoring. And as I said earlier short term we're very cautious. So we're putting more in the silo now than we were or we are more on the silo than and we were a month or two ago. But if the right deal is out there and then we're still there. I think our long-term view is very clear. We think this is but we don't think this is a permanent it's a temporary situation. And to the deal that you referred to the three ships that we saw. You might think that that now looks like a terrible deal but I think that deal still stands ground as a decent deal. If you it's for delivery and now we are still there. We're turned off the lights certainly not for further deals.
Greg Lewis -- BTIG -- Analyst
Great. Perfect. Thank you very much.
Operator
And your next question comes from the line of Michael Webber from Webber Research. Please go ahead.
Michael Webber -- Webber Research -- Analyst
Hey, good morning, guys. How are you?
Robert Hvide Macleod -- Chief Executive Officer of Frontline Management AS
Im fine. How are you?
Michael Webber -- Webber Research -- Analyst
Hey, good. Robert just wanted to loop back to the conversation around demand in this environment and there's obviously not a lot you can control for right now. But in terms of thinking about coming out of this and an eventual demand recovery or rebound how do you think about positioning your fleet for that? It might be too early but I'm just curious in terms of where you're choosing to what are there for the so much opportunities that could develop as production is kind of ramping kind of running beyond actual consumption levels here? Just how do you think about positioning your fleet the best to capture an eventual demand redone?
Robert Hvide Macleod -- Chief Executive Officer of Frontline Management AS
In terms of this obviously for the various segments. But to the one the Aframaxes and Suezmaxes we normally have a strong presence in the Atlantic basin and that is fortunately the case now. The Atlantic and the Mediterranean Black Sea and the Baltic has been hit a lot less. So we're in the right position there. We're not seeing that much inquiry going east. So we're sticking around. So we're in the right place I think where we are. For the Vs they are spread out as per normal. There's quite a lot of fixing out of the Middle East. And at today's levels if I have the choice between a 40-day voyage or an 80-day voyage I will go for the shorter voyage given our market view. As soon as we start seeing real real changes here and the contained virus and so forth we will be taking more ships balancing to the west on speculation. Because that will then coincide with Chinese demand coming back and giving the U.S.-China deal what we then believe that the U.S. Gulf exports on fees will pick up tremendously. So we want to be in position with that. And for the storage question. We saw the market into contango two three weeks ago then Australian backwardation. Now we're back in a contango or small contango again. But I think in terms of closing stores it doesn't defend the economics but this could suddenly happen of course given how low the oil price is. So it's something we're monitoring. At the same time we're much less of a floating storage player now than we were going back a few years. We've sold 19 old ships over the last three years fortunately. And with our fleet now we are much more focused on trading but if we have short-term stuff we can been doing that at better rates than what the market gives us on an AG East then we'll do it.
Michael Webber -- Webber Research -- Analyst
Yes that was kind of my follow-up question just given the kind of the whipsaw we see in that curve over the past month. I was just curious what are the relationships with FAFI that gives you a bit of a leg up or kind of a first look if someone were to move quickly on floating store just given how many how violent are we seeing that curve shift recently whether that's something you'd be open to or whether that be whether you see any kind of incremental interest there?
Robert Hvide Macleod -- Chief Executive Officer of Frontline Management AS
There is glory into it. And then looking away from Frontline's fleet then it's a fact that the large majority of the fleet is around the opex level. So when you come into that sort of category then there will be certain takers. And what we know will happen then. Did you strain the supply on that type of ship and that will affect the rest of us. So I'm of course very hopeful that it happens. And it could well be given how depressed the market is.
Michael Webber -- Webber Research -- Analyst
There enough. Alright guys. Thanks, guys.
Robert Hvide Macleod -- Chief Executive Officer of Frontline Management AS
Nice.
Operator
And we have no further questions at this time. You may continue.
Robert Hvide Macleod -- Chief Executive Officer of Frontline Management AS
Okay. Thanks very much for calling in everyone. And I would also like to take the opportunity to thank everyone at Frontline for their hard work and great efforts. We're going to come out of this strong. And hopefully it's not going to be too long. Thank you very much everyone.
Operator
[Operator Closing Remarks]
Duration: 32 minutes
Call participants:
Robert Hvide Macleod -- Chief Executive Officer of Frontline Management AS
Inger Marie Klemp -- Chief Financial Officer of Frontline Management AS
Jon Chappell -- Evercore -- Analyst
Randy Giveans -- Jefferies -- Analyst
Greg Lewis -- BTIG -- Analyst
Michael Webber -- Webber Research -- Analyst
