Frontline reports net income of $161.7 million for the first quarter of 2001, compared with net income of $1.0 million for the first quarter of 2000. This result reflects the strong tanker market that continued from the latter half of 2000 into the early part of 2001, combined with a full quarter’s contribution from the inclusion of the Golden Ocean fleet. Earnings before interest, tax, depreciation and amortisation (EBITDA) for the quarter, including earnings from associated companies were $196.6 million (2000 quarter: $41.1 million). The average daily time charter equivalents (“TCEs’) earned by the VLCCs, Suezmax tankers, and Suezmax OBO carriers trading in the spot market were $62,100, $43,000 and $39,400, respectively.
Net interest expense for the quarter was $22.2 million (2000 quarter: $20.0 million), as a result of higher debt balances due to the increased fleet offset by lower average interest rates and higher cash balances. The Company recorded an unrealised foreign currency exchange gain of $22.3 million relating to the revaluation of Yen debt in certain Golden Ocean subsidiaries. The Company changed accounting treatment for interest hedging instruments as from year 2001. This implies that the interest rate swaps are marked to market at balance sheet date. For the quarter this lead to a loss of $4.7 million booked under other financial items.
Earnings per share for the quarter were $2.10, (2000 quarter: $0.02). The weighted average number of shares outstanding for the quarter was 77,110,351, and 76,919,205 shares were outstanding at March 31, 2001 (as at March 31, 2000, shares outstanding were 68,811,860 and the weighted average number of shares outstanding for the quarter then ended: 63,981,091). Cash flow per share for the quarter was $2.48, compared with $0.32 for the same quarter in 2000.
The Board has based on the results achieved in the first quarter and the Company’s strong liquidity position decided to pay a dividend of USD 1.00 per share. The dividend becomes payable to shareholders on record as of 21 May, 2001.
THE MARKET
After a very strong finish of the year 2000, tanker rates slowed down somewhat in the first quarter of 2001 as a result of seasonally lower demand and OPEC’s production cut in February. In spite of the decline in activity tanker rates stayed healthy through the quarter as the overall supply of tankers and demand for crude oil transportation remain in balance. The trend towards higher quality awareness among users of tanker tonnage continues to favor owners of modern tonnage.
In spite of the strong market a total of 5 VLCCs and 7 Suezmaxes were removed from trading in the quarter either through scrapping or as they were converted for off-shore purposes. 6 VLCCs and 5 Suezmaxes were delivered from shipyards in the period.
The prices for second-hand vessels have been stable so far this year, while the price level for newbuildings has strengthened as a function of a tight yard situation.
CORPORATE AND OTHER MATTERS
In February 2001, Frontline entered into five newbuilding contracts. Two Suezmaxes were ordered with the Sasebo Shipyard in Japan for delivery in August and October 2001, and three VLCCs were ordered with Hitachi for delivery in April, August and October 2002. The total newbuilding project will have a cost of approximately $330 million.
In March 2001, Frontline entered into Memoranda of Agreement to sell the two 1993-built VLCCs, Front Tartar and Front Tarim, at an agreed total sales price of $104 million. The Front Tartar was delivered to the purchaser on April 24, 2001 and the Front Tarim on April 26, 2001. The Company considers these sales as an important part of its fleet renewal strategy, and the decision shall be seen against the newbuilding commitments
described above.
In the first quarter of 2001 the Company bought back and cancelled 1,387,300 of its own shares pursuant to a current Board authority to acquire up to 5,000,000 shares. The average price paid for the shares was $13.15. The Board remains of the opinion that during this period the Frontline share has been undervalued and considers this share buyback exercise as an effective way to increase shareholder value. A total of 1,639,454 warrants were exercised during the quarter and converted into 163,944 shares. Currently there are warrants outstanding to acquire up to 2,184,621 shares. All outstanding warrants expire on May 11, 2001.
On April 23, 2001 the Company announced that it was making an offer for the outstanding shares of the Oslo listed Mosvold Shipping Ltd. (“Mosvold’) and on April 27, 2001, Frontline submitted the formal offer document to the Oslo Stock Exchange. The offer expires May 11, and has certain restrictions attached. Mosvold has two 1974-built VLCCs and three VLCC newbuilding contracts with deliveries scheduled for November 2001, August 2002 and July 2003. The offer price values Mosvold at approximately $46 million. At May 8, 2001 Frontline holds 20.5% of the shares in Mosvold.
Frontline’s wholly owned subsidiary, Golden Ocean, agreed in May to a settlement with certain parties, in order to formally take over 5 VLCCs for which Golden Ocean had purchase options. Two of these vessels are employed through a market related bare boat charter arrangement with Shell. One vessel is fixed to Arcadia for another 14 months at a TCE of $40,000 per day. The two last vessels are trading spot. Frontline controls several debt instruments related to these vessels. These instruments will likely be converted to equity, and will together with bank refinancing of the vessels make up most of the financing needed to acquire the vessels. The total cost for the 5 vessels excluding any allocation for the overall acquisition cost for Golden Ocean amounts to less than $320 million. This is more than $75 million lower than the assessed market values of the vessels. The Board expects that the inclusion of the five vessels in Frontline’s Profit and Loss statement will significantly improve earnings and cash flow per share.
The plans to list the Company’s shares at New York Stock Exchange are progressing as planned. The Board anticipates the Company’s shares to be listed in July this year after the existing ADR programme has been terminated.
OUTLOOK
The seasonal slowdown in the market created by refinery overhaul and reduced OPEC production has lead to lower rates for May fixtures. The Board expects tanker rates to firm again in the summer when oil production is anticipated to increase. It is likely that the OPEC production in the fourth quarter will be at least 2 million barrels higher than the current levels. This will lead to an improvement in the supply / demand balance and result in increased freight rates.
The new rules that were agreed at IMO’s recent meeting will, lead to phase-out of more than 30% of the existing Suezmax and VLCC fleet before 2006. Currently the order book comprises 67 Suezmaxes and 92 VLCCs and shipyard capacity for deliveries before 2004 is very limited, which points towards a positive market development in coming years.
Frontline will still after the dividend payment of $1.00 per share have a strong liquidity position and will consider new investments and continued buyback of shares. The Board has in order to facilitate such buyback agreed to increase the existing authorization to buy back shares from 5,000,000 shares up to 7,500,000 shares. To date 3,107,145 shares have been acquired under the authorization.
Frontline has so far in the second quarter averaged TCE rates of $52,000 for the VLCCs and $39,000 for the Suezmaxes. It is likely that the net income before currency effects and sales profit for the second quarter will be lower than for the first quarter. The second quarter results will include a sales profit of $15 million linked to the sale of Front Tarim and Front Tartar.
With the outlook for a significantly increased OPEC production in the second half of the year, combined with the increased fleet, the Board is confident that the full year net income before currency effects and sales profits will be significantly higher than the comparable $298 million the Company made in 2000.
May 8, 2001
The Board of Directors
Frontline Ltd.
Hamilton, Bermuda
The presentation is available on the following link:
http://reports.huginonline.com/819860/89642.pdf
The full interim report is available on the following link: