The Board of Frontline Ltd. has in a board meeting in Hamilton, Bermuda March 16, discussed and approved the Group`s preliminary results for 1997. The Board is pleased to observe the positive development in the Company`s operating result. The development reflects the improved freight market, a larger fleet, as well as an improved over all cost structure. 1997 has been Frontline`s best year ever.
RESULTS For the full year the Group recorded a net profit of USD 17.4 million, compared with a net loss of USD 14.0 million in 1996.
As a result of Frontline`s consolidation with London & Overseas Freighters (LOF) the management has assessed the life expectancy of the fleet, and decided to change the depreciation schedule for the fleet from 20 to 25 years, with effect from the fourth quarter. This reduced the depreciation in the fourth quarter and for the full year 1997 by USD 3.6 million. The decision to change the depreciation schedule was taken after a thorough review of the specifications and quality of the current fleet including the Company`s newbuildings. It also included a review of normal depreciation strategy for other major shipping companies worldwide.
The results include charges of USD 4.5 million relating to non-recurring expenses in connection with the restructuring of the Group`s domicile, of this USD 0.3 million was expensed during the fourth quarter.
Operating profit before interest, taxes and depreciation, (EBITDA) for 1997 amounted to USD 112.2 million (USD 38.9 million in 1996). Net financial items amounted to USD 42.6 million (USD 22.6 million). The increase in financial costs reflects an increase in overall debt relating to a number of vessels acquired in the fourth quarter of 1996 and debt incurred in connection with the acquisition of shares in ICB Shipping AB (ICB) and LOF.
LOF is consolidated beginning November 1, 1997. The investment in ICB is accounted for according to the cost method. The book value of the investment is adjusted to market value at the end of each period, with the unrealized gain/loss recorded directly to equity. Frontline`s ideal share of ICB`s earnings for fourth quarter would have been approximately USD 5.3 million if the investment had been booked according to the equity method.
The result for the fourth quarter of 1997 was USD 9.2 million (USD - 4.4 million) and EBITDA was USD 36.5 million (USD 9.4 million). Net financial items were USD 15.1 million (USD 5.7 million). Fees in connection with the ICB bridge loan totaling USD 3.0 million are amortized over 12 months.
The average number of shares outstanding in the fourth quarter was 136,701,507, and for the full year 109,723,607. At year end 136,701,507 shares were issued and outstanding. Earnings per share for 1997 amounted to USD 0.16 and for the fourth quarter USD 0.07.
CORPORATE MATTERS During the fourth quarter, Frontline acquired 79.74% of the shares in LOF. LOF and Frontline are in the process of preparing an amalgamation, with LOF as the surviving entity. Frontline shareholders will receive 3.26 LOF shares for each Frontline share. LOF is currently listed on NASDAQ and the London Stock Exchange. The amalgamated company will in addition replace Frontline on the Oslo Stock Exchange. The name of the amalgamated company will ultimately be changed to Frontline Ltd. The amalgamation process has taken a longer time than anticipated due to documentation issues, but is expected to be completed in late April.
Frontline`s offer to the shareholders of ICB for all shares in the latter was withdrawn in early January 1998. Ever since Frontline made its offer in early September, the ICB board has characterized Frontline`s offer as hostile. ICB also countered with a proposal for merging with Astro Tankers, a tanker company. The general assembly of ICB voted in favor of a merger with Astro in October, notwithstanding the opposing votes of Frontline. Frontline is contesting the decision on legal grounds due to the fact that the merger proposal and the suggested completion of the merger are, in Frontline`s opinion, in breach with the Swedish Companies Act.
THE MARKET The ton-mile demand for large tankers increased approximately 4% during the second half of 1997, compared to the second half of 1996. The utilization rate of the world`s tanker fleet reached 90% during the fourth quarter, leading to freight rates for VLCCs peaking in excess of USD 50,000 per day on a timecharter basis in November. After this psychology turned against shipowners due to a combination of an unusually large number of VLCCs reaching loading positions in the Arabian Gulf at the same time, and the uncertainty of the effects of the financial turmoil in Asia.
The Group had good timing, fixing several of the vessels close to the peak and thereby avoiding the worst of the following slump. The VLCCs traded most of the quarter on the route Arabian Gulf to Far East, but late in the quarter, two of the vessels were relocated to the Atlantic basin. Income on timecharter basis was USD 42,500 per day in the fourth quarter, and USD 32,700 per day for the full year. Frontline has since the third quarter signed two contract of affreightments with leading Asian charterers.
The Suezmax market did not follow the rise in earnings experienced in the VLCC market, nor did it experience the following slump. The fleet has been employed in the Atlantic basin and the Mediterranean. The vessels had an income on timecharter basis of USD 26,000 per day in the fourth quarter, and USD 24,800 per day for the full year.
The dry cargo market has remained rather weak throughout the quarter. Due to this, the OBOs have been employed mainly in the wet market in the Atlantic basin. The OBOs had an income on timecharter basis of USD 24,600 per day in the fourth quarter, and USD 25,500 per day for the full year. The contracts with Valero and Hadeed have been renewed at improved freight rates. The contracts cover the employment for almost four of the eight OBO vessels.
OPERATIONS The cost reduction program has been implemented, and the cost level has been greatly reduced. Operating costs per day including dry-docking and insurance per vessel were USD 6,700, USD 7,500 and USD 7,000 for the VLCCs, Suezmax tankers and OBO carriers respectively in 1997. The higher Operating cost for the Suezmax and OBOs compared to the VLCC reflects the facts that these ship types have been operated under different shipmanagement systems during 1997. It is anticipated that the OBO and Suezmax operating costs will reduce in 1998 as the benefits of the new ship management solution are reflected in the results.
ORGANISATION In a board meeting March 4, senior lawyer in Appleby, Spurling & Kempe, Mr. Timothy J. Counsell, was appointed as new member of the Board of Frontline Ltd. He replaced Cameron Adderley.
OTHER MATTERS The Board resolved in the board meeting to exercise the rights the Company has to take over five newbuilding VLCC contracts from the Company`s major shareholder Hemen Holding Ltd. The purchase of the contracts is made subject to Frontline securing sufficient financing. The vessels have been taken over at cost. The Board has in connection with the purchase of the contracts gathered independent valuations from international shipbrokers. The Brokers assess the value of the contracts to be higher than the cost. Due to the heavy-ended payment terms in the current contracts Frontline anticipates that the delivered price can be improved further through a renegotiating of the payment terms. John Fredriksen did not participate in the Board decision to buy the five contracts, due to his affiliation with Hemen Holding.
In the Board meeting, the Board extensively discussed the Company`s investment in ICB AB. The Board is satisfied to see that the proposed merger between ICB and Astro Tankers will not be completed within the existing agreement between the parties. The Board anticipates that the process Frontline will have to go through in order to ultimately gain substantial influence in ICB could be time consuming. In order to be prepared for such a scenario the Board has considered different alternatives, in order to reduce the impact such a process will have on Frontline`s core activity.
One realistic alternative that the Board will focus on in the coming period would be to establish a separate holding company for the ICB shares. A holding company which ultimately could be partially or wholly dividended off to Frontline`s shareholders. The plan includes a separate listing of the holding company.
The Directors are currently considering several alternatives for the financing of the VLCC newbuilding program. The Board will in view of the current share price only consider alternatives, which will minimize or eliminate the need for issuing new equity. One financing option is issuing senior unsecured notes in the US bond market. A final decision with respect to the source of financing for the VLCC newbuilding program will be taken no later than June 30th 1998.
OUTLOOK The positive development in the fourth quarter was stalled by the uncertainty related to the Asian financial turmoil. After the first uncertainty settled, the market has firmed up again, though the rates are lower than the peak levels experienced in the fourth quarter. Still the current levels are substantially better than at this time last year. The tanker markets have so far experienced limited negative effects from the Asian turmoil.
The ordering frequency for new buildings picked up during the second half of 1997, but came to an abrupt standstill when VLCC rates declined. Currently approximately 70 VLCCs are on order, of which 15 will be delivered in 1998. Total deliveries of tankers in 1998 will increase to 14 mill. dwt, from 8 million dwt. in 1997. Based on the same removals as in 1997, the result will be a 2 % growth in the active fleet.
The combination with LOF will secure the combined company a listing on NASDAQ. This together with a possible high yield offering as mentioned above, will give Frontline access to the US capital markets, which is believed to be advantageous to the Company`s shareholders.
1997 has been marked by the organizational changes from moving the company from Sweden to Bermuda, changing the ship management solution and by setting up Frontline Management AS in Oslo. The Board is pleased to see that the efforts put into improving the quality of the company`s chartering operation are giving clear results. The larger size of the Frontline fleet increases Charterers` interest in the Company, generates new business and gives additional operating flexibility.
The Board feels the Company is well positioned, and anticipates that the positive earnings development will continue for 1998. Moderate new tonnage coming into the market, combined with a material increase in the OPEC production, an increased Iraqian export, and low oil prices could give room for a strong tanker market in 1998, especially in the second half of the year.
Bermuda, March 15, 1998 The Board of Directors Frontline Ltd.
Questions should be directed at:
Chairman John Fredriksen, Director Tor Olav Trøim and Company Secretary Kate Blankenship, Phone +1 441 295 6935 Tom E. Jebsen, CFO Frontline Management A.S, Phone +47 23 11 4000 / +47 90 747 997