Preliminary Fourth Quarter and Financial Year 2003 Results

29.02.2004

Frontline Ltd. reports net operating income before depreciation of $123.9 million and net income of $70.5 million for the fourth quarter of 2003. Earnings per share for the quarter were $0.96. Net operating revenues increased by 32 per cent compared with the immediately preceding quarter of 2003 due to strengthening in the tanker market. The average daily time charter equivalents (“TCEs”) earned in the spot and period market by the Company’s VLCCs, Suezmax tankers and Suezmax OBO carriers were $40,600, $32,600 and $27,900, respectively, compared with $28,200, $22,000 and $22,500, respectively in the third quarter.
 
Administrative expenses increased to $7.6 million in the fourth quarter, of which $4.1 million relates to a non-cash charge for stock option compensation costs. Net interest expense for the quarter was $20.3 million. Included in this amount is interest expense of $2.1 million incurred on the $580 million 8.5% Senior Notes issued by Ship Finance International Limited, a wholly-owned subsidiary of the Company, in December 2003 as discussed below. In the fourth quarter of 2003 the Yen continued to strengthen against the US Dollar, resulting in a foreign exchange loss of $5.1 million arising on the Yen debt in subsidiaries.
 
For the year ended December 31, 2003 the Company reports record highest annual earnings of net operating income before depreciation of $601.2 million and net income of $443.1 million. These results compares with net operating income before depreciation of $232.6 million and a net loss of $8.9 million in 2002. Earnings per share for 2003 were $5.92 and cash generated from operating activities was $524.7 million. The average daily TCEs earned in the spot and period market by the Company’s VLCCs, Suezmax tankers, and Suezmax OBO carriers in 2003 were $42,300, $33,900 and $31,900, respectively. As of today Frontline has cash breakeven rates for VLCCs and Suezmaxes of $21,400 and $15,900, respectively.
 
Ship operating expenses, including drydockings, increased from $109.3 million in 2002 to $117.6 million in 2003, reflecting the increased size of the fleet. Administrative expenses increased from $12.8 million in 2002 to $17.9 million in 2003 primarily due to a non-cash charge of $5.5 million in 2003 in connection with employee stock options compared with a charge of $0.5 million in 2002.
 
Net interest expense for 2003 was $65.9 million compared with $58.3 million in 2002. This increase is due to several vessels put on capital leases in 2002 and 2003 plus the effect of the bond issue as discussed above. Other financial items for 2003 were positive $33.3 million, of which $22.1 million is attributable to the gain recorded on the Bank of Nova Scotia Equity Swap Line that was settled in June 2003. In 2003, the strengthening of the Yen against the US Dollar resulted in the recognition of an unrealized foreign exchange loss $17.2 million.
 
In the fourth quarter of 2003 the Company changed its estimate of the useful life of certain of its single hull vessels from 2017 to 2015. A change in accounting estimate was recognised to reflect this decision, resulting in an increase in depreciation expense and consequently decreasing net income by approximately $1.3 million and basic earnings per share by $0.02 for 2003.
 
In December 2003, the FASB issued Interpretation 46 Revised, Consolidation of Variable Interest Entities. FIN 46R requires Frontline to consolidate any variable interest entities that are also considered to be “Special Purpose Entities” effective December 31, 2003. Variable interest entities that are not considered to be special purposes entities will need to be consolidated effective March 31, 2004 under the requirements of FIN 46R. The Company has a number of arrangements which may be considered to be variable interest entities under the provisions of FIN 46R and is in the process of making the determination as to whether it will be required to consolidate these entities. The significant arrangement that Frontline is evaluating is the call option held by its subsidiary, Golden Ocean Group Limited, to acquire all of the shares of Independent Tankers Corporation (“ITC”) from Hemen Holding Ltd, a related party.  ITC operates a total of six VLCCs and four Suezmax tankers, which are on long-term charters to BP and Chevron. Golden Ocean paid $10.0 million for the option in July 2003, which expires on July 1, 2010. The total book value of ITC’s consolidated assets at December 31, 2003 was approximately $950 million and the Company’s maximum exposure to loss is $10 million.
 
The full report is enclosed on the following link: