THIRD QUARTER AND NINE MONTH RESULTS
The Board of Frontline is pleased to report a record net income of $97.0 million in the third quarter of 2000: the best quarterly result ever announced by the Company. This represents a 180 per cent increase over the immediately preceding quarter. Earnings before interest, tax, depreciation, and amortisation (EBITDA) for the quarter, including earnings from associated companies were $141.3 million, compared with a loss of $14.9 million for the comparable 1999 period. Basic earnings per share for the quarter were $1.23 (1999 – loss of $1.28). Cashflow per share for the quarter was $1.51, compared with $(0.76) for the same quarter in 1999. This result reflects the strong tanker market that prevailed throughout the third quarter of 2000. In the third quarter of 1999, in addition to the market being very significantly weaker, the restated results include the loss on the sale of four VLCCs in the transaction to take control of ICB Shipping AB (“ICB”).
The average daily time charter equivalents (“TCEs”) earned by the VLCCs, Suezmax tankers, and Suezmax OBO carriers were $52,000, $41,100 and $41,200, respectively, (1999 – $19,400, $14,100 and $15,300, respectively). Total operating costs have decreased as the successful implementation of a cost reduction program is recognised over the increased fleet. Depreciation expense has decreased due to inclusion in the third quarter of 1999 of four VLCCs in the ICB fleet which were sold in the latter part of 1999, combined with the fact that these VLCCs, plus the other eight vessels in the ICB fleet, were being depreciated over a twenty year expected life. This was amended to twenty five years with effect from the fourth quarter of 1999. Administrative expenses have decreased due to the inclusion of costs associated with the operation of ICB in the 1999 quarter. Administrative expenses in the third quarter of 2000 include approximately $500,000 relating to the Tankers International Pool and a further $300,000 relating to social costs arising from the employee share option plans.
Net interest expenses for the quarter were $22.0 million (1999 – $22.5 million). This has decreased from $22.3 million the second quarter of 2000. There was no new debt drawndown in the third quarter and a total of $58 million of debt was repaid. Interest has been incurred for a full quarter on the new vessel debt drawndown in the second quarter, offsetting the reduction from debt repaid.
During the third quarter, the Company issued 68,700 ordinary shares to acquire Golden Ocean Senior Notes and 129,635 shares were issued on the exercise of warrants to acquire the Company’s shares. The Company acquired and cancelled 430,000 of its own shares pursuant to a call option. At September 30, 2000, 78,537,524 ordinary shares were outstanding and the weighted average number of shares outstanding for the quarter was 78,804,371 (as at September 30, 1999, 59,051,860 and for the quarter then ended – 46,247,567).
For the first nine months of 2000, the Company earned net income of $132.7 million (1999 – net loss of $68.3 million) and EBITDA of $260.1 million (1999 – $59.7 million).
Net interest expense was $64.3 million (1999 – $60.1 million). Earnings per share for the 2000 year to date are $1.86 (1999 – loss of $1.48) and cashflow per share was $2.74 (1999 – $0.07).
The comparative results for the 1999 periods presented have been restated to include the results of ICB Shipping AB on a consolidated basis.
The tanker market has showed increasing strength through the year to date. A significant rate improvement towards the end of the second quarter continued through the third quarter. Suezmax rates dipped temporarily in August but recovered again in September. At the end of the period Suezmaxes earned TCEs of over $50,000 per day and VLCCs over $60,000 per day.
The prime driver has been the sharp increase in OPEC oil production starting with the quota increase in April. The increased production added to the effect of a supply and demand balance created by scrapping of older tonnage in 1999 and the first half of 2000 and to the tightening of age and quality requirements imposed by charters after the Erika oil spill in late 1999.
The positive trend from the beginning of the year has continued into the fourth quarter. Second-hand values and newbuilding prices have continued to increase. In the first nine months of the year 26 VLCCs and 16 Suezmaxes were scrapped. 34 VLCCs and 19 Suezmaxes were delivered from shipyards in the same period.
CORPORATE AND OTHER MATTERS
In June 2000, the Company entered into an agreement with Euronav to acquire two Suezmax tankers, Ardenne and Brabant for a total price of $95.0 million. On June 20, 2000, the Company issued 4,000,000 ordinary shares at a price of NOK 104.5 per share in a private placement to a group of international institutional investors. Part of the $48.5 million proceeds of the issue were used to part finance the acquisition of the Ardenne and Brabant. The balance of the price was paid by traditional bank financing. The vessels, renamed Front Ardenne and Front Brabant, were taken over by Frontline in October 2000.
In October 2000, Frontline also acquired a 1993-built VLCC, which was named Front Ace and on delivery to the Company was placed in the Tankers International Pool. This vessel was acquired for $53 million from a related party, such price being based on three independent valuations less a $1 million discount. This acquisition has been part-financed by traditional bank financing.
Throughout the third quarter, Frontline continued its attempts to gain acceptance of its plan for the financial restructuring of the Golden Ocean Group (“Golden Ocean”). On August 4, 2000 the bankruptcy court in Wilmington, Delaware approved Frontline’s disclosure statement for restructuring of Golden Ocean. Frontline’s restructuring plan was also recommended to the court by the debtor, Golden Ocean Group Ltd., and by the official Creditors Committee. The Frontline Plan was distributed to the bondholders for voting and on August 15, 2000, the bankruptcy court approved a proposal to appoint Frontline as the manager of Golden Ocean’s operations with immediate effect. The Frontline Plan was approved by creditors and confirmed by the Bankruptcy Court on September 15, 2000. On October 10, 2000, all conditions precedent were satisfied and Frontline declared the Plan effective. This take-over of Golden Ocean increases Frontline’s controlled fleet to 30 VLCCs and 29 Suezmax tankers, and brings 10 modern bulkcarriers to the fleet.
The Board is pleased that the large financial and personnel resources which have been invested in the build-up of Frontline during the last four years now seems to pay off to the benefit of our shareholders.
Strong oil demand backed by favourable demand development in important consumption areas continues to drive the tanker market. In the absence of spare capacity in other areas, the additional barrels will be produced in the Middle East with a consequential increase in tonnage demand. The tanker order book for delivery during the next two years is modest and no significant newbuilding capacity is available before 2003. The new rules proposed by the IMO for barring older tonnage from further trading could cause the removal from the trading fleet of about a third of currently existing Suezmaxes and VLCCs in the years 2002 through 2005.
In the fourth quarter Frontline has substantial capital commitments linked to the payment for Golden Ocean. In addition to the payment to the unsecured creditors and administrative claimants, Frontline will also use liquidity to refinance some of the existing mortgage debt in Golden Ocean. After the final payment for Golden Ocean, Frontline presently has no significant future capital expenditure commitments.
The Board is continuously evaluating opportunities to expand the company further. A well priced equity is a major condition for such a growth. Based on the price level indicated for sale of modern tonnage it is the Board’s view that the current share price does not reflect a significant premium to the underlying value of the assets. This clearly limits the economical basis for growing the company through ship for share issues. In the event the Board does not find what it considers to be attractive deals, the Board will recommend to the shareholders that a significant part of the free cash generated will be distributed to the equityholders in the form of an organised tender buy-back program or, alternatively, a dividend. The Board is encouraged by the good share liquidity in the trading of Frontline shares on the Oslo Stock Exchange. The limited trading of the ADR on the Nasdaq National Market is, however, a concern. In order to improve the trading in the U.S. the Board is currently considering an application for listing of Frontline’s ordinary shares on the New York Stock Exchange.
Market factors governing the tanker industry look fundamentally positive in a short and medium perspective. Tanker rates in the first part of the fourth quarter point to an improvement over the third quarter and the Board is confident that the net income for the last quarter of the year will substantially exceed that of the third quarter.
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THIRD QUARTER AND NINE MONTH RESULTS