Frontline (FRO) Q2 2018 Earnings Conference Call Transcript

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Frontline (FRO 1.54%)
Q2 2018 Earnings Conference Call
Aug. 22, 2018 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Robert MacLeod -- Chief Executive Officer

Thank you. Good morning and good afternoon. Thank you very much for dialing in. This is Frontline's earnings call for the second quarter of 2018.

I will start by briefly going through the highlights of the quarter. Following that, Inger will run us through the financials. We'll then look at Q2 earnings and I will guide you on Q3. We will then move on to the current tanker market and outlook, where we will focus on why I'm increasingly optimistic on tanker rates going forward.

The call will be concluded by taking your questions. Let's get started and look at the company highlights, please. We recorded a net loss of $22.9 million, or $0.13 per share, adjusted for noncash items in the second quarter. Our results were driven by weak spot markets.

Earnings on our older VLCCs were particularly weak. From this, the spot TCE on ships less than 15 years of age was $13,200 and the ECOs made $17,000. Q3 is booked very close to our cash breakeven levels thus far, with 82% of the days at $21,700 on the ships under 15 years. We terminated long-term charters for three VLCCs recently in a continued effort to divest of less efficient tonnage.

We also invested in Feen Marine, a leading scrubber manufacturer, and we hold a 20% stake in the company. I will touch more on this later in the call. With that, I will hand the call over to Inger to take us through the financials, please.

Inger Klemp -- Chief Financial Officer

Thanks, Robert, and good morning, and good afternoon, ladies and gentlemen. Let's then turn to Slide 4 and look at the financial highlights. Frontline achieved total operating revenues net of voyage expenses of $73 million in the second quarter and reported a loss of $22.9 million, equivalent to $0.13 per share. The noncash items this quarter consisted of a $0.8 million mark-to-market gain on marketable securities, a gain on derivatives of $1.9 million, and also a gain on the release on accrued drydocking cost of $2.1 million, which were accrued at the time of the merger with Frontline 2012.

After adjusting them for these noncash items, we show adjusted EBITDA of $28 million and adjusted net loss of $27.7 million in the second quarter against adjusted net loss of $13.6 million in the first quarter of 2018. This is a decrease of $14 million. Let's then look a bit closer on the numbers and move to Slide 5, income statement. The decrease in the results in the quarter of $14 million is mainly explained by a decrease in [Inaudible] basis of $8.2 million due to the decrease in the TCE rates in the second quarter compared to the first quarter.

We have a decrease in ship operating expenses of $600,000. We had an increase in interest expense by $2.4 million, mainly due to the drawdown on debt in relation to the delivery of three vessels in the first quarter. And finally, we had an increase in other expenses of $5.4 million, mainly due to new charters on two VLCCs in the quarter. Then let's take a look at the balance sheet on Slide 6.

Changes to the balance sheet as of end of June from March 31, primarily relates to a decrease in vessels of $204 million due to depreciation in the quarter, an increase in newbuildings of $17 million due to installments paid in the quarter, a decrease in vessels under capital leases by $8 million due to the depreciation. Net increase in debt with $6.4 million in the quarter due to drawdown on the Hemen facility, ordinary loan repayments, reduction in obligations on the capital leases, and reduction in current liabilities. And finally, a reduction in equity of $22 million due to losses in the quarter. As of June 30, Frontline has $4 million in cash and cash-equivalents, including undrawn amounts under our unsecured loan facility.

Our remaining newbuilding capex requirements amount to $112.5 million, relating to the two newbuildings, and we have approximately $111 million in debt capacity under our newbuilding credit facility. We have no near-term debt maturities. The first debt maturity is in November 2019 when our senior unsecured loan facility of up to $275 million matures. We have drawn $190 million under this facility currently.

Let's then take a closer look at cash breakeven rates and opex on Slide 7. We estimate average cash cost breakeven rates, which is for the remainder of 2018, of approximately $23,500 per day per VLCC, $18,500 per day for the Suezmax tankers, and $16,200 per day for the LR2 tankers. These rates are all-in daily rates that our vessels has to earn to cover budgeted operating costs and drydock, estimated interest expense, TCE and bareboat hire, installments on loans, and G&A expenses. Every $1,000 per day in achieved rate in excess of our cash breakeven rate translates to approximately $19 million in incremental net income per year or $0.11 per share, which shows the high importance of maintaining low cash breakeven rates.

In the upper right-hand graph, we show some planned historical VLCC cash breakeven rates, along with average VLCC spot earnings in the period 2005 to 2018. Looking back in history, it is only the year 2009 and through '11 to '13, we have a cash breakeven rates of higher than the average VLCC spot earnings at that time. This has -- this is also the situation so far in 2018. Frontline's current cash breakeven levels are historically low and position us well in the context of existing market conditions and will help us generate significant cash flows in improving market conditions.

The operating expenses per day in the first quarter -- in the second quarter 2018 were $8,400 per day for the VLCCs, $6,800 for the Suezmax tankers, and $7,100 for the LR2 tankers. We drydocked one VLCC in the second quarter and no vessels are scheduled for drydock in the third quarter. With this, I leave the word to Robert, again.

Robert MacLeod -- Chief Executive Officer

Thank you very much, Inger. Let's turn to Slide 8, please, and look at the Q2 performance and guidance for Q3. The spot earnings for the overall fleet in the quarter was $11,700 on VLCCs. ECO VLCCs obviously did better, as mentioned earlier.

We improved 78% at $20,000 for Q3. Our suezmaxes made $14,100 and 64% of Q3 has been booked at similar numbers. On the aframaxes, Q2 was weak at 11,7, but our Q3 bookings with 57% done at 15.5 is stronger. Let's go to Slide 9 and look at the VLCC fleet growth.

The growth of crude oil tanker fleet grew substantially in 2017 and was expected to grow by 8.3% in 2018. At the start of the year, there was 57 VLCCs scheduled for delivery in '18. Twenty four have been delivered so far, and it's also likely that some deliveries will be delayed into 2019. Scrapping has increased considerably in 2018.

According to reports, 25 VLCCs have been scrapped so far, and an additional 14 have been sold for scrapping. This has changed the fleet growth outlook completely, and it now actually looks like we're heading toward negative growth in 2018. Fleet growth was heavily against us in 2016 and 2017 and this change is a very important factor. Let's move on to Slide 10 and have a look at the oil inventory cycle.

There is a clear historic link between oil increase and freight levels. In periods where inventory builds, freight increases as tanks are filled. 2015, when we enjoyed strong freight rates, is a very good example of this. As we went into 2016, this changed, inventory draws started, and the freight market came off slowly.

2017 showed significant fleet growth and inventory draws, and we entered a very straight market [ph] that has not yet recovered. Though we expect this now to change as the headwinds are turning to tailwinds. Let's move to the next slide and look at how we are preparing for 2020 by investing in Feen Marine Scrubbers. We believe in the economics in relation to installing scrubbers, especially on the big ships, and we will be installing scrubbers on a number of vessels as we have previously announced.

By investing in Feen, we secure access to scrubbers with high-quality systems, reliable delivery timings, and at an attractive price. And to be clear, retrofitting represents just as attractive economics as ordering newbuildings with a scrubber. And in many cases, it is even more compelling. Frontline's investment in Feen looks attractive on a stand-alone basis and we, therefore, believe this is a good strategic move preparing Frontline for 2020.

Let's move to the last slide, and have a look at the summary. As we've seen over recent years, oil demand continues to be strong. New trade routes have been established, the U.S. export trade is important, and more crude oil is moving to Asia resulting in increased ton-miles.

We are seeing record levels on scrapping, the crude oil tank -- oil contango is back, fleet growth is halting, and oil inventory growth is expected. There are many encouraging factors present and we only need some of them to continue for the tanker market to turn. But on the flipside, the order book remains substantial and scrapping activity could slow down. Trade wars could also disrupt global growth and demand could be hit in a higher price environment.

Contracting has slowed significantly, held by contracts and other shipping segments, but this could change. So to conclude, the 2017 headwinds we explained in detail on our Q1 call are now turning in our favor. 2017 was also the first year in five years where we did not see a seasonal rate increase going in toward Q4. We expect to see the rates increase this year.

Despite the current weak market, we believe there are important changes under way and we are, therefore, more optimistic going forward. And operator, with that, I would like to move on to questions, please.

Questions and Answers:

Operator

Thank you. [Operator instructions] It appears there are no questions at this time. I would like to turn the conference back to you for any additional or closing remarks.

Robert MacLeod -- Chief Executive Officer

OK. Thank you very much. That's it for us. So our press release, our presentation must have been extremely clear in covering.

So thank you very much for, everyone for dialing in. I would also like to thank everyone at Frontline for their great efforts. Thanks, again.

Operator

[Operator instructions]

Duration: 14 minutes

Call Participants:

Robert MacLeod -- Chief Executive Officer

Inger Klemp -- Chief Financial Officer

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