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FRO - Third Quarter and Nine Months 2011 Results

Press release from Frontline Ltd. 22.11.2011


Highlights

  • Frontline reports a net loss, excluding vessel impairment losses, attributable to the Company of $44.7 million for the third quarter of 2011, equivalent to a loss per share of $0.57. 

  • Frontline reports a net loss, excluding vessel impairment losses, attributable to the Company of $64.5 million for the nine months ended September 30, 2011, equivalent to a loss per share of $0.83. 

  • Frontline records vessel impairment losses of $121.4 million in the three and nine months period ended September 30, 2011, equivalent to a loss per share of $1.56. 

  • Frontline disposed of the Suezmax tankers Front Fighter, Front Hunter and Front Delta. 

  • Frontline agreed to terminate the charter parties for its three remaining single hull VLCCs Titan Orion, Titan Aries and Ticen Ocean and expects to receive compensation payments totalling $26.1 million. 

  • Frontline agreed with Ship Finance to terminate the long term charter party between the companies for the OBO carrier Front Striver. The Company expects to record a loss of approximately $9.3 million in the fourth quarter 

  • Frontline will not pay a dividend for the third quarter of 2011.   

Third Quarter and Nine Months 2011 Results  

The Board of Frontline Ltd. (the "Company" or "Frontline") announces a net loss, excluding vessel impairment losses, attributable to the Company of $44.7 million for the third quarter of 2011, equivalent to a loss per share of $0.57, compared with a net loss attributable to the Company of $35.2 million and a loss per share of $0.45 for the preceding quarter. The net loss, excluding vessel impairment charges, attributable to the Company in the third quarter includes a gain on sale of assets and amortization of deferred gains of $3.8 million, which comprises the amortization of deferred gains of $1.8 million and $2.0 million relating to the sales of Front Eagle and Front Shanghai, respectively. The net loss attributable to the Company in the preceding quarter included a loss on sale of assets and amortization of deferred gains of $12.0 million, which comprised losses of $9.3 million and $8.5 million arising on the termination of the long term charter parties for the OBO carriers Front Leader and Front Breaker, respectively, partially offset by gains of $3.9 million and $2.0 million relating to the sales of Front Eagle and Front Shanghai, respectively.

The Company has recorded a vessel impairment loss of $121.4 million in the three and nine months ended September 30, 2011, equivalent to a loss per share of $1.56. This loss relates to five Suezmax vessels built between 1992 and 1996, and includes 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, Front Hunter and Front Delta, respectively. Impairment losses are taken when events or changes in circumstances occur that cause the Company to believe that future cash flows for an individual vessel will be less than its carrying value and not fully recoverable. In such instances an impairment charge is recognized if the estimate of the undiscounted cash flows expected to result from the use of the vessel and its eventual disposition is less than the vessel's carrying amount.

The average daily time charter equivalents ("TCEs") earned in the spot and period market in the third quarter by the Company's VLCCs, Suezmax tankers and Suezmax OBO carriers were $17,000, $9,500 and $38,200, respectively, compared with $26,100, $15,800 and $31,300, respectively, in the preceding quarter. The spot earnings for the Company's double hull VLCCs and Suezmax vessels were $12,600 and $7,800, respectively, in the third quarter compared with $23,900 and $14,500, respectively, in the second quarter. The Gemini Suezmax pool had spot earnings of $7,600 per day in the third quarter compared to $16,200 per day in the second quarter. The Company's double hull VLCCs excluding the spot index time charter vessels had spot earnings of $14,600 per day in the third quarter, compared with $25,700 in the second quarter.

Profit share in the third quarter as a result of the profit sharing agreement with Ship Finance International Limited ("Ship Finance") was income of $1.6 million compared to $0.2 million expense in the preceding quarter. This is because profit share expense is calculated on a year-to-date basis and the poor spot market in the third quarter resulted in a clawback in the third quarter. Ship operating expenses decreased by $6.1 million compared with the preceding quarter as a result of a decrease in drydocking costs of $3.6 million and a decrease in running costs mainly due to recent sales and lease terminations. Charter hire expenses decreased by $0.8 million in the third quarter compared with the preceding quarter.

Interest income in the third quarter of $0.3 million primarily relates to restricted deposits held by subsidiaries reported in ITCL. Interest expense, net of capitalized interest, was $32.5 million in the third quarter of which $6.0 million relates to ITCL.

Frontline announces a net loss, excluding vessel impairment losses, attributable to the Company of $64.5 million for the nine months ended September 30, 2011, equivalent to a loss per share of $0.83. The average daily TCEs earned in the spot and period market in the nine months ended September 30, 2011 by the Company's VLCCs, Suezmax tankers and Suezmax OBO carriers were $24,000, $14,200 and $35,300, respectively, compared with $40,300, $28,200 and $48,100, respectively, in the nine months ended September 30, 2010. The spot earnings for the Company's double hull VLCCs and Suezmax vessels were $21,300 and $12,700, respectively, in the nine months ended September 30, 2011. The Gemini Suezmax pool had spot earnings of $14,000 per day and the Company's double hull VLCCs excluding the spot index time charter vessels had spot earnings of $22,900 per day, respectively, in the nine months ended September 30, 2011.

As of September 30, 2011, the Company had total cash and cash equivalents of $191.0 million and restricted cash of $157.2 million. Restricted cash includes $96.8 million relating to deposits in ITCL and $58.0 million in Frontline, which is restricted under the charter agreements with Ship Finance.

In November 2011, the Company has average total cash cost breakeven rates for the remainder of 2011 on a TCE basis for VLCCs and Suezmax tankers of approximately $30,200 and $23,600, respectively.

Fleet Development

In September 2011, the Company and Ship Finance agreed to terminate the long term charter parties for the single-hull VLCCs Titan Orion, Titan Aries and Ticen Ocean and 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 owner at which time Ship Finance will make a compensation payment to the Company for termination of the charter party. Expected compensation amounts and termination dates are $9.4 million and first quarter of 2012 for Titan Orion, $6.5 million and fourth quarter of 2012 for Titan Aries and $10.2 million and third quarter of 2013 for Ticen Ocean.

In October 2011, the Company entered into an agreement to sell its 1994-built Suezmax tanker Front Fighter and delivery to the new owner took place in October. The sale resulted in a net cash outflow of approximately $2.6 million, after repayment of bank debt, and a loss of $27.1 million, which has been included in the impairment loss recorded in the third quarter.

In October 2011, the Company agreed with Ship Finance to terminate the long term charter party for the OBO carrier Front Striver and Ship Finance simultaneously sold the vessel. The charter party terminated on October 27 and Frontline made a compensation payment to Ship Finance of $8.1 million for the early termination of the charter. The transaction reduced the Company's obligations under capital leases by approximately $10.7 million and the Company expects to record a loss of approximately $9.3 million in the fourth quarter.

In October 2011, the Company entered into an agreement to sell its 1996-built Suezmax tanker Front Hunter to VTN Shipping Group, a related party. The vessel will cease to trade in the spot market and delivery took place on November 10, 2011. The sale resulted in a net cash outflow of approximately $0.1 million, after repayment of bank debt, and a loss of $30.6 million, which has been included in the impairment loss recorded in the third quarter.

In November 2011, the Company entered into an agreement to sell its 1993-built Suezmax tanker Front Delta.  Delivery to the new owner is expected to take place at the end of November 2011. The sale will result in a net cash outflow of approximately $1.5 million, after repayment of bank debt, and resulted in a loss of $18.5 million, which has been included in the impairment loss recorded in the third quarter.

The Company is currently establishing the Orion Tankers 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 costs. During the fourth quarter of 2011, the Company will leave the Gemini pool. This changeover will bring the Company closer to the commercial operations and will not result in any disruption. 

Newbuilding Program

As of September 30, 2011, Frontline's newbuilding program comprised of two Suezmax tankers and five VLCCs, which constitute a contractual cost of $649.9 million. Installments of $212.0 million have been made on the newbuildings and the remaining installments to be paid as of September 30, 2011 amount to $437.9 million, with expected payments of approximately $13.5 million in 2011, $175.7 million in 2012 and $248.7 million in 2013.

In November 2010, the Company secured pre- and post-delivery financing in the amount of $147.0 million representing 70 percent of the contract price for the first two VLCCs to be delivered in 2012. As of September 30, 2011, $72.0 million was drawn down on this facility.

For the three remaining VLCCs and the two Suezmax tanker newbuildings to be delivered between late 2012 and 2013, 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 30, 2011.

Corporate

The Board of Directors has decided not to declare a dividend for the third quarter of 2011.

77,858,502 ordinary shares were outstanding as of September 30, 2011, and the weighted average number of shares outstanding for the quarter was 77,858,502.

The Company reports vessel values provided by a broker panel on all loan facilities to its banks each quarter. At September 30, 2011, there were two facilities where the minimum value of the vessels was below the required levels defined in the loan agreements. In October 2011 the Company therefore made, in accordance with the loan agreements, prepayments of $13.3 million on these facilities in order to restore compliance. The Company was in compliance with all other covenants in the loan agreements at  September 30, 2011.

The Market

The market rate for a VLCC trading on a standard 'TD3' voyage between the Arabian Gulf and Japan in the third quarter of 2011 was WS 47, representing a decrease of approximately WS 6 points from the second quarter of 2011 and a decrease of WS 5.5 points from the third quarter of 2010. Present market indications are approximately $12,000/day in the fourth quarter of 2011.

The market rate for a Suezmax trading on a standard 'TD5' voyage between West Africa and Philadelphia in the third quarter of 2011 was WS 70; equivalent to approximately $10,600/day compared to approximately $13,500/day in the second quarter of 2011, representing a decrease of approximately WS 7 points from the second quarter of 2011 and a decrease of WS 5 points from the third quarter of 2010. Present market indications are approximately $17,000/day in the fourth quarter of 2011.

Bunkers at Fujairah averaged $664/mt in the third quarter of 2011 compared to $657/mt in the second quarter of 2011; an increase of $7/mt. Bunker prices varied between a low of $626.5/mt at the end of September and a high of $699.5/mt in early August. On November 18, 2011, the quoted bunker price in Fujairah was 677/mt.

Philadelphia bunkers averaged $675/mt in the third quarter, which represent a decrease of $6/mt from the second quarter of 2011. Bunker prices varied between a low of $640.5/mt mid August and a high of $705.5/mt at the end of July. On November 18, 2011, the quoted bunker price in Philadelphia was 658/mt.

The International Energy Agency's ("IEA") November 2011 report stated an average OPEC oil production, including Iraq, of 30 million barrels per day (mb/d) during the third quarter of the year. This was an increase of 540,000 barrels per day compared to the second quarter of 2011 and an increase of 720,000 barrels per day compared to the third quarter of 2010.

IEA further estimates that world oil demand averaged 89.8 mb/d in the third quarter of 2011, representing an increase of approximately 1.7 mb/d compared to the previous quarter, and an increase of approximately 540,000 barrels per day compared to the third quarter of 2010.

The VLCC fleet totalled 588 vessels at the end of the third quarter of 2011, up from 574 vessels at the end of the previous quarter. 14 VLCCs were delivered during the quarter. The orderbook counted 131 vessels at the end of the third quarter, down from 143 orders from the previous quarter. Two new orders were placed during the quarter, and the current orderbook represents about 22 percent of the VLCC fleet. According to Fearnleys the single hull fleet stands at 35 vessels.

The Suezmax fleet totalled 442 vessels at the end of the third quarter, up from 432 vessels at the end of the previous quarter. 12 vessels were delivered during the quarter versus an estimated 15 at the beginning of the year. The orderbook counted 118 vessels at the end of the quarter, down from 125 vessels at the end of the previous quarter. Five new orders were placed during the quarter and the current orderbook now represents 27 percent of the total fleet. Two vessels were removed from the trading fleet and according to Fearnleys, the single hull fleet now stands at 12 vessels.

The newbuilding orderbook at the end of the third quarter 2011 includes a high number of expected vessel deliveries remaining in 2011 and in 2012. However, the actual number of deliveries is likely to be lower due to the expected delays, slippage and cancellations of newbuilding orders going forward.

The International Monetary Fund forecasts world growth to rise by approximately 4.0 percent in 2012 compared with 2011 and the IEA projects an increase in world's oil consumption in 2012 by 1.3 mb/d and 1.5 percent compared to 2011. This is not enough to absorb the newbuilding orderbook, but will help mitigate.

Strategy and Outlook

The tanker market has shown a strong negative development in the last two years. Rates are currently at operating cost levels with no contribution to capital and vessel values have fallen approximately 25-50 percent, depending on age, during the last year. If the weak market continues it is likely to lead to significant financial problems for the whole tanker industry.

At September 30, 2011 Frontline was, after minimum value clause prepayments of $13.3 million on two loan facilities in October, in compliance with all of its financial covenants and had cash and cash equivalents of $191 million. The negative operating cash flow, the funding of the newbuilding program and the additional decrease in values in the fourth quarter creates a challenging situation. If the current market does not improve, the Company is likely to need additional funding in the first part of 2012 in order to meet the Company's cash obligations. There are also significant uncertainties regarding the Company's ability to comply with certain of its financial covenants at the end of the fourth quarter 2011.

The Company has received committed financing for two of its seven newbuildings, while five newbuildings remain unfinanced. The remaining installments to be paid as of September 30, 2011 amounts to $437.9 million, with expected payments of approximately $13.5 million in 2011, $175.7 million in 2012 and $248.7 million in 2013.

The Board has in view of this difficult situation started to consider ways to improve the Company's maneuverability. Certain assets have already been sold in order to reduce the Company's liabilities.

In the period to come the Board will seek discussions  with the Company's creditors and counter parts. The target is to find a restructuring solution which reduces the Company's overall liabilities, reduces the cash break even rates and get relief in the Company's financial covenants and debt repayments. The Board anticipates that any such solution will be dependent on a significant new equity contribution or an asset sale and will, in view of the seriousness of the situation, explore all possible alternatives with the preferred target of finding a solution prior to December 31, 2011.

If the current weak market continues and no solution can be found there are significant uncertainties linked to Frontlines sustainability in the present form. The Company's major shareholder Hemen Holding has expressed a positive view in order to contribute to an overall solution.

The full report is available for download in the link enclosed and from the Company's website www.frontline.bm.

 
Forward Looking Statements

This press release contains forward looking statements. These statements are based upon various assumptions, many of which are based, in turn, upon further assumptions, including Frontline management's examination of historical operating trends. Although Frontline believes that these assumptions were reasonable when made, because assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond its control, Frontline cannot give assurance that it will achieve or accomplish these expectations, beliefs or intentions.

Important factors that, in the Company's view, could cause actual results to differ materially from those discussed in this press release include the strength of world economies and currencies, general market conditions including fluctuations in charter hire rates and vessel values, changes in demand in the tanker market as a result of changes in OPEC's petroleum production levels and world wide oil consumption and storage, changes in the Company's operating expenses including bunker prices, dry-docking and insurance costs, changes in governmental rules and regulations or actions taken by regulatory authorities, potential liability from pending or future litigation, general domestic and international political conditions, potential disruption of shipping routes due to accidents or political events, and other important factors described from time to time in the reports filed by the Company with the United States Securities and Exchange Commission.

The Board of Directors
Frontline Ltd.
Hamilton, Bermuda
November 21, 2011

Questions should be directed to:
Jens Martin Jensen: Chief Executive Officer, Frontline Management AS
+47 23 11 40 99

Inger M. Klemp: Chief Financial Officer, Frontline Management AS
+47 23 11 40 76

This information is subject of the disclosure requirements pursuant to section 5-12 of the Norwegian Securities Trading Act.

3rd quarter 2011 results

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